Operationalizing the “S” in ESG

2020 Global Investment Conference Coverage

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Business agreement concept with grass growing in shape of two businessmen shaking hangs inside transparent piggy bank © pogonici /123RF Stock PhotosIn the world of investing that incorporates environmental, social and governance factors, environment and governance have been very prominent parts of the conversation to date. And now, the pandemic is shining a new light on the importance of considering social factors in investment decision-making.

At the Canadian Investment Review’s 2020 Global Investment Conference, Catherine Jackson, an advisor in the sustainable finance practice at Mosaic Governance Advisors, spoke about how pension funds can operationalize the “S” in ESG.

Organizations can work to align their goals with their stakeholders, she said, noting she defines stakeholders as those who the pension plan has a fiduciary duty to. “It’s a narrower definition, and the reason for more narrowly defining it is if you don’t define it narrowly, you invite other stakeholders to take control over your narrative.”

Once objectives are defined, investors can integrate social elements through investing in companies with strong social purposes and practices, engaging to improve existing portfolio companies’ social practices and avoiding certain companies not aligned with ultimate goals.

To align ESG initiatives with stakeholders, pension funds can incorporate stakeholder surveys, attend roundtable conversations with members and beneficiaries or get views from advisory groups to help with investment decisions, Jackson said. “This comes down to the idea that everyone who is in the financial sector is not the sum of everybody who should be influential on the financial sector.”

Pension funds can also engage with companies they’re invested in. Jackson highlighted an example of a Canadian pension fund that is putting the “S” into action through a policy for their investee companies about the effect of the pandemic for workers. “They’ve gone fairly deep in, not setting out their own expectations, but some of the issues that they would hope that their investee companies would be thinking about. On worker health and safety, for example, what are the deep cleaning procedures that are being used? How are the physical distancing protocols being effective and overseen? And [with] respect to cutting jobs, are there alternatives being considered like job rotation [and] rotational furloughs? For those [who] have been furloughed, are benefits still being provided? Is the retraining of employees being offered?”

The pension fund is also relaxing its expectations about share-buybacks during this time, signalling their understanding of the financial issues at risk, she added.

In addition to engaging proactively with companies, institutional investors can also divest from certain companies. “An engagement strategy should have goals and milestones, but it should also include some consideration if engagement fails.”

Organizations can also use exclusions, Jackson noted, pointing to the example of PGGM, a Dutch pension fund for the health and welfare sector. “In 2013, their clients decided that given that health care and health was so important . . . that they would divest from tobacco and any company engaged in the production of tobacco or tobacco products.”

Overall, pension funds need to build capacity and interact with their stakeholders, she said. “And then, based on that, develop your house view on sustainability, including the S factor, social issues. Be selective about what those are. You can’t do everything; you can’t divest of everything; you can’t, and probably shouldn’t, invest in everything; you are paid to have a judgment here and to that extent you should be selective about which issues you can get behind.”

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