Pension plans focusing on ethical, responsible investing

Demand for defined benefit pension plan sponsors to focus on environmental, social and governance factors through their investments is growing.

Both plan sponsors and members have been increasingly vocal about keeping ESG issues top of mind. For example, the Healthcare of Ontario Pension Plan has worked on balancing this increased appetite for ethical investing with an overall responsible investing strategy.

“At HOOPP, we think, while it’s challenging, the investment universe is large and there are opportunities where those two seemingly different aims overlap,” said Sarah Takaki, the pension fund’s senior director of sustainable investing, during an Association of Canadian Pension Management virtual roundtable on Tuesday. “With the pandemic, the changes we’re experiencing now even highlight that overlap. . . . Those two circles really overlap and that’s a space we really like to play in as an investor.”

Read: Benefits of integrating ESG include long-term alpha, minimized risk: survey

The Alberta Investment Management Corp. has taken a similar approach, focusing on investments that are ethical while balancing ESG issues with other considerations such as the long-term viability of investment portfolios, according to Alison Schneider, the organization’s vice-president of responsible investment, also speaking during the roundtable.

While there’s sometimes pressure to take immediate action if a company’s ethics come under fire, she noted the AIMCo’s leadership first looks for ways to fix the problem. “Our mantra is voice over exit. We prefer to be invested and stay invested and stay engaged with companies rather than unnecessarily divest and reduce the investable universe.”

For example, following the Rana Plaza tragedy in Bangladesh in April 2013, the AIMCo stayed the course. Instead of divesting from any investments in the country, it worked with business and government leaders to ensure higher labour standards were met going forward.

“Out of something really horrible came something better and companies not only improved their supply chains out of Bangladesh but [elsewhere, too],” said Schneider.

Read: AIMCo’s philosophy on sustainable investing

On the flip side, divestment is sometimes the right choice. After news outlets reported last year that the AIMCo was among a list of Canadian pension plans that had invested in private U.S. prison companies that run immigration detention centres, it first looked at not divesting, but ultimately chose to do so, she said.

In other cases, it isn’t only public criticism that brings about change, but direct feedback from concerned plan sponsors and members. In March, Desjardins Investments Inc. announced it would be excluding fossil fuels from the investing policy of certain funds. The change came after fielding many phone calls on the heels of a visit from environmental activist Greta Thunberg to Canada last fall, said Deborah Debas, responsible investment specialist for Desjardins Group’s investment solutions and wealth management, during the webinar.

Complex ESG issues can’t all be solved with swift policy changes; consistent stakeholder engagement is often required to bring companies around, said Schneider, recounting the story of a male executive who recently pushed back hard when called out for the lack of women on his company’s board. The executive even went as far as to claim there were no qualified women and suggested they should be focused on their families, not work.

She’d heard these types of objections before and wasn’t hopeful for change but the next time she talked to the executive, his company had found a qualified woman to put on its board. Going forward, engagement and accountability will remain key, as will increased standards around ESG disclosure, added Schneider.

Read: How investors are turning the gender diversity dial on corporate boards

Being on the right side of history on a range of ESG issues — from equal representation of women on boards to labour rights to climate change — can result in lower risks for investors, noted Takaki.

While ensuring strong returns for pension members can seem in direct opposition to doing good in the world, she argued the two goals can co-exist. “Sustainable investing is really about what we do and how we do it. We believe that ESG factors can impact the risk return profile of an investment and, therefore, integrating ESG factors is really part of our robust approach to investment management.”