The National Post’s recent profile of Canada Pension Plan’s investment philosophy notes that CPP Investment Board managers have bought into Environmental, Social and Governance, ‘ESG’, scoring in its asset allocation. Having permeated Canada’s institutional investment sector, ESG exposes the over twenty million working and retired CPP members to ESG investment risks and poor returns. Not having voted for ESG, they must still accept it, in this mandatory retirement income program.
ESG scoring’s goal: induce institutional and other investment managers to place funds into debt, equity, and other financial instruments of firms found acceptable based on ESG criteria. Those criteria try to make corporate behaviour less environmentally damaging, labour-abusing, or ‘corrupt’. (Note: existing laws prohibit egregious environmental, labour and corruption crimes, making ESG’s need doubtful.)
Adhering to ESG limits the choices that investment portfolio managers have, i.e., by shrinking the available investment ‘universe’. For example, following ESG investing parameters usually rules out investing in firms involved in oil and gas production, transport, processing, coal mining, some forestry and agriculture businesses, tobacco products, and, sometimes, defense firms, casinos, alcohol, and fast foods, adult entertainment, cannabis, and either operating or investing in repressive or outlaw nations.
Following the subjective dictates of ESG investing, investors risk having lower investment returns than those that are reached by managers that do not adhere to such limitations. Even ‘passive’ management, such as holding investments tracking indexes such as the TSX/S&P Composite or TSX/S&P 60, the S&P500 index for United States stocks, or the MSCI Capital International Global Index for the world, over time would likely exceed returns from following the narrower, ‘green’, ESG-dictated limitations.
Such broader indices’ returns have in recent quarters exceeded those of ESG-oriented funds, as the latter contain fewer strongly performing energy and defense firms – while holding more of sagging IT and ‘Green Transition’ stocks. If the CPP and its institutional peers persist in ESG-style investment strategy, subpar returns could hinder the asset growth needed to keep the pensions of Canadians fully funded.
ESG’ main goal: reorient investment towards a ‘Green Transition’. However, as presently formulated, ‘green’ investing is based on a false assumption – that renewable energy sources are reliable, clean and cheap – impossible without pairing with expensive energy storage. The disastrous wind and solar dependence is shown by the European Union’s current peril, and Texas’s dark and cold debacle last year.
ESG ‘scoring’ is inconsistent and often makes little sense. For example, some Asian exports to Western firms are made by UN-deemed forced labour – which should be unacceptable. Another ESG flaw oft ignored: extra environmental costs of solar, wind installations, and rare metals (some mined from horrific places like the Democratic Republic of Congo) to be used therein and in electric vehicles.
Finally, ESG dictates are being forced upon all of us as CPP plan members, many of whom would balk at it were they were apprised as to what it entails. CPP pensioners and contributing workers are not given a choice, unlike in Singapore or Chile where people have self-directed investment accounts. As it is, CPP pensioners and working contributors are unknowingly vulnerable, subject to inadequate returns from the politically correct and misguided ESG doctrine – a faulty investment ideology.
If the CPPIB opposes providing higher return, non-ESG alternatives to members then we must begin a serious discussion about transforming the CPPIB into a system of private pension accounts. This would leave political pension investment choices up to the individual where they should be.
Ian Madsen is the senior policy analyst at the Frontier Centre for Public Policy