Despite regulatory challenges, the outlook is promising
By Ed McCarthy
Responsible investing (RI) has become the predominant trend among Canadian investors. Consider these statistics from the Responsible Investment Association’s 2020 Canadian Responsible Investment Trends Report:
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$3.2 trillion (CAD) in RI assets under management (AUM) as of year-end 2019. Pension funds account for $1.6 trillion of that amount, up from $453 billion in 2010.
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48% growth in RI AUM over a two-year period.
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RI represents 61.8% of Canada’s investment industry, up from 50.6% two years ago.
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97% of respondents expect moderate to high levels of growth in RI over the next two years.
Large Plans Take the Lead
Geneviève Bouthillier
The report notes that the growth in pension funds’ RI assets is being driven by the large public funds, 10 of which accounted for over 95% of the AUM reported. For example, ESG (environmental, social and governance) themes feature prominently at CPP Investments and CDPQ. Per CPP Investments’ June 2020 Policy on Sustainable Investing: “We integrate ESG factors into our investment analysis and asset management activities because we believe it supports generating better returns across our portfolio. Where such considerations are material, they can affect our assessment of an investment’s risk profile and value.”
CDPQ has been working on sustainable investing and ESG for over 25 years, according to Geneviève Bouthillier, managing director, Private Mid-Market Companies and Stewardship Investing in Quebec City. In 1994 the plan published its first proxy voting policy, which took into account ESG matters.
“We put out our first responsible investment Policy in 2004, which was followed by the integration of ESG analysis in the equity markets investment process in 2005,” Bouthillier says. “A few years later, in 2009, we presented our first Sustainable Development Plan. In 2014, we integrated ESG criteria in the investment decision-making process in all of our asset classes.”
Alternatives and ESG
Laura Zizzo
Laura Zizzo, co-founder of Manifest Climate in Toronto, shares an example of how her firm could be involved with the ESG considerations for an infrastructure investment. “If you’re going to be acquiring infrastructure that is on a coast, have you considered whether the company or the asset itself has a climate resiliency plan in place?” she asks. “Have you thought about the potential impacts from extreme weather events? Are you moving towards low-carbon energy sources if that’s of interest? Those are the types of risks and opportunities we help our clients identify and then come up with a strategy and plan around them.”
The outlook for alternative investments’ role in fulfilling plans’ ESG mandates is promising. Bouthillier notes that CDPQ invests in alternatives such as private equity, infrastructure and real estate as part of its stewardship investing strategy. “As of December 31, 2020, our portfolio of low-carbon assets totaled $36 billion in the sectors of renewable energy, transportation and industrials, and real estate,” she says. “This is double the value of our investments compared to 2017.”
Challenges Remain
Roger Beauchemin
The ESG-regulatory climate is improving, says Zizzo. She points to momentum at both the federal and provincial levels, as well as globally, for the Task Force on Climate-Related Financial Disclosures (TCFD) mandates to be coming.
Still, while overall use of ESG strategies is increasing, pension plans face some challenges in adopting them, according to Roger Beauchemin, president and chief executive officer of Addenda Capital in Montreal. Canadian securities regulators have not “clearly delineated a safe harbor or even a clear fiduciary obligation for plan sponsors to include ESG analysis,” Beauchemin explains.
Despite the lack of regulatory guidance, an increasing number of plan sponsors agree that a sustainable approach to pension investments makes sense, he adds. Beauchemin also cites the growth in plans’ younger participants, who tend to view favorably the inclusion of ESG factors in investment management.
Be sure to attend The CAiP Alternative Investments Forum, an in-person event September 21-23, 2021, in Montebello, Q.C., where leading experts and top pension fund managers from across Canada will offer insights into new opportunities and risks in the alternatives market, including the role of ESG.
Ed McCarthy is a longtime financial writer and author of three books, including “Foundations of Computational Finance with MATLAB.”
