Newfoundland & Labrador and NLPIB
What does NLPIB do?
What is divestment?
Find out about the global divestment movement and how it has impacted the province of NL and NLPIB.
Who is impacted?
Come see the stakeholder groups who will feel the impact of NLPIB’s descisions and the Board of Directors who represent their interests.
NLPIB
The Province of Newfoundland and Labrador
Newfoundland and Labrador (NL) is the most eastern province of Canada and is made up of two large but disconnected land masses: Newfoundland and Labrador.
525,000
Population of NL, mostly on the island of Newfoundland
Oil & Gas
Logging
Fishing
Mining
As a result of its increasing economic dependence on oil & gas, the province is sensitive to fluctuations in the oil price:
25%
of government revenue from 2007 to 2013 from oil royalties
From recent collapse of oil prices, this ratio has dropped clos
13%
The NL Oil Spill
About NL Pension Investment Board
History of NLPIB
What does NLPIB do?
It is responsible for investing $15 billion of assets (half of NL’s GDP) belonging to 82,500 active and retired members, and ensuring that liquidity requirements are met. However, it is not responsible for administering the plans and paying out the liabilities, which is done by another government entity.
NLPIB’s Dual Mandate
Making a sustained and durable contribution to the local provincial economy**
*If the fund consistently misses the target, the board of directors would likely face public scrutiny and see significant turnover.
**27% of NLPIB’s assets are directly invested in NL firms and infrastructure projects.
NLPIB’s Request for Proposal
How does NLPIB currently invest?
All investment decisions are overseen by an independent investment board comprised of 7 members. Each board decision is scrutinized closely by members of the press, and any person who is a plan member may request information in writing about the fund’s administration and investment activities.
NLPIB’s Mission
Manage assets in the best interest of NLPIB contributors and beneficiaries
Invest assets to achieve a maximum rate of return
Continue to invest in provincial initiatives and projects to bolster the NL economy
What kind of assets does NLPIB invest in?
Equity: shares of ownership in companies
-Public equity: stocks in publicly traded companies on exchanges
-Private equity: shares in private companies generally owned by institutional investors such as pension funds
Fixed Income: bond investments paying “fixed” rates of interest and returning investors’ principal
-Nominal: interest rate paid on loans or bonds
-Real: nominal interest rate adjusted for inflation
Real Assets: physical, tangible assets with inherent worth
-Infrastructure: assets such as highways, airports, railways, energy generation and distribution
-Real estate: residential or commercial properties
Alternatives: investments that aren’t traditional assets like stocks and bonds
-Commodity: physical goods like gold, copper, crude oil, or corn
-Futures: contract between two parties to buy or sell an asset some time in the future
-Commodity futures: contract to buy/sell commodities like gold or corn some time in the future
NLPIB’s Request for Proposal
Among all these asset classes, NLPIB holds both direct and indirect investments. Direct investments are those that NLPIB manages directly, while indirect investments are NLPIB’s shares in funds managed indirectly by external investment managers.
The fund currently allocates 27% of its portfolio to direct investments and the remaining 73% to indirect investments. The Board believes that diversification of the investment portfolio by asset class, underlying risk factor, geographic exposures, currencies and active management strategies, provides both substantial diminution of long-term portfolio risk and broad access to the worldwide range of investment opportunities for the generation of long-term returns.(See: what is diversification?)
Direct Investment
The fund has been trending towards larger positions in fewer assets to better influence business operations locally. The NLPIB invests mainly in three local industries: oil & gas, mining, and infrastructure.
Muskrat Falls (Infrastructure)
NLPIB currently holds a $500M stake in the Muskrat Falls project, which is an 824 MW hydroelectric generating facility on the Lower Churchill River, for which construction began in late 2013. The project embodies NLPIB’s commitment to sustainable investing. The facility intends to meet the province’s long-term energy needs of providing clean and renewable energy for future generations, irrespective of oil production. Upon sanctioning and approval from the NL government, the project was expected to cost around $6B. However, as of 2018, the project had incurred costs of over $12.7B and remains significantly behind schedule. Construction has also been slowed by organized protests on the part of the Nunatsiavut government*, which fears that the project may cause methylmercury poisoning in the surrounding Lake Melville. Due to delay and cost overruns, the project has yet to generate returns. *The rights to autonomous governance of indigenous peoples in NL was recognized at the provincial and federal governments of Canada in 2000. Subsequently, they formed their own governing body in 2005. This is explained later on in the case.
Saint John’s Airport (Infrastructure)
NLPIB holds an $800M stake in the St. John’s airport, the largest in the province. In 2010, tourism in NL contributed $410M to the province’s GDP, or 1.1% of economic output. This contribution was higher than logging and fish harvesting, showing the region’s potential for further growth in the tourism sector. Supporting local infrastructure and tourism has the potential to generate economic wealth and prosperity in NL.
Labrador Iron Ore (Mining)
Mining is one of NL’s oldest and most important economic activities. The sector provides over 6,000 jobs in the province, particularly in under-served rural areas. NLPIB has invested $1.1B of its direct portfolio in Labrador Iron Ore, a publicly traded iron ore mining company situated in a remote region of Labrador. Though this remains one of the fund’s best performing assets, Labrador Iron Ore was adversely affected by a nine-week labor strike from March to May of 2018, halting all production during that time. As a result, the company faced a 17% drop in its 2018 revenues, as compared to 2017.
South White Rose (Oil)
Following the collapse of NL’s cod-fishing industry and the subsequent discovery of new oil extraction sites in the province, NLPIB began to amass significant holdings in this sector. Discovered in 1984, the White Rose Oil Field is the province’s third largest, estimated to contain over 230 million barrels of recoverable crude oil. NLPIB currently holds a $1.6B stake of South White Rose, a 40-square kilometer fictional subfield within the broader geography, making it the fund’s largest local investment.
Indirect Investment
The remaining 73% of NLPIB’s portfolio are invested in a series of Exchange Traded Funds (ETFs), which are convenient, low-cost, and efficiently managed
Equities
NLPIB invests in global equity markets through seven ETFs. This diversified portfolio of long-term core holdings is exposed to hundreds of publicly listed and private stocks of all sizes and compensate for industries that are underrepresented in NL such as technology, healthcare and consumer staples, while providing global diversification. It is important to note that the fund is exposed to oil & gas through its ETF holdings. For instance, the iShares Emerging Markets ETF (EEM) has a 7.37% allocation in the energy sector, including holdings in petroleum producers. (See: what are ETFs?)
Fixed Income
The fund currently invests in three fixed-income ETFs that disburse cash monthly to match liabilities. Two funds include government and corporate nominal bonds with different durations, and one fund specializes in bonds indexed to Canadian inflation.
Real Estate & Alternatives
In addition to its equity and fixed-income ETFs, NLPIB tactically invests in two additional ETFs: one invested in real estate, and another tracking commodity futures. These futures contain gold, oil, wheat and corn futures among others.
Environmental, Social & Governance (ESG) Considerations
NLPIB encourages companies and organizations to adopt policies and practices that promote responsible corporate and organizational behavior with respect to environmental, social and governance (ESG) factors. NLPIB firmly believes in the engagement and integration of ESG factors into the evaluation and management of both public and private investments. In addition, following recent pressures to conform to ESG standards, NLPIB has recently begun to invest in two ETFs specifically focused on ESG-focused investment strategies.
With escalating tensions following the SeaRose oil spill and pressure from activist groups, NLPIB has been urged to do more. Proponents of the ESG movement are calling for NLPIB to divest away from oil & gas and to implement a transparent ESG investment screening process to be used in all investment decisions.
How has divestment impacted NL & NLPIB?
Global Divestment Movement
The divestment movement around the world stemmed from a group of American students in 2011, which they contend is “a moral call to climate action”. In recent years, this movement has taken a new direction with pension funds, banks, and insurance companies around the world announcing they would start divesting their holding in non-ESG industries. Based on the recently published Global Fossil Fuel Divestment and Clean Energy Investment Movement 2018 Report, nearly 1000 institutional investors from all around the world with a combined $6.24 trillion in assets have committed to divesting their funds to improve the state of the environment for future generations. Since then, the divestment movement has seen increasing popularity around the globe, particularly in developed economies.
Divestment Movement in Newfoundland and Labrador
The recent offshore oil spill in NL has exacerbated protests against large polluting firms and strengthened the divestment movement in NL. The most immediately affected are the indigenous communities living in coastal areas, who have seen increasing environmental damage from the release of the oil. Tensions are escalating between these communities and oil companies, sometimes requiring police intervention.
Following a major protest that brought together thousands of citizens, students and indigenous groups, both the Prime Minister and the Premier of NL – who also face pressure from international activist groups – have made a strong case to the NLPIB Board to consider a strategy divesting the Fund’s fossil-fuel investments. An alternative to complete
divestment from the oil & gas sector would be a moratorium similar to that imposed on the cod-fishing industry in 1992. Under these conditions, no new oil extraction projects could be pursued in NL.
Implications of Divestment for NLPIB
It is important to clarify that divestment does not necessarily imply a halt in oil production. After careful review, the board of NLPIB anticipates two likely outcomes if it divests from its direct investments in oil-related assets:
It is possible that NLPIB cannot find a buyer for the South White Rose project, meaning the project would need to be shut down. This would result in a significant reduction in revenues, notably from offshore royalties.
NLPIB successfully finds a buyer, but the degree to which this buyer would be concerned with environmental protection is uncertain. Moreover, a portion of tax revenues on profits from the industry would be shifted to an external entity.
NLPIB would also need to sell its position in all ETFs with oil related equities. While divestment will surely appease activists, NLPIB is likely to face two challenges:
New pressures from pensioners to invest in assets with similar risk-return profiles as that of the oil & gas sector.
Potential precedent for divestment from other polluting industries such as mining or logging.
NLPIB
Implications of Divestment for NL’s Economy
13.2%
Oil Extraction
12%
Construction
15.6%
Finance, Insurance, Real Estate, Business Support services
Furthermore, these industries are highly interrelated. Construction in the province is largely focused on developing the infrastructure needed for oil extraction. The financial services sector is also dependent on the oil extraction industry given the industry’s clients and capital expenditures.
Regarding the possibility of job loss, the oil extraction and construction industries only make up 1.3% and 9.2% of NL’s population. However, the economic benefits reaped from these industries trickle down to the larger economy, such as the retail sector, which accounts for 16.2% of total employment. The potential impact of divestment on NL’s economy thus cannot be overlooked.
Impact of Divestment on NL’s Public Finances
NL’s three greatest sources of its $5.8 billion annual revenue (hyperlink already attached in previous drafts) are provincial taxation (50%), federal government transfers (17%) and offshore royalties (13%). Divestment from oil and gas projects could eliminate large portions of government tax revenue and the entirety of offshore royalties, especially if the government cannot find buyers and must shut down operations. Furthermore, the development of the local oil industry has increased the province’s ability to generate revenues so significantly that NL is no longer eligible for federal government transfers as of 2008. Yet, government spending in NL has increased significantly in the last two decades, amounting to $7.8B in 2018 and resulting in a total net deficit of $14.6B. Seeking to reduce spending on bureaucracy, the NL government has already removed 795 positions and is still negotiating lower employee benefits with labor unions.
Who are NLPIB’s key stakeholders?
Provincial Government
The provincial government must balance the needs for economic development and environmental protection. On the one hand, the oil & gas industry is the most significant contributor to GDP for the province, allowing for government funding of infrastructure, social services and benefits. Due to slower economic growth, however, investment in environmental cleaning and waste management is limited – making complete divestment from oil & gas difficult. The government is also facing a deficit of $547 million in 2018, which requires continuous cash injection for debt-servicing costs (which amounted to nearly $1B in 2018).
On the other hand, the provincial government is aware that being dependent on a single industry is risky. In the 1990s, overfishing of cod led to the collapse of the industry, which represented an important source of revenue for the province. The provincial government also seeks to abide to its commitment to the Paris Climate agreement and limit carbon emissions. Ultimately, the government needs to strike a balance between economic growth and environmental protection.
Taxpayers
Personal and sales taxes are primary sources of revenue for the NL government. Beyond this, taxpayers are influential because of their voting power and ability to limit government action in dealing with important issues. As such, taxpayer satisfaction is an important decision factor in this case. For one, taxpayers expect a minimum level of social services to be provided by the government, such as education, healthcare and infrastructure maintenance. If these services cannot not be met due to lack of government revenue, taxpayers may choose to vote out the current government or leave the province altogether.
Demographic shifts are also influencing the need for taxpayer funding. For one, the ageing population in the province is increasing demand for hospitals and retirement homes. Furthermore, the aforementioned government debt burden is being partially passed on to taxpayers, with the government considering the possibility of raising taxes by another 26%. Taxes in the province are already considered high and any further increases could cause political upset. The balance between future and current benefits leaves considerable debate among citizens of NL.
Pensioners
In order to maintain its fiduciary duty to plan members, NLPIB must consider the impact of any decision it makes on current beneficiaries, who want to continue receiving benefits as promised. New plan beneficiaries are also concerned with receiving the same benefits as older generations and maintain equality. Following the oil spill, NLPIB surveyed pensioners to determine their views on supporting the oil & gas sector in the province, as well as the wide-scale adoption of ESG principles in all future investment decisions. The results were interesting: although respondents indicated that they preferred a portfolio of sustainable investments, the overwhelming majority was unwilling to accept lower returns in exchange for ESG compliance.
Indigenous Groups
In 1995, the Federal Government declared that Aboriginal groups have an inherent right to self-government. This allows groups to negotiate for complete political autonomy in some areas and obtain some natural resource management rights on their land. NL’s Aboriginal groups are generally against oil exploration because of ancestral ties to the land, and deep respect for the environment. In 2005, the Inuit communities formed the Nunatsiavut Government and secured a board seat on NLPIB and giving them a strong voice over oil extraction on their lands.
The Oil & Gas Labor Union
Oil exploration and extraction employees are largely unionized, with most bargaining units falling in the jurisdiction of the NL Oil & Gas Labor Union (NLOGLU). Payment of union dues is mandatory for workers in the sector. As a private-sector union, the NLOGLU has no direct ties to NLPIB or its assets. Despite this, it has a strong and unified presence in the NL community; well-known for a long history of strikes and protests. Moreover, their large size and high visibility in local media and politics makes them a strong adversary to the divestment decision.
Current Role: Ex-Assoc. Dean of Faculty of Business, Memorial Univ. of Newfoundland
Ms. Michael has over a decade of experience as the Associate Dean of Memorial University’s School of Business. As current Chairwoman of NLPIB, Ms. Michael has been appealed to numerous times by proponents of both sides of the divestment movement. She wants to ensure that all sides of the issue, and the people they affect, are considered ahead of the vote in November. She remains undecided about what should be the optimal investment strategy.
Current Role: Ex-Assoc. Dean of Faculty of Business, Memorial Univ. of Newfoundland
Ms. Michael has over a decade of experience as the Associate Dean of Memorial University’s School of Business. As current Chairwoman of NLPIB, Ms. Michael has been appealed to numerous times by proponents of both sides of the divestment movement. She wants to ensure that all sides of the issue, and the people they affect, are considered ahead of the vote in November. She remains undecided about what should be the optimal investment strategy.
Current Role: NL Minister of Advanced Education, Skills and Labour
Mr. Anders is responsible for developing NL’s human capital. He oversees provincial educational activities at all levels. Through his pro-divestment stance, Mr. Anders hopes to publicly display his commitment to sustainable development and ecological protection – particularly to student voters. Mr. Anders intends to run for the position again in the upcoming provincial elections and is trying to garner as much support as possible.
Current Role: NL Minister of Advanced Education, Skills and Labour
Mr. Anders is responsible for developing NL’s human capital. He oversees provincial educational activities at all levels. Through his pro-divestment stance, Mr. Anders hopes to publicly display his commitment to sustainable development and ecological protection – particularly to student voters. Mr. Anders intends to run for the position again in the upcoming provincial elections and is trying to garner as much support as possible.
Current Role: Canadian Coast Guard Commissioner
Mr. Hutchinson has served as Canadian Coast Guard (“CCG”) Commissioner since 2010. Under his leadership, CCG was tasked with marine search and rescue, communication, navigation and transportation issues in Canadian waters, and was also responsible for managing marine pollution issues. Mr. Hutchison has always been in favor of divestment, and since the recent oil spill, he has become concerned that oil & gas companies have become negligent to the environmental impact of their actions.
Current Role: Canadian Coast Guard Commissioner
Mr. Hutchinson has served as Canadian Coast Guard (“CCG”) Commissioner since 2010. Under his leadership, CCG was tasked with marine search and rescue, communication, navigation and transportation issues in Canadian waters, and was also responsible for managing marine pollution issues. Mr. Hutchison has always been in favor of divestment, and since the recent oil spill, he has become concerned that oil & gas companies have become negligent to the environmental impact of their actions.
Current Role: President, Labrador Inuit Association
Ms. Ross was appointed by the active beneficiaries of the NLPIB for a 3-year term which began in May 2017. This seat was created in 2005 for Inuit communities in conjunction with the provincial and federal governments to give them a voice in the investment decision process. Ms. Ross has a wealth of experience with the Labrador Inuit Association, and has held the position of President since 2015. As a representative of the Indigenous community with a deep spiritual and ancestral connection to the surrounding lands, she favors divestment to prevent natural heritage in NL from being further exploited.
Current Role: President, Labrador Inuit Association
Ms. Ross was appointed by the active beneficiaries of the NLPIB for a 3-year term which began in May 2017. This seat was created in 2005 for Inuit communities in conjunction with the provincial and federal governments to give them a voice in the investment decision process. Ms. Ross has a wealth of experience with the Labrador Inuit Association, and has held the position of President since 2015. As a representative of the Indigenous community with a deep spiritual and ancestral connection to the surrounding lands, she favors divestment to prevent natural heritage in NL from being further exploited.
Current Role: Chief Risk Officer, Canadian Tire Bank
As a CFA charterholder and Chief Risk Officer of a Canadian bank, Mr. Rogers brings financial expertise to the Board. He believes that divesting from fossil fuel and O&G stocks would significantly lower the portfolio’s overall return and that there is no existing combination of assets that could replicate this return at the same level of risk. Subsequently, Mr. Rogers asserts that divestment is not consistent with the board’s fiduciary duty to pensioners.
Current Role: Chief Risk Officer, Canadian Tire Bank
As a CFA charterholder and Chief Risk Officer of a Canadian bank, Mr. Rogers brings financial expertise to the Board. He believes that divesting from fossil fuel and O&G stocks would significantly lower the portfolio’s overall return and that there is no existing combination of assets that could replicate this return at the same level of risk. Subsequently, Mr. Rogers asserts that divestment is not consistent with the board’s fiduciary duty to pensioners.
Current Role: Chairman, Association of Sea Food Producers
Mr. Butler has led the Trade Union for Seafood Producers since 2012 and has witnessed the adverse impact of the Cod fishing ban on the workforce in NL. While most fear that over-extraction of oil and gas could lead to a recession, Mr. Butler is more concerned with the impact of divestment on workers in the sector and their dependents. He argues that it would be nearly impossible to replace all the lost jobs by creating new ones, and further, believes that the increased cost of unemployment insurance will outweigh the benefits to the province.
Current Role: Chairman, Association of Sea Food Producers
Mr. Butler has led the Trade Union for Seafood Producers since 2012 and has witnessed the adverse impact of the Cod fishing ban on the workforce in NL. While most fear that over-extraction of oil and gas could lead to a recession, Mr. Butler is more concerned with the impact of divestment on workers in the sector and their dependents. He argues that it would be nearly impossible to replace all the lost jobs by creating new ones, and further, believes that the increased cost of unemployment insurance will outweigh the benefits to the province.
Current Role: Professional Pension Lawyer
Mr. Frank has over 10 years of experience in pension law and has sat on two pension investment boards in Canada prior to joining NLPIB. Mr. Frank is concerned that by divesting away from oil & gas may significantly reduce the overall return profile of the fund, amounting to significant underperformance over time. He is worried that the fund may not be able to pay out its liabilities and face legal repercussions from pensioners.
Current Role: Professional Pension Lawyer
Mr. Frank has over 10 years of experience in pension law and has sat on two pension investment boards in Canada prior to joining NLPIB. Mr. Frank is concerned that by divesting away from oil & gas may significantly reduce the overall return profile of the fund, amounting to significant underperformance over time. He is worried that the fund may not be able to pay out its liabilities and face legal repercussions from pensioners.Winning Proposals of MIPC 2019
Mind the GAAP (HEC Montreal)
Axe Capital (National University of Singapore)
APM Capital (University of Sydney)
Artemis (Yale University)
Eco-lution (Illinois Institute of Technology)
News & Articles
Disclosure
This case was written by the students of FINE 435—Pension Investing (Winter 2019) under the direction of Professor Sebastien Betermier at the Desautels Faculty of Management of McGill University. Authors of the case include Somdeb Bhadra, Yunyi Cai, Charles Cormier, Rhea Dsouza, Olivier Forgues, Pierre Fossecave, Liping Guan, Mehreen Haider, Alexandre Lasry (lead), Oriane Pacic, John Poole, Hanna Ranstrand, Hugo Saviane, Bhoomika Saxena, Ye Sun, Matthew Wilson, and Fang Yang.
The authors would like to thank Clifton Isings of the Canadian National Railway Pension Fund, Sophie Leblanc of the McGill Endowment Fund, and Christopher Truong of La Caisse des Dépots et Placements du Quebec for their helpful comments.
This case was written solely for the purpose of the 2019 McGill International Portfolio Challenge. The contents of this case are fictitious and any resemblance to actual persons or entities is coincidental. The McGill International Portfolio Challenge prohibits any form of reproduction of this document without its written permission. Any requests can be sent to mipc.mgmt@mcgill.ca.
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