As pension plans grapple with what to do about environmental, social and governance factors, Quebec-based fund Bâtirente offers some guidance on the options available. It formalized its approach in 2005, the year before the United Nations laid out its six principles for responsible investment.
Bâtirente is one of the original signatories of the principles. “I had been working on elaborating our responsible investing policy for a few years, and it was not as publicly discussed as it is nowadays,” says Daniel Simard, the pension fund’s chief executive officer, noting he reached out to the chairman of the PRI Association (a global proponent of responsible investment) when he learned of its launch.
“By coincidence, it was really essentially in the same philosophy. . . . It became natural for us to belong to the PRI.”
Managing the managers
Because the union-affiliated capital accumulation plan’s assets are under external management, its policy focuses on steering its investment managers to integrate environmental, social and governance factors into their portfolio construction process. “We expected they would buy ESG information or databases and, according to their style or process, would incorporate that into their strategy,” says Simard, referring to Bâtirente’s early policy.
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It also created a specialized committee to monitor its managers, ensured they were signatories to the principles and then refined the ways it held them to account, says Simard. “With the years, we’ve been asking a little more of them. And, of course, now we ask that they give us their PRI assessment, that they show us how they actually put in practice the principles and they share with us how they respond to the PRI framework.”
But the change didn’t come as naturally to the investment managers as it had to the pension plan, he adds. “There was, and there probably still is, some prejudice around leaving money on the table, putting restrictions on the investment universe, all this screening out.”
Indeed, there’s often a myth around responsible investment, says Dustyn Lanz, chief operating officer at the Responsible Investment Association. “A lot of investors will mistakenly believe you’re going to sacrifice returns if you start doing responsible investing, but there’s a growing body of evidence that shows responsible investments perform just as well, if not better, than traditional investments because you’re seeing more material information.”
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For its part, Bâtirente’s policy hasn’t had an impact on which companies or sectors it invests in. “Our line of thought was the following: it would take time for us to lead our managers to understand, to know, to learn about what it meant to be a responsible investor,” says Simard. “So we never were prescriptive about what they should or shouldn’t invest in. What we asked of them was on the notion of integrating ESG information into their investment process. And if, in the due process, you come to realize there are some ESG issues with some companies, please tell us. . . . But we have never told an asset manager not to invest in any given company.”
Engaging companies
The second pillar of Bâtirente’s policy is engaging with companies in its portfolio. One example is Talisman Energy Inc., which had been encountering difficulties in its relationships with Indigenous communities near its properties in South America. The UN’s permanent forum on Indigenous issues requires companies to consult those communities before any industrial project begins, says Simard. Bâtirente, which acquired 74,300 equity shares in the company in 2008, submitted a shareholder proposal to Talisman’s board asking it to adopt a policy that set out how it would meet the UN objectives. “Of course, it took some time before we really had a dialogue,” says Simard. “But when we had a dialogue, they had done their homework and they had really reflected on our proposal . . ..
“They said, ‘We think your idea is very good . . . because governments around the world are well aware it will be necessary to reinvent the way we do things, they will favour companies that actually demonstrate their capacity to cope with this way of doing things that is the future.’ So they set up a process, they hired an international consultant. . . . And over the next two years, they actually adopted that policy.”
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Simard says the policy was a breakthrough in the oil and gas industry. “It was actually the first company to make it public that its board was adopting a policy that aimed at being best at dealing with local communities in industrial projects. And that example was followed in the years after by other companies.”
Publishing data
Bâtirente’s third pillar is about information: asking companies to publish more data and sustainability reports and provide details about how they approach responsible investment issues.
The pension fund has also aimed to be transparent about its own activities, something Simard notes can be challenging for some investors that prefer to keep matters behind closed doors.
“They are more shy about what they actually do, but we, maybe because our size is a factor, we have had a tendency to be very much transparent about that,” he says, noting Bâtirente’s annual report includes the names of companies and the topics discussed with them, such as fiscal policies, community relationships and disclosure.
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The 2016 report, for example, notes discussions related to climate change with two major oil companies, Canadian Natural Resources Ltd. and Suncor Energy Inc. In addition, the report notes Bâtirente’s entry-level salary is $23.16 per hour.
Disclosure, of course, has been a key question for many pension plans, particularly since Ontario enacted regulations in 2016 that require them to reveal whether they incorporate environmental, social and governance factors into their statements of investment policies and procedures.
“At this point, it’s difficult to quantify the impact of this regulatory amendment on the marketplace,” says Lanz. “But we have working groups, our membership has been growing, and we can say, at least anecdotally, we’re certainly seeing a growing interest in responsible investing from pension funds and their investment consultants.”
Lanz would like to see federal and provincial regulators clarify that all institutional investors should be considering long-term risks and opportunities, including environmental, social and governance factors, in their decision-making processes. The Shareholder Association for Research and Education is currently asking the federal government and other provinces to follow Ontario’s lead by enacting similar regulations.
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“We’ve felt that Ontario was our first focus and that was successful, but because the pension landscape is governed primarily by province, then we need to see this taken up across the board,” says Kevin Thomas, director of shareholder engagement.
Simard agrees, noting the Ontario provisions are driving the conversation. “Although there is a fair extension of the level of awareness in the institutional field here in Quebec, I think it would send the right message if the regulator would do something equivalent to what Ontario has done.”
Raising the bar
Because public sector pension plans have a large stakeholder base and are in the public eye, they tend to be more proactive about disclosing information, says Lanz, noting they often have more resources to deal with responsible investment matters.
But both defined benefit and defined contribution plans have a duty to incorporate such practices into their policies, says Thomas. “Neither one is insulated from the realities of . . . non-financial concerns and metrics, but the way they’re played out might differ depending on how the plan is structured.”
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For its part, Bâtirente continues to expand its work on the issue. As part of its efforts, it launched a private firm called Aequo Shareholder Engagement Services in 2016. “We wanted to make a tool available to other responsible investors in the institutional field, other pension funds or asset managers, so they could access expertise and capacity for leading engagement programs with their own investing companies,” says Simard.
The plan is also actively looking at green bonds and it just published its carbon footprint data for 2015 and 2016.
“We are definitely raising our act on ESG and we’re definitely discussing with our asset managers how they could, themselves, make us more capable of generating impacts,” says Simard. “It is important investors are aware of the risks that are embedded in these new issues.”
Jennifer Paterson is the managing editor of Benefits Canada.
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