Toby Mitchenall, New Private Markets, and Wei Leng Liong, CDPQ

Is taking advantage of tax loopholes bad form for ESG-conscious investors? It is for CDPQ, according to Wai Leng Leong, the Canadian pension’s managing director for Asia-Pacific.

“We do believe in playing fair. We are not supportive of extremely creative, abusive tax planning,” Leong said during a keynote interview last week with Toby Mitchenall  PEI Media’s senior editor, ESG and sustainability, at the company’s Responsible Investment Forum: APAC Investor Day. “This is a subject matter that we feel quite strong about.”

Leong said that CDPQ, which is among Canada’s largest institutional investors with C$389 billion ($304 billion; €259.5 billion) in assets, has made tax planning a key focus as part of its approach to building good governance internally and within its portfolio. “When we have to pay, we have to pay,” she explained. “That’s really part of the contribution to the fiscal health of each economy.”

Three areas of tax planning that CDPQ focuses on are considering a jurisdiction’s effective tax rate; base erosion and profit-sharing standards; and the approach of its investment partners. “This is something which all of the investment professionals within CDPQ [focus on],” Leong explained. “This is really our bread and butter.”

She added that even though CDPQ’s approach to tax planning has led to “tense discussions” internally and with the investor’s partners, it is still a “very healthy debate to be had”.

“We differentiate in terms of what we can live with, what we should fight for and what are some of the things that we will push back,” Leong said. “Some of our GPs will have the last say when it comes to tax jurisdiction, but we will articulate our point of view and try to influence as much as possible.”

CDPQ has participated in 30 deals over the previous three years, totalling around C$9 billion of investment, in which tax planning issues have been a focal point of negotiations. “We were able to come to an agreement on structuring the deals in such a way that we feel that it’s a fair game when it comes to tax jurisdiction as well as the effective tax rate,” Leong explained.

Outlining other ESG initiatives that CDPQ has implemented or is in the process of implementing, Leong said the LP has limited ESG-linked bonuses to environmental efforts because carbon emissions are more easily measurable than areas such as diversity, equity and inclusion.

She added that DE&I is still “something that we are very mindful of increasingly”. CDPQ’s board of directors has almost reached gender parity, and the executive committee is around 31 percent female. The LP also launched a C$250 million investment platform last October called Equity 253 which aims to increase diversity and inclusion in growing small and medium-sized businesses in Quebec and across Canada.

On the environment, Leong said CDPQ is running ahead of previous commitments to increase low-carbon investments and decrease carbon emissions. The investor has doubled the amount of capital it deploys into low-carbon assets over the previous three years, with such assets now representing around 10 percent of CDPQ’s total portfolio, according to Leong. The LP has also cut its portfolio’s carbon emissions by 37 percent – ahead of a target, set in 2017, of reducing them by 25 percent by 2025.

CDPQ has joined industry initiatives including the Net Zero Asset Alliance, the Investor Leadership Network and Maple Eight, a network comprising Canada’s eight largest pension funds that seeks to standardise ESG reporting.

Leong also teased an upcoming announcement about a platform CDPQ is launching that will focus on innovative investing in the transition to a low-carbon economy. “The idea is that this can be better targeted [to] types of investments,” she explained.

CDPQ generated a 5.6 percent net return for the first six months of 2021. The pension has returned 8.5 percent over a five-year period and 8.8 percent over 10 years. CDPQ’s portfolio is split between 42 percent alternatives – private equity, real estate and infrastructure – 30 percent public equities and 20 percent fixed-income.