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CPP Investments’ US$229-million investment in controversial data firm Palantir raises questions about pension fund’s ESG principles

Palantir CEO Alex Karp arrives at a "Tech For Good" event in Paris in May 15, 2019.
Palantir CEO Alex Karp arrives at a "Tech For Good" event in Paris in May 2019. Bertrand Guay/AFP/Getty Images
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The Canada Pension Plan Investment Board invested over US$229 million in controversial data-mining firm Palantir prior to the company’s public offering, according to documents filed with the U.S. Securities and Exchange Commission (SEC) on November 12. And while the fund has tripled its investment, critics say its stake in the firm raises questions about its stated commitment to ethical investing. 

Documents show CPP Investments, the investment arm of Canada’s largest pension fund with $434.4 billion under management, held more than 24 million shares when Palantir debuted on the New York Stock Exchange on September 30. That made it the firm’s third-largest shareholder among institutional investors, as of its public listing date.

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Talking Point

Documents show CPP Investments, Canada’s largest pension fund, held more than 24 million shares in controversial data-mining firm Palantir when the company debuted on the New York Stock Exchange on September 30. While Palantir’s share value has nearly tripled since, critics say the pension fund’s stake in the firm raises questions about its commitment to ethical investing.

The fund made the investment through its active-investment practice. An SEC filing dated August 24 shows that Bill MacKenzie, head of active fundamental equities, and Samantha Hill, senior principal of sustainable investing, signed off on it. 

Palantir’s stock has surged from its opening price of US$10 per share the day it went public to a high of US$29.05 on November 25. The company added about US$17 billion to its value last week, nearly tripling the value of CPP Investments’ stake in the firm. The two institutional investors with larger stakes in Palantir than CPP Investments—Point72 Asset Management and BlackRock—bought about US$284 million and US$278 million worth of shares, respectively. 

The bulk of Palantir’s work involves collecting and analyzing data for government agencies. As of August 2019, it had over US$1.5 billion worth of contracts with the U.S. government, including more than US$1 billion from the Department of Defense and US$94.3 million from Homeland Security. The company has faced criticism from human rights groups as well as its own employees over its involvement in helping facilitate U.S. Immigration and Customs Enforcement activities, including surveillance, raids, detentions, family separations and deportations. In September, Amnesty International published a report urging Palantir to improve its human rights record. 

In documents filed with the SEC as part of its IPO process, Palantir lists “purported or real impact on human rights, privacy, employment, or other social issues” as brand and reputational risks that could impact its finances.

CPP Investments declined to respond to The Logic’s questions about the investment, including when it was made and how it fits with the fund’s commitment to investing according to environmental, social and governance (ESG) principles. Neither MacKenzie nor Hill responded by publication time to The Logic’s request for comment.

The fund often cites its ESG mandate as part of its fiduciary duty to maximize returns for pensioners. “We believe companies that effectively manage [ESG] factors are more likely to create financial value over the long term, improving investment performance by the Fund,” reads its 2020 sustainable-investing report

“Institutional investors that are responsible are increasingly calling on companies to disclose their human rights due diligence,” said Paloma Muñoz Quick, who leads the UN’s Business, Human Rights and Technology Project, which looks at how institutional investors can integrate human rights considerations when investing in tech firms. “But ESG investing is still very problematic from several perspectives, including that investors just get to decide what is ESG.” 

Morningstar PitchBook analyst Brendan Burke said that on top of human rights concerns associated with Palantir, investors with an ESG lens may take issue with the firm’s governance structure, which gives its founders outsized voting powers per share. “The founder-dominant governance structure will be a concern for activist investors that are used to affecting strategic decisions through voting. The only option they have is to buy or sell the stock, given their limited voting power. That creates more pressure on the share price, as it becomes untenable to hold the stock,” said Burke. “For some investors, selling the stock may be a better route than engaging with the company.”

Burke cited employee resignations over Palantir’s human rights record as material risks to the firm’s business. “We believe that there are some corporations that would not want to work with Palantir for ethical reasons,” he said, adding, “As Palantir expands its enterprise growth strategy, it will have to improve its policies to win more customers.” 

In its sustainable-investing report, CPP Investments said it uses a Reputation Management Framework to “identify and mitigate risks that may negatively impact our corporate reputation….  ESG considerations are an integral part of these assessments given their potential to generate reputational harm to the organization.” 

CPP Investments came under fire in 2018 for its holdings in two U.S. prison companies, CoreCivic and Geo Group. The companies had facilities that detained people suspected of illegally entering the U.S. under a policy imposed by President Donald Trump. Unlike its investment in Palantir, those investments came through the pension fund’s passive-investing practice, meaning they hadn’t been specifically selected by the fund’s portfolio managers. It originally resisted calls to sell its stake in the prison companies. “Divesting achieves little for CPPIB and all of our stakeholders,” said CPP Investments CEO Mark Machin in November 2018. “There is a large supply of capital in both public and private markets that can step in if we were to exit.”

A year later, however, the fund sold its investments in the prison firms, citing reputational risk that could impact its returns.

“The decision to invest in Palantir is shocking,” NDP ethics critic Charlie Angus told The Logic. “[CPP Investments] has gone from investing in the privatized detention centres to investing in the technologies that are targeting migrant families in the United States.” 

In a letter sent to Machin on Tuesday, Angus called for the fund to divest its holdings in Palantir. “Mr. Machin, what worries me most of all is that through this investment, you have not only signaled that CPPIB … does not seem to care about human rights records of the companies that you invest in, but you have made every single Canadian, who has paid into the Canadian Pension Plan, now complicit in these human rights abuses,” Angus wrote.

Muñoz Quick said CPP Investments may be better positioned to influence Palantir’s human rights practices by engaging with the firm on the issues, rather than divesting its shares in the company. “All companies are exposed to human rights risks, and it’s important that investors, therefore, across investment portfolios, including with Palantir, take steps to ensure that these companies respect human rights. That means engaging in a dialogue around what types of policies and processes Palantir has in place,” she said. “If that engagement fails, then it may be appropriate to divest. But it’s important not just to cut and run.”

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In September, federal ethics commissioner Mario Dion found that Palantir Canada president David MacNaughton, Canada’s former ambassador to the U.S. and an advisor to Prime Minister Justin Trudeau, broke conflict-of-interest rules by offering the firm’s services to the federal government as part of its response to the COVID-19 pandemic. Dion also ordered nine top government officials to “restrict their official dealings” with MacNaughton for a year. Dion’s probe was prompted by Angus’s request for an investigation after The Logic reported MacNaughton had told a private audience that Palantir was working with several Canadian governments on their COVID-19 responses.