Investing in Canada’s future: John Graham, CPP Investments

John Graham has a clear mandate. As CEO of Canada Pension Plan Investments, he oversees the retirement savings of 20 million Canadians, with the goal of achieving the highest possible returns without undue risk.

And yet in a volatile and unpredictable world, his challenge is anything but simple.

Take, for example, the fund’s investments in the energy sector. Recently CPP Investments committed to achieving a net-zero portfolio by 2050. But that doesn’t mean it is divesting its holdings in Canada’s oil and gas industry.

“We believe fundamentally in a path of engagement,” Graham tells Goldy Hyder in the Speaking of Business podcast. “Divesting takes responsible owners away from the table. Divesting basically puts these assets in the hands of people who may not have the same values.”

Graham says Canada is poised for an “economic transition”, not just an energy transition, because the shift to low-carbon energy sources will affect almost everything we produce and consume.

And he sees a significant leadership role for Canada. “Canada knows how to do these types of initiatives at scale. I think we very much have the resources and the scientific and technical know-how.”

Find out more – including why John Graham switched careers from research scientist to pension manager – by listening to this engaging and wide-ranging episode of Speaking of Business.

Transcript

John Graham:

One of the things I love about the investment industry is it is so competitive. If you’re standing still, you’re going to fall behind.

Goldy Hyder:

Welcome to Speaking of Business, conversations with Canadian innovators, entrepreneurs, and business leaders. I’m Goldy Hyder of the Business Council of Canada. If you’re one of the more than 20 million people who contribute to, or benefit from the Canada Pension Plan, you should get to know John Graham. As the President and CEO of CPP Investments, he oversees the $550 billion fund. John and his team are focused on a very clear mandate, achieving a maximum rate of return without undue risk of loss. How do they achieve that in a world of volatility and uncertainty? Let’s find out. Welcome to the podcast, John.

John Graham:

Thanks Goldy. Thanks so much for having me.

Goldy Hyder:

So John, I mentioned in the introduction about how clear your mandate is, maximum return without undue loss. It does seem though like a pretty big challenge when you look at what’s going on around the world, the global pandemic, war, geopolitical uncertainty. How do you manage that?

John Graham:

In some ways, part of the beauty of the organization is a very clear mandate that we are here to maximize the total return of the total fund. We’re here to maximize return without undue risk of loss taking into account the factors that may impact the funding of the CPP. So how we’ve decided to execute on that mandate, is to build an active global investment organization. We have gone down a path of building out investment capabilities to invest in really all the major asset classes from private equity to infrastructure, credit, public equities, fixed income, and do that on a global scale and global basis. We have nine offices around the globe, eight outside of Canada, and have really spent the past 10, 15 years building the relationships, the infrastructure, the capabilities to be a global active investor. I’ve been here for over 14 years. I’ve been here for a lot of that growth. When I started, we were one office, we were one office here in Toronto. Our first office actually outside of Toronto was Hong Kong, then London. And as I said, today we have nine global offices.

Goldy Hyder:

So that positions you well to navigate the situation we find ourselves in then. What have you had to do as a response to the horrific events taking place in Ukraine?

John Graham:

Yeah. And of course, the thoughts go out to everybody impacted by the horrific acts in the Ukraine, and we’re supporting our employees to work through this terrible situation. Now I would say fortunately, I’ve been here for 14 years and we’ve never really viewed Russia as a priority or frankly an investible country. So we actually have not been actively investing in Russia pretty much since the time I started here at CPP Investments. And that’s a position we’ve continued to take. Now, that being said, Russia is a small part of the global economy. And as we can see from the volatility in the markets, there’s a knock-on effect here. There’s a knock-on effect into the energy markets. There’s a knock on effect into the markets going into a risk off-load.

John Graham:

What are we doing about it right now? The one thing is, in crisis, don’t make strategic decisions. And in this business, there’s two emotions, fear and greed. And right now fear is the dominant emotion in the market. So it’s important to reflect on what are your underlying investment principles? What’s your underlying investment philosophy and challenging yourself whether that still holds. We have a very diversified portfolio. Our portfolio is diversified as I mentioned by asset class, by geography. And that diversification is serving us well right now. And I’m sure we’ll talk about it at some point, we’ve continued to be one of the institutional investors that invest in energy and invest in conventional energy. And as we watch the energy market, that’s proved to be a pretty good investment.

Goldy Hyder:

Why don’t we go there? Because it definitely is on the list of things that I want to talk about. And I think it connects the dots right back to what’s going on in Europe today, right? Because much of the implications of what’s taking place has energy consequences, both inflationary pressures, supply issues, and of course, there’s agriculture and other things. But you’ve said that it’s not an energy transition, but in fact, an economy transition. Tell me what you mean by that.

John Graham:

As we think about the path to net zero, and we made our net zero commitment a few weeks ago, when we released our Q3 results. Part of that, we made a 2050 net zero commitment with a belief that the global economy will transition to net zero. And it’s the whole economy that needs to transition. It is the consumer that needs to transition, it’s the demand side of the equation that needs to transition, and it’s the supply side of the equation that needs to transition. If you’ve read Bill Gates’ book on climate, which is a relatively straightforward book, he does a pretty good job of unpacking the different industries and the different contributors to climate change and the energy sector and transitioning just from an internal combustion engine to an electric vehicle, that’s only part, right? You have energy intensive industries, you have agriculture, the economy, the world won’t transition to net zero unless all of these hard to abate sectors also transition, which I’m sure we’ll get to later. That’s where we see a real investment opportunity.

Goldy Hyder:

One of the things that sometimes leadership is about is, you don’t necessarily know how you’re going to do what it is that you’ve just said. And it sure sounds like that’s the case with climate change for a lot of people with their net zero commitments. How hard is it to make a commitment to something when you don’t really know how it is you’re going to get there?

John Graham:

Yeah. And look, this is something that we debated quite a bit internally, and really debated about the transition and the path of the portfolio to net zero. And I would say, we actually do know how to get the portfolio to net zero, but we’re not going to do it. And that’s blanket divestment. And we’ve been incredibly clear that we think blank divestment is counterproductive and it’s not the right path, it’s not the right path.

Goldy Hyder:

Why do you say it’s counterproductive? If someone was listening they would pushback and say, “Well, ask him why he thinks it’s counterproductive?”

John Graham:

Yeah. So we believe fundamentally in a path of engagement, and engaging with companies through the entire energy complex. Look at any forecast on energy consumption over the next decade, couple of decades, and conventional energy is going to continue to play an important role. And natural gas will be a transition fuel in this economy transition. Divesting takes responsible owners away from the table. Divesting basically puts these assets in the hands of people who may not have the same values. And so as a long term institutional investor, we believe that the path is engagement. It doesn’t mean that we won’t sell them. It doesn’t mean that we won’t sell assets. What we’re saying is we won’t do blanket divestment, but we expect the companies we invest in to have viable transition plans. And if we don’t believe they have viable transition plans, we will sell.

Goldy Hyder:

Yeah, you couldn’t be clearer about that. But in many ways, the situation in Europe with the reliance on Russian gas, is that an opportunity to make the case that you’re making right now?

John Graham:

I think very much so. Being a long-term investor, a long-term investor that can be constructive and engaged in the transition. We see this when people do blanket divestment, the assets end up in the hands of people that may not share the same values.

Goldy Hyder:

Another area of the world that has drawn a lot of attention is China. And I’m wondering, when the federal government puts out a policy paper effectively saying, we need an eyes wide open approach that includes China, how are you navigating that at the pension plan?

John Graham:

Over the past year, almost every conversation I’ve had has touched on at least one of the three Cs. Climate, China and COVID, every conversation.

Goldy Hyder:

Yeah. I don’t want to break this to you, but I think that’s been said a lot by a lot of people.

John Graham:

Yeah. I know. Now I do think crypto might replace COVID.

Goldy Hyder:

All right. You’re different there. My fourth was Canada, I talk a lot about Canada, the other C.

John Graham:

On China, and maybe I’ll just talk about why we think it’s important for CPP Investments to be a global investor, that we look to invest into harness the global economic growth. And in many ways we’re a GDP investor, we’re looking for the big economies around the world and to develop the capabilities to invest in those economies. We want to build, as I said, the relationships, the infrastructure, the capabilities to invest. And China’s a big economy, second biggest economy in the world. And at the current growth rates may very well end up being the largest. So we look at these economies and whether it be China, whether it be in India, whether it be Brazil, and we see an opportunity for diversification for global portfolio, we see an opportunity for scale and we see an opportunity for alpha. And what we spend a lot of time thinking about is the how. How do you do it? How do you navigate the geopolitical risk? And then how much? The how is really the question we ask ourselves with respect to investing in China.

Goldy Hyder:

And you’re optimistic about the ability to navigate that?

John Graham:

Am I optimistic?

Goldy Hyder:

Pragmatic, how about pragmatic?

John Graham:

I would say I am pragmatic about it. And I would say that everyone needs to be eyes wide open.

Goldy Hyder:

Yeah.

John Graham:

And constantly challenging ourselves and incorporating new information if it becomes available.

Goldy Hyder:

Well, that probably segues well to the fact that you became a CEO during COVID. There’s several people I know in that place. And I’m wondering, you started your role, everyone was working remotely. Obviously they knew, you’d been there a while. How is CPPIB navigating the workplace today? You and I’ve talked about this a lot in the last two years, but where are you at given everything that’s transpired over the last sort of while with Omicron, et cetera. But what’s your sense of where we go from here?

John Graham:

It’s an interesting question and I would say that, as I mentioned earlier, we have eight offices outside of Canada. And I’ll have to give the CPP Investments answer in that it’s very varied. And the path back to whatever the new normal is, is very geography dependent. I was in New York last week, I’ll be in London next week. Our U.S. and European offices are largely back to almost pre-COVID type of levels of activity, obviously Hong Kong with the breakthrough of Omicron and the break of the no COVID policy that they’re going through a very challenging situation right now. And I’d say within Canada, we’re probably a little bit behind where we’re seeing some of our U.S. and European and U.K. colleagues.

John Graham:

That being said, going forward where we want to end up, I think like a lot of people, Goldy, we want to end up at the hybrid. We’ve seen a lot of positives in the work from home with, we’ve seen productivity, but we’ve probably questioned whether we’re being as creative, whether we have as much collaboration and that there’s real value in being together. So ideally we want to be in a place where people are spending the majority of their time in the office, but are empowered to work from home when they don’t have to be in the office.

Goldy Hyder:

Most CEOs I speak with are really seized with culture. Every CEO thinks their place has got the special secret sauce. Are you worried? How do you think you’ll manage the culture given that there’s obviously change when you change the model the way you’ve just described?

John Graham:

Yeah. Another C word, right? Culture, put it on the list. But global organizations, this is something that you have to spend a lot of time thinking about, right? We have one fund, we’re here to deliver the best total return to our 20 million Canadian contributors and beneficiaries. It’s not lost on anybody in this company that our investment portfolio is global, but our contributors and beneficiaries are all Canadian. And that’s really who we’re here to deliver the best return for, we have one fund, we have one brand and we do have one culture. We have lots of different accents across this organization.

Goldy Hyder:

Well said.

John Graham:

We have 80 different languages spoken by our employee base across the organization. And we have spent, I think, a tremendous amount of time trying to build what is the CPP Investments culture, what are our guiding principles? What are our expectations? And we’ve probably leaned into it over the past two years during the pandemic. But undoubtedly, as we come out and get people back together, we need to rebuild that connective tissue. One of the things I’m doing and I’m personally doing is over the next few months I’ll be visiting all of our significant offices. I’ll be in Mumbai, I’ll be in Sao Paulo, I’ll be in New York, San Francisco, London, Sydney, spending time with the local teams. And it’s not just me, the senior team across the organization will be fanning out across the globe to really ensure they have that connectivity with our global team.

Goldy Hyder:

On the road again.

John Graham:

On the road again. Yeah. It’s not quite as glamorous as it used to be.

Goldy Hyder:

Yeah. But let me tell you, having done it a little while recently, it’s like riding a bike. It comes back pretty quickly. Now, in the spirit of C words, there was one that’s not in my list of things I was going to ask you about, but given what you do, I’m wondering, we talked about geopolitical risk and everything that’s going on out there, the need for security and particularly cyber security. Have things changed? How are you managing those kinds of risks? Because, again, Canadians care about how you manage that.

John Graham:

Yeah. I would say cyber is top of mind. It’s certainly top of mind for our board. It’s certainly top of mind for me.

Goldy Hyder:

But did it become more important as a result of what’s going on, is it immaterial? Are you concerned?

John Graham:

I would say it has been more important, it’s probably more topical, but this is something that we need to have in place the appropriate defenses, and we shouldn’t be reacting to an environment like this.

Goldy Hyder:

Right, right.

John Graham:

So it’s an area we spent a lot of time and effort over the past few years getting to a level we’re comfortable with. And I think everybody’s watching around the world and talking to a lot of people around the world is, what do you expect from a cyber perspective with the Russian-Ukraine crisis?

Goldy Hyder:

All right. I’m glad I asked that because that’s something that I know that people know it’s important but don’t quite know why, or how it is that affects them even in a pension fund. So, sticking with the theme of Cs, you were a chemist, I guess you have a PhD in chemistry.

John Graham:

Oh, yeah.

Goldy Hyder:

How does a guy with a PhD in chemistry, or scientist by training, end up at the Pension Plan and running the Pension Plan?

John Graham:

Yeah. No, I have a PhD in physical chemistry and then I worked for about nine years as a research scientist. So really as a bench scientist developing, writing patents, writing papers and came over to CPP Investments around 14 years ago. Now, when I was working as a scientist, I did do my MBA. So I did do some formal business training and I was in the corporate world. So I was in corporate R&D and I transitioned into more strategy alliances, looking for new technologies, lots of really interesting things. And then I got an opportunity to come to CPP Investments. And at the time, CCP Investments was still building out. And what I had was some technical skills. I had the MBA, so I had the formal training there, and I took a huge step backwards professionally to go from a successful executive within a technology company to really an entry level employee at a pension plan.

Goldy Hyder:

So all of these kids listening, you took a step backwards, I’m guessing it came with a big step backwards on the pay.

John Graham:

Oh, yeah.

Goldy Hyder:

And you set yourself up for success later.

John Graham:

I remember getting the call and said, “We want you to come in and talk.” And I think I may have told you this before, my first reaction was, John Graham’s a really common name, are you sure you have the right John Graham? They’re like, yeah, no, we got the right John Graham. I said, “Okay, I’d be interested in hearing more.” And I must admit, Goldy, when I came in and met the people I was just blown away. And what I could see at that time in CPP Investments was an organization that had unbelievable potential, the trajectory it was going to be on and an unbelievable potential, both on a national and an international scale. And to be able to get in somewhat at the ground floor in an organization that had this capability, it was really exciting. Now, I did have to take a step back and it was my wife, Melissa, that really pushed me over the edge and I remember trying to be very …

Goldy Hyder:

It’s good she didn’t push you out the door. I’m sorry, we’re making less now?

John Graham:

And trying to use the scientific method and going through the pros and the cons. And Melissa said, “John, I know you and you’ll regret more not taking it than taking it and failing. So just do it.” And when I came, everything I saw from the outside, even I underestimated the potential of the organization at the time.

Goldy Hyder:

Well, and the numbers speak for themselves.

John Graham:

Yeah.

Goldy Hyder:

In terms of growth. Your story is somewhat playing out for others that you’re hiring at CPPIB. I’m told that you started a program that you were actually willing to hire people with no credit experience, another C word by the way, but no credit experience. So what made you do that? I mean, why hire somebody who doesn’t know what they’re doing for what you need them to do?

John Graham:

Yeah. And as you can imagine, I have a soft spot for nontraditional backgrounds.

Goldy Hyder:

No kidding. No bias there.

John Graham:

Yeah, exactly. And at the end of the day, really looking for the best brightest employees to come in. We are a long term investor, and also taking that perspective with our talent, that we’re here to play the long game with our talent and we can train people. We can train people to be investors. And I think we have 70 people within the company who have PhDs. We have 80 different languages as I mentioned, we have people who have graduated from 1600 different universities from around the world. So really I think have tried to lean into diversity of thought and that diversity of kind of educational background.

Goldy Hyder:

I think people underestimate just how much good business diversity is, frankly.

John Graham:

Yeah.

Goldy Hyder:

Now, we’ve been talking a lot about sort of the present situation and you and I are talking first week of March, the podcast will run a little later than that. But when you look further down the field, right? We’ve obviously talked about geopolitical risk. We’ve talked about climate. Are there other headwinds that have you concerned?

John Graham:

Other headwinds that have me concerned.

Goldy Hyder:

Yeah. Whether it’s about the pension plan itself or just more globally or economically, or the region that we live in, what keeps you up at night I guess to some extent?

John Graham:

Yeah. Well, nothing keeps me up at night. I would say as a global investor, it’s something we touched on before and thinking about maintaining and being a global investor, two things I would say that I’m really focused on one is competitiveness and-

Goldy Hyder:

What do you mean by that?

John Graham:

Well, one of the things I love about the investment industry, is it is so competitive. If you’re standing still, you’re going to fall behind. And every few years, we watch certain markets commoditize where the ability to add value just gets driven away by the amount of capital that’s in the space.

Goldy Hyder:

Is that a risk for us as Canadians? Like, are you comparatively saying, we are a little too cautious or a little too careful, should we be more bold and aggressive? Responsibly, of course. But should we be doing more bold things?

John Graham:

I wouldn’t extrapolate to Canada or Canadians, but people who know me, the risk that I am most worried about and probably everything is, complacency, another C word is complacency.

Goldy Hyder:

As well as competitiveness.

John Graham:

As well as competitiveness is complacency. And the investment industry just punishes complacency. And it’s one of the things I really actually love about it is, you have to wake up every day thinking about how do you compete and how do you maintain an edge. Our organization has tremendous comparative of advantages and we have to make sure that we keep leveraging those. So whether it be by asset class, by geography, whatever it is, ensuring that we never become complacent. The other area that is always on our mind is, we have made the decision to be a global investor. And some of that is predicated on convergence, right? Convergence of the global economy. And are we seeing divergence now, is divergence occurring between the big economies? And what does that mean? In and of itself, it’s not necessarily bad. It may mean more diversification. It may mean that correlations aren’t as high. But that is something that needs to be reflected upon is convergence a thing in the past?

Goldy Hyder:

That’s a great question. I mean, this is what the big bet has been for the last little while, hasn’t it? I guess time will tell.

John Graham:

Yeah.

Goldy Hyder:

Well, let’s flip it around and try and end on a couple of positive notes if we can. In terms of the optimism, where do you draw your optimism from? What makes you feel like things are going to be all right?

John Graham:

Yeah. I would go back to what we talked about at the beginning, and that’s getting back to climate and the economy transition. I’m incredibly excited about the opportunity here. I’m incredibly excited about the opportunity for CPP Investments. I’m incredibly excited about the opportunity for Canada to be a leader in the transition. The whole global economy has to transition. And I see estimates of 60, 70, 100, $120 trillion. I don’t know what the right number is, but it’s a big number.

Goldy Hyder:

Some have said the size of the entire global GDP.

John Graham:

It’s a big number.

Goldy Hyder:

It’s a big number.

John Graham:

Yeah. And it will require patient capital, it will require partnership capital and it will require scale capital. And that’s the type of capital we have. We’ve been building out really a competency here to invest in this, including building out some real value creation conferences. We named our first chief sustainability officer in building out a transition strategy. And I think it’s amazing to watch the world starting to actually get some convergence on this issue and the private sector in particular, starting to get some convergence and seeing that this is actually a huge investment opportunity.

Goldy Hyder:

You said it earlier, and I didn’t pick up on it. I want to come back to it. You mentioned that there’s a role for a lot of people in this transition, whether it’s government, whether it’s business or others, but you also said the consumer. How are you feeling about how much the consumer actually knows about just what an impact this could have on their lives? And I guess it’s going to have to cost them something as well. Do you think we’re communicating as governments and as business leaders and others to the public well?

John Graham:

We wanted to end on optimism.

Goldy Hyder:

I have one more. Don’t worry, I’ll give you one more.

John Graham:

Okay.

Goldy Hyder:

But this is an important question, right? Because you can’t get there without the support of the public.

John Graham:

Well, this is something we’ve talked about and an area that we think there’ll be a lot of discussion over the next few years within ESG, E has been a real focus, but it ultimately could be like pushing air around a balloon, right? And S is critically important and this needs to be a fair, it needs to be a just transition. And it can’t be disproportionately born by certain parts of the population. And I think we’re going to be talking a lot about S over the next few years. So that was really my reference to the consumer, is also taking into consideration the impact on the ultimate consumer.

Goldy Hyder:

All right. Last question is one that we’ve been asking everyone who’s been a guest this season, and that really is, put on your thinking cap and say, what is one big idea that you think can help? And I know you may have already answered it, but I have to ask it anyways. But what is one big idea that you think could really help transform Canada?

John Graham:

I probably have a couple, but maybe I’ll think of one and-

Goldy Hyder:

No, I’m going to allow you two. What the heck?

John Graham:

Yeah. Well, I think I have covered one a little bit and that’s around the energy transition. Part of it is with respect to the scientific and engineering know-how that Canada possesses. And the solution to this is industrial in scale. It’s not going to be solved in a garage, it’s industrial in scale and Canada knows how to do these type of initiatives in scale. So I think we very much have the resources and the scientific and the technical know-how. The second one is a looking at the geopolitical risk and looking at the geopolitical risk around the world. And even over the past, I would say year, I’ve spoken to old colleagues from going back to my science days who want to come to Canada, who want to immigrate here and see Canada and with all the geopolitics around the world as an incredibly attractive place to hoover up the best scientists and engineers from around the world and bring them to academia or into in the industry. I’m actually in a way I haven’t seen in my career a desire for some of the best minds to come to Canada.

Goldy Hyder:

Yeah. Pretty key to our growth. John, thanks for doing this. I was thinking of all the C words to describe your appearance and cool keeps coming to mind. So the cool CEO from the CPPIB with all that confidence and competence sharing his wisdom for our listeners. Thank you for doing this. We appreciate it.

John Graham:

Thank you much. Appreciate it.

Goldy Hyder:

John Graham is the president and CEO of CPP Investments. I’ll be back on April 7th when I’m speaking with Mary Ann Yule, president and CEO of HP Canada, here’s a preview.

Mary Ann Yule:

Everyone needs the freedom to disconnect. Confronting the burnout from the last two years is quickly becoming a bottom line issue for employers. And there’s no one size fits all remedy. Flexibility looks different for everyone. So finding that right solution that balances the organization’s performance needs with the needs of employees, requires understanding, empathy and support from leaders and teammates.

Goldy Hyder:

If you’re liking our Speaking of Business podcast, please give us a review. And if you’re new to the podcast and would like to hear more conversations with innovators, leaders, and entrepreneurs, why not subscribe? Search for Speaking of Business, wherever you get your podcasts or go to our website @thebusinesscouncil.ca. Yes, it’s thebusinesscouncil.ca. Until next time, I’m Goldy Hyder. Thanks for joining us.