By Joel Kranc
Environmental, Social and Governance initiatives are no longer a buzzword in corporate marketing. It’s an established strategy that is reflected by pensions managers’ push into these markets, while still finding areas of high return to satisfy their liabilities and clients (pensioners).
In fact, fund managers’ ESG risk management for pension fund clients is improving, according to an XPS Pensions Group client survey released last year. The U.K. consultant looked at 227 funds across 53 managers and found that the proportion rated the highest – green – improved to 47% from 36% in 2022, particularly for equity and multi-asset fund managers. The survey also found that 18% of clients are 100% invested in the green-rated ESG funds, up markedly from 2022, when it was just 2%.
In Canada, the Shift Action for Pension Wealth and Planet Health report card on climate change says Canadian pension funds have made incremental progress, however, funds in Canada still remain off track, especially compared to international peers.
“Despite a summer that saw smoke-filled skies blanket Canadian cities and some of the worst air quality in the world, last year most of Canada’s pension managers acted as though climate action is not an urgent concern,” said Laura McGrath of Shift Action for Pension Wealth & Planet Health. “For the majority of Canadian pensions, there is a mismatch between the incremental pace of climate progress and the need for urgent action to prevent irreversible climate breakdown.” The report further states that four of the 11 Canadian pension funds looked at do not have emissions reduction targets for 2030 or 2050.
Even if progress is slow, it is moving in the right direction, at least for the largest of plans.
“Our purpose is to help create retirement security for generations of Canadians,” says Bill Rogers, Global Head, Sustainable Energies Group, CPP Investments
“In today’s investing environment, we believe that considering sustainability issues contributes to delivering superior long-term financial returns and we look to integrate material sustainability factors into the lifecycle of our investments.”
He adds, that the fund is committed to growing its portfolio of green and transition assets from a current figure of $79 billion to at least $130 billion by 2030.
“To accomplish that goal, we will continue to invest in solar and wind energy projects, and will also be looking for other products and opportunities in asset classes that contribute to climate solutions and could merit a green premium,” adds Rogers. “This includes using a Decarbonization Investment Approach to look for value in grey and transition assets. In 2023 we applied this approach to 10 existing and new assets in real estate, infrastructure, energy and tourism and we are able to use these learnings to identify future opportunities in 2024 and beyond.”
Small Steps vs. Big
In a very recent transaction announced in February of this year, the CPP Investment Board signed a definitive agreement providing for a proposed merger of Aera Energy and California Resources Corporation, an independent energy and carbon management company committed to the energy transition. The transaction valued Aera Energy at approximately $2.1 billion.
But there is a difference between what larger funds are doing versus mid-sized plans. Bonnie Foley-Wong is the Sustainable Investment Leader with Mercer Canada. She says the larger investors are well on their way in terms of integrating ESG across the whole investment approach.
“They’re actively allocating whereas more of that mid-market or mid -sized investor is at an earlier stage. They’re still thinking more about establishing or evolving their governance documents,” she says.
Developing a Sustainability Standard
In fact, the International Sustainability Standards Board (ISSB) has created a single standard for company ESG reporting, with the idea that sustainability disclosure will become more uniform and easier for investors to consider. This has been endorsed by 11 of Canada’s top pension fund managers.
By establishing a “global baseline” for sustainability reporting, the standard will “enable comparable and consistent sustainability disclosures across global capital markets,” according to ISSB. While ISSB can’t force anyone to adopt its framework, it is getting support, with the expectation it will be adopted by companies voluntarily.
“The large investors are proactively preparing for the shift in standards,” notes Foley-Wong, “although I would say that all investors would benefit from understanding what the managers or companies in their portfolio are doing. I am seeing senior finance executives of companies…are actively considering how these standards impact them.”
Foley-Wong adds that smaller pensions haven’t really started looking at these standards because they’re still looking at their own internal decisions about how they want to tackle that. “There’s still a fair bit of delegation to their managers in terms of ESG integration and the adoption of sustainability related standards or activities. And so those investors are more reliant on what are their fund managers reporting.”
The Future of ESG for Pension Funds
And while large investors may be taking a whole portfolio approach to their ESG investments, this year will be an important one in the movement towards even more ESG priorities. The EU is pushing out its ESG regulations, and the US Security and Exchange Commission is trying to finalize its disclosure rules on ESG.
In the meantime, Canada will require financial institutions to publish climate disclosures that align with the Task Force on Climate-related Disclosures framework beginning in 2024, using a phased approach. The movement towards ESG prioritization is only moving forward for pension funds in Canada and around the world.
