New PSP team aims to ‘integrate ESG’ in all investment decisions

The Public Sector Pension Investment Board is making a new foray into corporate stewardship by releasing its first responsible investment report.

The report outlines several areas of focus for the organization, identifying goals for 2017 and the actions taken to achieve them. “The inaugural report was an important milestone,” says Stéphanie Lachance, vice-president of responsible investment and head of the new responsible investment group at PSP Investments.

The efforts include promoting greater gender diversity on boards of Toronto Stock Exchange-listed issuers, assessing the environmental, social and governance aspects of significant private market transactions and actively using proxy voting to engage with public issuers on relevant issues. The report outlines a practical example of a responsible allocation made during the year for each major sector.

In one example described in the report, environmental, health and safety factors posed possible material risks to a U.S.-based industrial cleaning company. To review the company as an investment opportunity, PSP Investments enlisted the assistance of an expert advisor, performed interviews with management and made on-site visits. Through its analysis, the responsible investment group determined the company had the required processes in place to operate safely with respect to waste water, air emissions and chemical storage, the report stated.

But as Lachance notes, the challenge then is to ensure a company continues to be a responsible investment. “Once it’s in the books, how do we follow up in making sure that the companies in which we’re invested are keeping up with their ESG challenges?” she asks.

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The new team aims to make it possible to “integrate ESG in all our investment decision-making, because we believe that it’s an additional layer of information that will enable us to distinguish good companies from excellent companies.”

As such, all levels of the organization must be on board. “Training is critical to us at PSP because we believe that ESG needs to be part of the business gene of our investment professionals. And we’ll not be able to get that gene unless we can train them properly,” says Lachance.

The responsible investment group includes a broad range of  expertise. “I’m a lawyer by training and I didn’t want to surround myself with lawyers because this is not a compliance exercise. I don’t need to duplicate what my legal group at PSP is already doing.”says Lachance. “I need people that will be able to assess the importance of ESG risk. We’ve got a water engineer with us, as well as a chemist who has a master’s degree in sustainability, an MBA finance . . . and another responsible investment specialist.”

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The report is part of a broader movement within the organization to establish a normalcy around responsible investing throughout every aspect of PSP Investments, she says.

“We felt that the story needed to be told in a standalone document, so we wouldn’t feel the constraint of an annual report, and that we would be communicating with our target audience, being our pension beneficiaries, our peers and our partners.” she says.

Diversity is a key factor in those efforts. “We are a member of the 30% Club,” she says, referring to an organization aimed at ensuring better gender balance at all levels of business. “We do engage with boards for companies where we see that there are improvements required in their governance structure or they are facing environmental or social challenges,” says Lachance.

Lachance stresses the need for companies to work with investors to help them make more precise decisions with environmental, social and governance factors in mind.

“All sectors do present their own challenges, and it will vary probably depending on the financial cycles we may be experiencing in the capital markets. The biggest challenge for us as investors is access to information,” she says.

“With public markets, you will have public companies that are disclosing, and it’s a regulated process where you will have annual reports. . . . But there is one piece of the information missing right now, and we are a big proponent of an initiative that is calling for additional disclosure on climate change financial risks,” says Lachance, noting PSP Investments is inviting companies to report their exposure to financial risks related to climate change based on the Task Force on Climate-Related Financial Disclosures, an organization chaired by Michael Bloomberg.

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“We believe this is the best framework to report on climate change,” she adds.

A movement toward more responsible investing is a rare opportunity for teamwork among groups normally in competition, she suggests. ”When it gets to responsible investments, we are all looking for the same thing. Better governance, greater disclosure. So we work a lot with our peers in Canada and elsewhere making sure we can push the subject further, because I cannot achieve it alone. I can achieve it only with my peers.”