Pension plans in Canada now factor environmental, social and governance monitoring in their investment process, and in the absence of national guidance, plan managers are using various tools and methods to analyze ESG risk, noted panelists of a roundtable recently hosted by The Association of Canadian Pension Management.
“Considering ESG requires a balance of the investment opportunities with the risks, I think we’re still in an evolving situation right now where lack of data is a challenge to assessing some of the risk,” said Graeme Hay, chief investment officer for the Teachers’ Retirement Allowances Fund.
While Canada still lacks a national benchmark for ESG-risk reporting, pension plans are adopting their own internal standards. Many have turned to the United Nations’ principles for responsible investing for guidance to develop those standards, becoming signatories of the PRI’s six voluntary principles that offer a menu of possible actions investors can take to incorporate ESG issues into investment practice.
Hay noted roughly 97 per cent of his organization’s assets are managed by firms that are PRI signatories. As the fund is largely an externally managed plan, it doesn’t have the opportunity to engage directly with some of the businesses represented in its portfolio. “We recently created a responsible investing policy here [that] really revolves around a few key things, which is engaging strong managers that we think actually care about ESG risks.”
He added that means putting policy and procedures in place and gaining evidence plan managers have actually made decisions based on ESG risks. “I think the pension industry, in general, benefits by working together, and so we’re involved in a number of organizations that take an active role on engaging with companies on ESG issues, including disclosure of the ESG risk.”
It’s hard to assess the risk if you don’t have the data, he pointed out, and a key part of the fund’s program is being part of organizations that represent its interests on these investment matters.
All of the Co-operative Superannuation Society Pension Plan’s managers are also signatories of the PRI. “From a defined-contribution perspective, ESG is probably even a greater potential issue,” said Brent Godson, the plan’s investment manager. The pension plan also delegates its investment authority to external investment managers. He said the pension plan relies on its investment consultants and their contributions in terms of rating each fund manager on how they’re incorporating ESG within their investment processes, both for selection and monitoring; however, they do have some governance aspects in-house. The last portfolio study the fund did included some climate-risk scenarios, he says. “I think we’re in early stages of appropriation, but I think that will naturally improve over time.”
The Civil Service Superannuation Fund pension plan is managed internally, so its plan managers have the opportunity to meet directly with leadership of the companies in which it invests, said Peter Josephson, chief investment officer of the CSS Board. “The area that we do have a little influence is in proxy voting, and we have guidelines that outline how our proxies are to be voted internally.”
He noted each of the pension plan’s managers has proxy voting guidelines that relate to the governance of corporate structure, diversity and inclusion, and numerous other factors. “Every quarter we have a report that provides us with information as to what they’ve voted for and against in terms of the corporate issues that they are seeing in the various investee companies. So that’s part of the information flow that we get from the monitoring.”
Its managers are signatories to the PRI, which provides another layer of comfort in terms of its policies and procedures. He said right now the standards for benchmarking ESG policies of corporations is pretty unstandardized, as everybody has a different approach and opinion as to how to rate it. But he believes the industry is looking at ways to become a little more standardized in how it views ESG.
With or without national standards, Hay believes the industry will ultimately hold bad actors to account. “Capital markets are still fairly efficient, and if there are bad actors, capital markets will punish them for that and ones that are above average in terms of ESG will attract more capital. And I don’t expect that to change over time.”