Can CPPIB be long tobacco and still follow PRI ?

As you noodle the ethics of investing in gun companies and felonious banks (see prior post “Once CalSTRS is finished with guns, are HSBC and UBS next?” Dec. 19-12), I can’t help but save you the time and scan the stock portfolio of our very own CPP Investment Board. Although no gun manufacturers jump out, CPPIB owns stakes in each of the four publicly-traded U.S. tobacco companies, for example:

Altria: $98M position
Imperial Tobacco: $40M position
Lorillard: $87M position
Reynolds American: $8M position

It is reported that these firms represent 96% of the smokes made in the USA. Merchants of death, some might say, even if the 116k lung cancer deaths in the U.S. last year were mostly a result of self-inflicted puffing. For many, that makes it different than investing in gun manufacturers, since the cigarettes usually just end the life of the primary user.

CalSTRS appears to have zero invested in any of these four tobacco companies, and will soon be out of the gun manufacturing business. Local politics at work, perhaps, or maybe they’ve just been following their own 21 CalSTRS Risk Factors, with a focus on this risk directive in particular:

“Human Health: The risk to an investment’s long-term profitability from business exposure to an industry or company that makes a product which is highly detrimental to human health so that it draws significant product liability lawsuits, government regulation, United Nations sanctions and focus, and avoidance by other institutional investors.”

Which brings us to the CPPIB’s “Responsible Investing” policy, first adopted in 2005 and updated in August 2010.

As a long-term investor and owner, we believe that responsible behavior by these companies with respect to environmental, social and governance (ESG) factors can generally have a positive influence on corporate financial performance.

In the annual ESG report, things get quite profound:

CPPIB is highly committed to leadership in responsible investment practices throughout the world. Put simply, we wish to maximize sustainable, long-term economic outcomes by encouraging good business management of environmental, social and governance issues in the corporations and assets in which 18 million Canadians have a stake through the CPP Fund.

WHAT ESG FACTORS DOES CPPIB ADDRESS?

While individual to each situation, here are some of the issues that we consider when evaluating opportunities and managing assets, and that we bring up in dialogue with companies to seek improvements in their business practices and disclosure.

Environmental: Climate impact, notably greenhouse gas emissions; energy efficiency; air and water pollution; water scarcity; biodiversity; site restoration.

Social: Human rights; local community impact and employment; child labour; working conditions; health and safety; anti-corruption practices.

Governance: Balance and alignment of interests; executive compensation; directors’ election and terms; board independence and expertise; voting and other shareholder rights.

Our Policy on Responsible Investing articulates our principles, our strategy and our approach to active investment decisions. We do not screen stocks or eliminate investments based on ESG factors alone, as to do so would be inconsistent with our investment-only enabling statute. However, we believe that better corporate management of ESG issues is a strong indicator of, and contributor to, superior long term financial performance.

Having now read that bumpf, do any of you know what it actually means?

Does CPPIB invest in firms that have a negative impact on an individual’s health and safety, such as cigarette companies or gun manufacturers? As one of the founding signatories to the United Nations Principles for Responsible Investment, CPPIB has agreed to define responsible investing as: “excluding companies from the investment universe on the basis of criteria relating to their products, activities, policies or performance. This includes sector-based screening (where entire sectors are excluded)….”

The first principle of the UN PRI mandate says it all:

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.

That clearly requires CPPIB to consider avoiding investments in a particular industry based on its product. And yet the conclusion has been to stay invested in the tobacco space. But why? CPPIB doesn’t publish that information, other than to say that “our governing legislation states a simple objective “…to invest with a view to achieving a maximum rate of return without undue risk of loss…”.

So where does PRI / SRI fit, if the sole mandate is to “invest with a view to achieving a maximum rate of return without undue risk of loss”? On that sole mandate basis, CPPIB could have invested in the Cerberus fund, which in turn owned XR-15-maker Bushmaster, provided that it met this return vs. loss criteria.

Better yet, how does CPPIB’s PRI code treat firearms, tobacco, or banks HSBC and UBS? Canadians owned $175M of HSBC stock as of the last reporting date (3/12), and $74 million of UBS via the CPPIB. HSBC and UBS have just paid almost US$3.5 billion in fines after admitting they were engaged in illegal activity over an extended period of time; involving a wide range of their staff members. No rogue trader this time.

One of CPPIB’s stated PRI tests is “anti-corruption practices”. It turns out we have a large investment in a bank that has just been found to have been corrupt for a decade (in the cae of HSBC’s multi-billion dollar drug money-laundering). How can the agency continue to hold the stock? Because things have been cleaned-up? The adult version of “that was then and this is now”? That may well be an answer.

And if they/we don’t sell, despite this new knowledge that our investment is offside the agency’s PRI rulebook, does it make a mockery of the 2005 UN pledge that requies CPPIB to be a world leader in PRI? If you stand for protecting the “health and safety” of individuals, how do you own tobacco stocks when so many of your sister investing bodies appear to have made the decision to avoid the sector?

It’s all very fascinating. If only we knew the answers.

MRM