The Canadian Source Of Employee Pension Fund Investment And Benefits Plan Management


Recent ESG Happenings Revealing

ESG Investment GraphicThis review is about environmental, social, and governance, or ESG. The topic, which has evolved from what was formerly called Social Responsible Investing or SRI, has long been an important pension investment topic and the subject of much investment research and publication. In this review, we cover the following three aspects:

  • Details on the province of Ontario’s recent requirement that as at January 1, 2016, ESG be disclosed in all Ontario pension plan Statements of Investment Policies and Procedures (SIPPs)
  • A recent presentation by Ontario Teachers’ Pension Plan’s (OTPP) Deborah Ng at the CFA Society Toronto’s 'Annual Spring Pension Conference'
  • A Globe and Mail article showing how ESG investing has grown quite significantly globally in the past two years, reflecting the investment importance and implications of ESG

FSCO announced on November 27, 2014, amendments to the Ontario Pension Benefits Act (PBA) which related to ESG and SIPPs. Starting January 1, 2016, plan sponsors must file their SIPP annually with FSCO, within 60 days of January 1. Previously the PBA only required SIPPs be reviewed annually, amended if necessary, and approved, but not filed with the FSCO. This has now changed.

Investment Decisions

Regarding ESG, SIPPs must now include information about whether or not ESG factors are disclosed in the SIPP. Plan sponsors are not required to include ESG factors in their investment strategy, but must state in the SIPP whether or not ESG factors are considered in investment decisions. If ESG factors are included in investment strategy, the SIPP must disclose how the ESG factors are incorporated. So far FSCO has not provided any information on what these ESG factors are. That is, for now, entirely up the plan sponsors.

The following are a number of relevant points on ESG, not from FSCO’s website, but worth noting. Several factor details typically included in ESG considerations are:

Environmental Considerations:

  • Minimization of the impact on pollution, climate change, and other negative impacts
  • Minimization of environmental liabilities such as habitat protection and water scarcity

Social Considerations:

  • Human rights, community impacts, health and safety of products and processes
  • Child and forced labour and employee relations

Governance Considerations:

  • Executive compensation
  • Shareholder rights
  • Board independence

As the issues surrounding ESG are somewhat complex and sometimes require a fair degree of research on the part of sponsors, two organizations which can assist with ESG analysis are the Shareholder Association for Research and Education (SHARE) and the Canadian Coalition for Good Governance. There are also research databases like Sustainalytics and MSCI ESG Manager that can also help.

And just a final comment; other provinces often follow Ontario’s lead in responding to pension issues like this. However, to our knowledge so far, none have reported similar ESG moves.

ESG Presentation by Deborah Ng of OTPPNg, OTPP portfolio manager in the strategy and asset mix team, asset mix and risk division, told the Toronto CFA Society’s 2015 Annual Spring Pension Conference “it is not about avoiding ESG risks, but identifying them and balancing them with other risks and the return that Teachers’ can expect.” Her presentation included five principles for responsible investing:

  • Integrating ESG into Investments: This principle requires looking at ESG factors across the entire investment process in difference countries, industries, and companies. Examples include social trends, lifestyles, worker health and safety, and demographics. A recently dramatic example is the environmental impact of changing weather patterns – the very hot dry weather in western Canada causing many lightening instigated forest fires, dry earth, and significant crop failure. The overall impact of the risk of such factors on investment returns of companies is the key takeaway of integrating ESG factors into the outlook for investment risk and returns.
  • Engaged Ownership: This principle involves the engagement of OTPP in both public and private equity ownership in the management of the businesses it invests in as an engaged owner. This includes sitting on boards, meeting with management, and voting shares. OTPP employees who sit on the boards of investee companies ensure that material ESG risks are flagged and followed up on.
  • Continuous Learning: As its name clearly states, this principle is oriented to the ongoing process of expanding OTPP’s knowledge, understanding, and assessment of current and emerging ESG risks. The principle is carried out in many ways including, stranded assets, water scarcity, climate change, and data security and privacy.
  • Seeking Disclosure: Also, as its name clearly suggests, this principle is devoted to seeking clear and relevant information that may assist in making investment decisions. It includes working on and supporting shareholder resolutions, disclosure on proxy votes and conducting ESG research – which Ng calls “deep dives.” In one recent infrastructure direct investment with the Brussels Airport, Teachers’ conducted one of these deep dives to learn as much as possible about what the company was doing from an ESG perspective.
  • Collaboration: OTPP collaborates with a large number of entities classed as Peers and External Initiatives.

She noted her department has started to assess Teachers’ progress in using this framework and will complete its first assessment under this model later this year.

The Globe and Mail article discussed a report by the Responsible Investment Association and RBC Global Asset Management on Responsible Investing and how it has grown over the past several years, plus how investors are managing their portfolios with respect to ESG factors.

Significant Increase

It shows a significant increase in money managers’ attention to ESG in their investment decisions. There has been a 68 per cent increase in Canadian assets under management using some form of ESG from $601 billion at the end of 2013 to $1.01-trillion today. This means 31 per cent of the financial assets under management in Canada’s investment sector are using ESG strategies.

The report goes on to note that about 80 per cent of these assets are held by pension funds.
It discusses a wide range of ESG factors from proxy voting decisions to more direct strategies like investing in green technologies or investment projects that provide social or environmental benefits. It says “Some organizations screen investments to choose the 'best in class' companies in different sectors based on positive ESG performance, while some exclude certain investment sectors entirely, such as tobacco producers or weapons manufacturers.”

It quotes Dan Chornous, CIO of RBC Global Asset Management, who notes that with the increasing ESG criteria used by investment managers: “We have begun to more formally integrate ESG criteria across all of our investment classes.”

Deb Abbey, CIO of the Responsible Investment Association, is quoted as saying “The global investment community (not only North American) is rapidly shifting its attitudes to recognize the importance of using broader investing criteria. Studies show U.S. assets managed under responsible investment criteria climbed by 76 per cent over two years while European assets were up 55 per cent.”

The article concludes that the growth in ESG strategies comes from the both pressure of asset owners plus the interests of their money managers.

Bruce Grantier (CFA) is founder of
September 22, 2015

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