The federal Budget 2023 included important news for the Canada Growth Fund, Canada’s recently established “green bank” to catalyze private investment in Canada’s clean economy. The Public Sector Pension Investment Board (PSP Investments), a federal Crown corporation, will manage the Growth Fund’s assets to deliver its mandate of attracting private capital to invest in Canada’s clean economy.
That’s good news for getting the Growth Fund going fast. PSP already has expertise and resources, and has an arms-length relationship with the federal government.
But here’s the challenge: to succeed, the Canada Growth Fund can’t focus on delivering private returns. The purpose of the Growth Fund is to invest in projects the market alone won’t invest in. Its mission will be to find projects that don’t currently deliver private returns , but will deliver bigger, broader benefits to society by unlocking additional private investment. That’s an important function, but one that is different than what PSP Investments is used to, and likely counter to the instincts of its investment strategists
We unpack some key differences between the functions of the Canada Growth Fund and PSP Investments and explore the implications for their respective investment strategies. We also discuss three ways to help make the relationship between the two institutions a success and enable the Canada Growth Fund achieve its purpose.
The Canada Growth Fund and PSP Investments have distinct purposes and accountabilities
PSP Investments, established in 2000, is one of Canada’s largest pension investment managers with $230.5 billion in assets under management. PSP Investments’ mission is to manage these assets in the best interests of contributors and beneficiaries. The objective is to “invest its assets with a view to achieving a maximum rate of return, without undue risk of loss” and in line with the policies and requirements of the included pension plans.
In contrast, the Canada Growth Fund was established in late 2022 and capitalized with $15 billion from the federal purse. Its purpose is to “make investments that catalyze substantial private sector investment in Canadian businesses and projects to help transform and grow Canada’s economy at speed and scale on the path to net-zero.” The Fund was created to support both economic and climate policy goals, including emissions reductions and Canada’s future economic well-being. Equipped with public money and established to drive public policy objectives, the Fund is ultimately accountable to the Canadian people.
These distinct functions imply differences in investment strategies and decision criteria (see Table 1).
The Canada Growth Fund will use concessional finance instruments that help attract private-sector investors to get clean growth projects off the ground whose project economics are unattractive to conventional investors (including PSP Investments). Clean growth projects are often unprofitable to private investors because they rely on novel, high-risk technologies, require large upfront capital investment, and have long return horizons. Still these projects can generate significant benefits for Canadian society, furthering the transition to a low-carbon economy, creating jobs and generating learning spillovers for companies in the same or other sectors. But private investors are unable to capitalize on these society-wide benefits. The Canada Growth Fund’s purpose is to step in and lower risks for private investors just enough to make these clean growth projects palatable for them and thus realize the benefits for Canadian society. In other words, assuming higher risks than conventional funders must be part of the Canada Growth Fund’s investment strategy and necessary for achieving its purpose. At the same time, the Canada Growth Fund is also looking to recover its capital on a portfolio basis (i.e., not necessarily for each individual project) and recycling its capital base over the long term (i.e., not immediately).
In contrast, PSP Investments does not invest on a concessional basis. It has no mandate to consider societal benefits in its investment decisions, which are exclusively dependent on project economics and risks/returns for investors. While PSP Investments has developed a climate strategy and has set goals with regards to shifting its portfolio toward assets that are consistent with Canada’s emission reduction targets, it is not the Fund’s purpose to support Canada’s climate objectives. Rather, taking climate and transition risks into account is simply part of prudent financial management to better serve the people that PSP Investments is accountable to, namely current and future retirees.
In sum, the Canada Growth Fund and PSP Investments have overlapping but distinct mandates and accountabilities (see Table 1). These differences imply different investment criteria, or at least a different weighting of criteria (e.g., an asset’s projected financial returns vs. its anticipated role in the transformation of Canada’s economy). As a result, management of the Canada Growth Fund will require a different mindset (e.g., different level of comfort with risk) and different expertise (e.g., in domestic and global climate policy, concessional finance, technological innovation and low-carbon technology markets).
The risk of conflating private and social returns could undermine effectiveness of the Canada Growth Fund
A key risk in this new arrangement is that Canada Growth Fund will be absorbed in PSP Investments’ ‘business as usual’ approach to fund management. The danger is that the Fund’s policy-focused mission wil lbecome conflated with a focus on private, rather than social returns, —whether intentionally or not.
The good news is that important details about the relationship between the Canada Growth Fund and its new institutional home, as well as between the Fund and the federal government, still need to be hammered out. And this is an opportunity to reduce the risks we’ve outlined here and to instead set the Fund up for success.
Here are three ways to mitigate the risks of these arrangements:
- The Canada Growth Fund must have a clear, transparent investment strategy.
To operationalize the distinct purpose and mission of the Canada Growth Fund, it requires an explicit, transparent investment strategy, including a set of clearly defined and measurable performance criteria that set it apart from PSP Investments’ core business.
The first reading of Bill C-47 suggests that PSP Investments will “incorporate a subsidiary for the purpose of providing investment management services to the Canada Growth Fund Inc.” The bill also introduces other amendments to the Public Sector Pension Investment Board Act that exempt the subsidiary from PSP Investment’s usual investment policies, standards, and procedures. In other words, this bill suggests a clear separation between PSP Investment’s core business and the management of the Canada Growth Fund, in line with this recommendation.
The Canada Growth Fund’s investment strategy should be co-written by policy and finance experts, because the Canada Growth Fund’s work will reconcile these two areas. The strategy’s authors should have expertise in climate and clean growth policy, as well as finance.
The Canada Growth Fund must aim to generate social returns in addition to being financially profitable. It must fund projects that are based in Canada and that yield returns to Canadians. This is not a trivial task. Global capital markets are usually not particularly concerned with localized benefits of investments: money simply goes wherever expected financial returns are highest.
Importantly, the Canada Growth Fund’s strategy should be made accessible to the public. Transparency is key to building public trust in the new institution, and will create the foundation for holding the Fund accountable for its performance measured against its mandate.
Australia’s Clean Energy Finance Corporation (CEFC), the world’s largest green bank, is an illustrative example of an institution guided by the kind of language that the Canada Growth Fund’s investment strategy could include. The CEFC’s purpose is to contribute to both the delivery of policy outcomes and the transformation of Australia’s renewable energy sector. Similar to that of the Canada Growth Fund, the CEFC’s role is to develop new markets by funding projects that private markets do not invest in. Like the Canada Growth Fund, Australia’s green bank invests on behalf of the Australian government.
The CEFC’s investment mandate explicitly states its double objectives. The mandate defines a portfolio benchmark return that the CEFC has to achieve over the medium- to long-term. At the same time, the mandate also states that it should “have regard to positive externalities and public policy outcomes when making investment decisions and when determining the extent of any concessionality for an investment.” For instance, the investment mandate strongly encourages the CEFC “to prioritise investments that support reliability and security of electricity supply.” In its annual report, the CEFC has to report on both financial and non-financial outcomes of all its investments.
- Fulfilling the Fund’s purpose requires bringing together a diverse set of expertise.
The Canada Growth Fund’s investment decision-making committee and staff should draw on expertise on a variety of themes, including domestic and global climate policy, the functioning of Canada’s carbon markets, concessional finance instruments, net zero transition pathways, low-carbon technology innovations and markets. Formally consulting with policy experts, industry, civil society and Indigenous rights holders would enable PSP to integrate external perspectives on these themes. Decision-makers need to understand and know how to implement the Fund’s broader policy function in addition to achieving projects’ financial returns. Decision-makers need to understand and be comfortable investing in projects with higher risks and using newer technologies than some of the PSP Investment’s usual investments.
Similarly, they need to understand the concept of externalities and local impacts of projects and investments. The Canada Growth Fund’s best investment decisions will take into account a project’s potential for generating positive externalities for Canadian society. For example, decision-makers should be able to answer the following questions to fully appreciate the project’s returns for Canadian society beyond financial considerations:
- Where on the learning curve does the technology sit and what is the potential for this project to achieve further cost reductions over time?
- How does the project benefit the local community, create employment and training opportunities, and contribute to regional economic development?
- How does the project contribute to achieving Canada’s emissions reduction targets?
Coming back to the Australian CEFC, for example, investment decision-makers need some knowledge of electricity systems to be able to consider the implications of a specific project on reliability and security of electricity supply.
- Defining transparent and differentiated accountabilities for PSP investment’s core business, the federal government, and the public will make the Canada Growth Fund more effective.
The Canada Growth Fund needs well-designed accountability mechanisms to carefully navigate its internal and external relationships.
It is critical to keep the Canada Growth Fund distinct from PSP Investments because of its specific purpose, while keeping boundaries open enough to let the Fund benefit from its investment expertise.
The relationship between the Fund and the federal government must avoid both interference in investment decisions on the side of the government and a lack of accountability on the side of the Fund. It’s a tricky balance to strike, and strong, explicit accountability structures can provide much-needed guardrails.
When it comes to the relationship between the Canada Growth Fund and the public, transparency and proactive communication will be key. In the short term, publishing any Statement of Priorities and Accountabilities the Minister of Finance issues for the Fund would contribute to greater clarity and transparency. Moreover, by building functioning relationships with both PSP Investments and with the federal government, the Fund can support a foundation for trust with the broader public.
Just like with any investment, making this arrangement work is about maximizing returns, while balancing risks. There is a sweet spot where the Canada Growth Fund capitalizes on the investment expertise and institutional strength of PSP Investments without losing focus on its specific purpose and the differences in expertise and decision-making required to be successful.
The Canada Growth Fund has an ambitious mission and an important role to play in Canada’s clean growth policy strategy. Getting the institutional structures and accountability arrangements right will be central to making investment decisions that support Canada’s low-carbon future.
Table 1: Key differences between Canada Growth Fund and PSP Investments
|Canada Growth Fund
|“CGF will make investments that catalyze substantial private sector investment in Canadian businesses and projects to help transform and grow Canada’s economy at speed and scale on the path to net-zero.”
Support national economic and climate policy goals:
Reduce emissions, accelerate deployment of low-carbon technologies, scale up clean growth companies, secure Canada’s future economic and environmental well-being (source)
|“Manage amounts that are transferred to it in the best interests of the contributors and beneficiaries under the acts related to the Plans.” (source)
|“To achieve its strategic objectives, CGF will use investment instruments that absorb certain risks in order to encourage private investment in low carbon projects, technologies, businesses, and supply chains. This includes investments that scale Canadian clean technology businesses.” (source)
“Its objective will be to deliver against its strategic objectives while recovering its capital on a portfolio basis and recycling its capital base over the long term.” (source)
“CGF will invest concessionally by accepting, where necessary, below-market returns relative to the risk it incurs.” (source)
Taking on risks is part of the investment strategy and will be necessary to achieve the Canada Growth Fund’s mandate.
|“Invest its assets with a view to achieving a maximum rate of return, without undue risk of loss, having regard to the funding, policies and requirements of the Plans and the ability of the Plans to meet their financial obligations.” (source)
Committed to sustainable investment and ESG values, and action on climate change, commitment to investing contributing to global low carbon transition, Green Asset Taxonomy, increase investment in green and transition assets, reduce investment in carbon intensive assets
|Accountability to whom?
|“Full accountability to the people of Canada” (source)
|“Responsibilities to contributors and beneficiaries” (source)