How Ontario Teachers’ is embracing a systematic approach to ESG integration

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Huge cloud of polluted smoke from coal power plant Copyright : kodda // 123RFWhen the Ontario Teachers’ Pension Plan started to zero in on environmental, social and governance issues, it began by asking why these subjects were worth pursuing in the first place.

“We started this journey 10 years ago,” said Barbara Zvan, chief risk and strategy officer at the Ontario Teachers’, during a session at the Canadian Investment Review’s Defined Benefit Investment Forum in Toronto on Dec. 6.

The pension fund has developed a framework to determine which ESG issues matter from a financial point of view. “This isn’t about impact. It’s really about financial materiality,” she said.

Once material issues are identified, the Ontario Teachers’ includes those factors in making the original investment decision and subsequent engagement. “At some point, the deal team will be saying, ‘OK, I’m ready to spend some serious money investigating this deal,’ said Zvan. “And part of that exercise is taking into account the material ESG factors and doing the same due diligence that we would do on any aspect like tax, the quality of your earnings, growth prospects.”

ESG questions are also embedded in the process of hiring and reviewing outside money managers, she noted. “We also look at their practices. It’s not just about the policy they may have posted internally, but we ask for examples.”

It’s also worth knowing whether an outside manager has a specific person accountable for ESG, she added.

Even if a manager is in the early stages of developing its strategy on ESG, it doesn’t mean the Ontario Teachers’ won’t work with it, said Zvan. In fact, the plan has helped many managers, especially in Asia, develop stronger processes where ESG is concerned.

As for engagement, even with the Ontario Teachers’ relatively large size, the pension often teams up with other investors when engaging with portfolio companies. “We try to do a lot of collaborative engagements with others . . . trying to leverage different groups,” she said.

For example, the Ontario Teachers’ participates in Climate Action 100+, a group of investors focused on a core group of companies with some of the worst greenhouse gas emission habits. “Being part of that and taking on a few companies has a lot more impact than us trying to do a whole bunch of companies ourselves,” said Zvan.

The Ontario Teachers’ is also part of the Investor Leadership Network, alongside other pension plans and money managers. The project is focused on three initiatives: a sustainable infrastructure fellowship program, diversity in investment and climate disclosures.

“Since June 2018 when this was announced, the 14 pension plans created an infrastructure program at York University,” Zvan said.“We get asked [about] emerging market infrastructure all the time. And it’s hard. There are things in the contracts that we just can’t agree to. The documentation might not be there.”

The five-week course at York University brings candidates from different emerging markets to participate, as well as infrastructure teams from across the participating plans. The course helps create a dialogue where emerging market participants can better clarify what challenges they’re facing in their domestic markets and North American institutions can better communicate their needs as investors, she said.

For the Ontario Teachers’, working with partners is key. “It’s really important for us to join other groups to try to influence change. . . . I have basically eight people dedicated to this topic and there is not enough time in the day for every initiative out there,” said Zvan.

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