With more than $400 billion in Canadian pension assets under socially responsible investment policies, SRI is an idea whose time has come.

Canadian pension assets under socially responsible investment (SRI) policies have experienced huge growth in the last few years, rising to $433 billion in 2006 from only $25 billion two years earlier, according to the Canadian SRI Review, published by the Social Investment Organization. The 2008 report is expected to cite an even higher estimate.

The growth has been fuelled by the adoption of SRI policies at some of Canada’s largest pension managers, including the Canada Pension Plan Investment Board (CPPIB), the Caisse de dépôt et placement du Québec and the British Columbia Investment Management Corporation (BCIMC). SRI policies commit the funds to voting their proxies appropriately on environmental, social and governance (ESG) issues, engaging with company management on such issues and working collaboratively with other investors on ESG concerns. ESG analysis and SRI are shaking up the institutional investment industry. In May, Mercer announced that it will now rate all fund managers in its database on their ESG capabilities.

Globally, interest from institutional investment managers in SRI is growing. The United Nations Principles for Responsible Investment, for example, has gathered signatories from asset owners and investment managers representing more than US$13 trillion in assets.

One reason for this change is the growing recognition that sustainable and responsible investment can also be financially prudent. For example, the Domini Social Index—the oldest SRI index, with an 18-year track record—has recorded an annualized return of 11.01% (as of April 30, 2008) since its inception on May 1, 1990. By comparison, the S&P 500 recorded an annualized return of 10.57% over the same period. In Canada, the Jantzi Social Index, a large cap index weighted to the top 60 Canadian equities, has chalked up an annualized return of 8.32% (as of April 30, 2008) since its inception on Jan. 1, 2000, compared to an average annual return of 8.16% for the S&P/TSX 60. The success of the SRI indexes over time shows that it is possible to integrate ESG considerations into a portfolio without sacrificing return.

What’s in store for SRI and pensions in Canada and around the world? As the head of Canada’s association for socially responsible investment, let me take this opportunity to sketch out a few possible future trends.

Integration of ESG into active portfolios – Increasingly, pension funds will lose their reluctance to apply SRI screens to their active portfolios. One major new pilot program is the US$225 million sustainable investment program announced in 2007 by the California State Teachers’ Retirement System, which awarded one of four sustainability mandates to Toronto-based Acuity Investment Management, manager of the Clean Environment Fund. Such pilots will be useful in teaching pension funds how to integrate ESG into their investment programs.

More investment in clean technologies – Pension funds will pay greater attention to sustainability and social responsibility issues in their private equity, real estate and infrastructure investments. In February 2008, the Investor Network on Climate Risk (a group of global pension funds) promised to invest US$10 billion in clean technologies within the next two years. And on April 1, the CPPIB announced an investment of US$200 million in a U.S. wind energy development company—the first of its kind by the CPPIB. We’ll see more of this type of investment in the future.

Greater collaboration with other investors on ESG initiatives – Earlier this year, in what proved to be a landmark event in corporate governance in the Netherlands, the BCIMC acted with other global shareholders to vote down a proposed compensation policy at Royal Philips Electronics that would end the link between executive bonus payments and shareholder return. We can expect more such collaboration in the future.

Now that SRI has established a solid base in the Canadian pension industry, we will see greater innovation and acceptance of SRI strategies. Pension funds will use non-financial analysis to enhance return and reduce risk, and to contribute to global sustainability, social responsibility and good governance.

Eugene Ellmen is executive director of the Social Investment Organization. ellmen@socialinvestment.ca

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© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the July 2008 edition of BENEFITS CANADA magazine.

 

Copyright © 2018 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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