The Investment Management Corp. of Ontario is publishing its inaugural environmental, social and governance report, which includes an outline of its four-pronged ESG integration strategy.
“We have long understood that companies with good governance practices and diverse teams make better decisions that lead to superior performance,” wrote Brian Gibson, board chair of the IMCO, in the report. “Meanwhile, the global transition to a low-carbon economy is already proving to be a significant investment phenomenon that poses enormous risks and opportunities for investors that have obligations spanning generations.”
The first prong involves the integration of ESG issues, including ones related to fossil fuel emissions and diversity, equity and inclusion, into the investment decision-making process. The second relates to stewarding assets through discussions with corporate leaders and proxy voting. The IMCO will engage with investee organizations to push for the adoption of ESG standards and the promotion of board diversity.
The third prong relates to sustainable investing. The IMCO intends to continue its policy of investing in sustainable, long-term ESG opportunities that contribute to investment returns and have a positive impact on the environment and society. To accomplish this, it has started assessing potential investee companies’ contributions to the United Nations’ sustainable development goals and is making investments designed to capitalize on the ongoing energy transition.
The fourth prong is screening. Last year, the IMCO adopted a new ESG screening guideline to determine if investments are ineligible for consideration. The new rules bar the organization from making any investments in companies that are sanctioned by either Canada or the U.N. involved in the manufacture of firearms for the civilian market, weaponized explosives, prisons, detention centres or tobacco.
The IMCO has also committed to ensuring its portfolio is carbon neutral by 2050 or sooner. In order to reach this objective, it will adopt a five-part responsible investment strategy. Beyond considering ESG issues in the investment decision-making process, the new approach specifically mandates considering climate change and DEI issues.
The report also includes the IMCO’s first climate disclosure report, covering its portfolio’s carbon emissions in 2019, 2020 and 2021. It concluded that, in 2021, the portfolio’s assets released 2,351,913 tonnes of carbon dioxide into the atmosphere. That’s estimated to be about 27 per cent lower than the amount of carbon released by its portfolio in 2019, but 1.1 per cent higher than in 2020. According to the IMCO, the disclosure, which will be followed by similar annual reports, was designed to be in line with the task force on climate-related financial disclosures’ recommendations.
“We know that considering ESG issues can improve risk-adjusted investment outcomes for our clients,” wrote Bert Clark, president and chief investment officer of the IMCO. “We know that stakeholders want greater transparency on how organizations are managing ESG risks, notably climate change, in their business strategies.”
In response to the report, Shift Action for Pension Wealth and Planet Health said the IMCO has taken its “first steps towards building a credible climate plan.” However, it also highlighted perceived gaps in the approach. “It has committed to net-zero emissions across its portfolio by 2050 or sooner, but still needs to set interim targets to reduce the emissions of its portfolio and scale up investments in climate solutions. IMCO has indicated that both kinds of targets are coming in 2022.”
Shift Action also praised the IMCO for its proxy voting policies, describing them as being unusually clear on climate-related issues. “IMCO’s proxy voting guidelines (developed in 2021) contain stronger sections on climate than is typical of other Canadian pension fund managers. Proxy guidelines generally indicate a fund will ‘encourage’ climate-risk disclosure and ‘appropriate’ handling of climate-related financial risk, but these are weak and poorly defined expectations.”