A Q&A with Ric Marrero, CEO of ACPM
By Emily Holbrook
Environmental, social and governance (ESG) investing is spreading to all pockets of the fixed-income markets. But many questions remain regarding how to measure success, what organization or governmental body should be in charge of regulations, and what investment approaches are the best for pension plans.
To get a better understanding of ESG and its status within the Canadian pension market, we reached out to Ric Marrero, CEO of Association of Canadian Pension Management (ACPM), to get his take on the current landscape of ESG investing within Canadian pension plans.
EMILY HOLBROOK: ESG has received some backlash lately, particularly in US markets. Are politics is playing a part in ESG investing within the Canadian pension market and if so, how?
RIC MARRERO: While there has been some dissent in the U.S. regarding the application of ESG practices, this is not particularly surprising as ESG itself is evolving as a standard. The U.S. opposition to ESG is getting headlines, but it looks like a mixture of apprehension and politics, both being particularly important as they approach the U.S. federal mid-term elections.
Opposition to ESG is not the direction that many other countries are taking and our federal government, given their prioritization of environmental issues, is ensuring that ESG remains front and center.
Most pension plan sponsors now integrate ESG principles into their investment strategies, but there is little consensus on how this can be done effectively. How do you feel about the general approach to ESG investments taken by pension investors?
Sustainability-related financial reporting is occurring, but it is true that there is no consensus on how it needs to be done. In the United Kingdom, there was a 2021 proposal requiring defined benefit (DB) and defined contribution (DC) pensions, under certain criteria, to manage climate-related risks and to produce Task Force on Climate-related Financial Disclosures (TCFD) reports.
One group that has been moving towards international harmonization is the Sustainability Accounting Standards Board (SASB) and the International Financial Reporting Standards (IFRS) group, both of which have formed a new International Sustainability Standards Board (ISSB) that is integrating all the major disclosure frameworks. This could be part of the way forward.
Other respected sources of information are the Principles for Responsible Investment (PRI), which are a voluntary and aspirational set of investment principles that offer possible actions for incorporating ESG issues into investment practice. As of December 31, 2020, organizations with global assets under management of US $121 trillion are signatories to these principles.
To make a long story short, staying close to the guidance from the TCFD, ISSB, and PRI initiatives is gaining international traction.
Do any individual approaches stand out?
Some organizations, such as CPP Investments and other large pension plans (those with AUM of $5 billion+ Cdn.) are making headway in their ESG reporting processes. The challenge, of course, is to ensure that a plan’s ESG investment and monitoring system is aligned to what will satisfy regulatory standards which, at the moment, are a moving target.
While it may be helpful to highlight individual approaches, it is not known if all these approaches will be relevant once there is more clarity on what is expected from the investment community. Pension plan sponsors are doing what they can in the face of multiple information sources, differing external guidance, an evolving regulatory environment, and more, so international standardized reporting is not quite there yet.
In your opinion, how should governments and regulators play a role in the ESG space?
They should play a role by developing clarity on ESG issues in conjunction with the retirement income community itself, and to profile exact actions that will improve the global situation. For instance, there has been an enormous amount of pressure for plans to divest themselves of fossil fuel investments despite their ongoing necessity in the world economy.
This would be a much easier argument to make if there was clear indication that the divestment of fossil fuel investments actually did reduce global emissions or whether these divestments are simply picked up by a different investor which may not constitute a substantive change at all.
How do you measure success when it comes to the ESG initiatives of companies that are potential investment opportunities?
This is the $64,000 question, and it is compounded by the expectation that an investor will have transparency along the entire business chain starting with the targeted company for investment plus all of the company’s suppliers, business partners, etc.
Needless to say, many companies are challenged to provide this type of transparency, particularly in a multinational setting. One thing that has gained some popularity is ESG ratings systems and they are offered by a variety of providers such as MSCI, S&P Global, etc. These ESG rating reports can be quite thorough but, once again, they are proprietary approaches that are not harmonized so more “wait and see” may be required.
What else do you see happening in terms of ESG investing in Canadian pensions?
Pension plan sponsors are keenly aware of the ESG expectations of their plan members and the governmental focus on this topic. One of the main issues that remains is what I will refer to as “harmonized clarity,” so people don’t have to keep asking, “What am I supposed to do?”
This is more pronounced for smaller plans who simply don’t have the resources to generate detailed ESG reporting or to comply with requirements that will have a significantly adverse impact on their fiduciary obligation to plan members. There may also be some advantage in addressing E, S, and G separately as they have individual frameworks, strategies and tactics.
