Wednesday, February 1, 2017

OPTrust Taking Climate Change Seriously?

The Canada News Wire reports, OPTrust Proposes Action on Climate Change with Release of Position Paper and Portfolio Climate Risk Assessment: Report:
OPTrust today released Climate Change: Delivering on Disclosure, a position paper that details the fund’s approach to navigating the complexities of climate change with respect to institutional investing and includes a call for collaboration in the development of standardized measures for carbon disclosure.  The position paper is accompanied by a report by Mercer titled OPTrust: Portfolio Climate Risk Assessment which provides an assessment and analysis of the organization’s climate risk exposure across the total fund.

"Climate change impacts, and policy responses to these, will undoubtedly have repercussions on capital markets and our investment portfolio. While these impacts continue to grow, the investment industry has yet to develop a common approach to measure, model and mitigate these risks," said OPTrust President and CEO Hugh O'Reilly. "We have been active in the conversation around climate change, and now is the time to take the next step. It is our intent in sharing these documents to engage in further dialogue with our partners and peers on developing these measures."

OPTrust's approach to climate change is rooted in its investment beliefs and strategy, which recognize that environmental, social and governance (ESG) factors will impact the fund's investment risk and return, decades in the future. For pension funds, climate change presents a number of complex and long-term risks. In Canada alone, pension funds manage well over $1.5 trillion in assets, which brings a real responsibility to collectively seek innovative approaches to modeling carbon exposure and its impact across portfolios.

The position paper and the Mercer report are available at optrust.com.

With assets of $18.4 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan, a defined benefit plan with almost 87,000 members and retirees. OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the Plan and the investment of its assets, through joint trusteeship. OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.
You can read the OPTrust position paper on climate change here as well as the accompanying Mercer report here.

So what's this all about? Another feel good, tree-hugging story on how we should all take care of the environment and how pensions should divest from the fossil fuel industry? Not exactly.

First, let me thank Claire Prashaw, OPTrust's Manager of Public Affairs, for contacting me and setting up a brief call with Hugh O'Reilly, OPTrust's President and CEO.

Hugh is a very nice man, told me we met a while ago at a HOOPP conference on DB plans and that he is an avid reader of my blog and enjoys reading my comments. I must admit, I vaguely remember that conference but I think I remember him (I am terrible at remembering names and faces but can tell you telephone numbers of people I met years ago!).

He also corrected me when I called OPTrust "op -trust" and said "we call it O.P. Trust", stating he will need to "fire his marketing team" (he was joking, of course).

Anyways, Hugh explained to me that OPTrust is taking climate change and responsible investing based on environmental, social and governance (ESG) factors very seriously and this was an effort to really drill down and holistically assess OPTrust's approach to responsible investing, a first of its kind in Canada to my knowledge.

Hugh began by stressing that this isn't about "divesting" from the fossil fuel industry. I said good because a while ago, I blasted some of bcIMC's members for slamming their pension fund for unethical investing and was clear that once you go down the slippery slope of divesting, there is no end in sight:
[..] to all those tree-hugging, vegetarian environmentalists from British Columbia fighting for social justice in their Birkenstock sandals, it's time to grow up and realize that the world is a sewer and if you push responsible investing to its limits, the first companies you should divest from are big banks speculating on commodity and food prices. How come you're not hopping mad about pensions gambling on hunger? I'm way more concerned about banksters engaging in financial speculation than tobacco and arms-producing companies.

The reality is that once you push the envelope on responsible investing, you quickly divest from many companies in all industries, including Big Pharma which some claim thrives on perpetual sickness and slavery, as well as everyone's beloved Apple whose Chinese mega-plant, Foxconn, admits having had child laborers in its factories.

Another example is the coal industry, which Harvard students demanded its endowment divest from. I said this was a dumb idea and note that with China and India ravenous for energy, coal’s future seems assured (take it from someone who got scorched last year investing in environmentally friendly Chinese solars!!!).

I'd much rather see large pension funds and sovereign wealth funds invest in these companies and use their clout to bring about important change, ensuring that labor, health, environmental and governance standards are respected while they deliver on performance.
You can add McDonald's and the entire fast food industry to this list since cow 'emissions' are far more damaging to planet than CO2 from cars.

Ok, I was a bit harsh in my comments but the point is divesting might sound easy and make environmentalists feel warm and fuzzy inside but pension fund managers have an obligation to maximize returns without taking undue risk, which means they need to focus on what's best for their pension over the long run to ensure their beneficiaries will be able to retire in dignity and security, effectively getting the payments that are owed to them.

Every week I read about some contentious investments that pensions are called to divest from. This week, Europe's five largest pensions are being asked to divest from companies with activities in and around illegal Israeli settlements.

So what? What's wrong with that? Well, investments pensions undertake aren't based solely on ideological or political factors, they are based on many other factors like do these investments make sense over the long run, will they help the pension attain its overall actuarial target rate of return.

Once people start demanding pensions get out of this investment or that investment because it offends their environmental, political and ideological views, they might think they are right but in reality they may be doing far more damage to these pensions over the long run than they realize.

By the way, if you want to invest in solar stocks, be my guest, invest in the Guggenheim Solar ETF (TAN) which has had a major pullback over the last year (click on chart):


Like I said, been there, done that. I'm not saying these are bad investments over the long run, but investing based on one factor (environment) isn't always the best thing for your portfolio, and I would be very careful taking a unidimensional approach.

[Note: If you're going to invest in solar, stick to First Solar (FSLR), one of the leaders in the industry, a top holding making up the TAN ETF and a US company. Remember Trump's inaugural speech: "We are going to put America first again!".]

Now, I know there are investment heavyweights with an environmental agenda. One of them, Tom Steyer, the billionaire Democrat founder of Farallon Capital Management, one of the best multi-strategy hedge funds in the world, is so passionate about divesting from fossil fuels, he forced his hedge fund to divest even though he left the industry to focus on philanthropy and politics.

Steyer posted a video on his Facebook page on Tuesday asking liberals to share their ideas for how he should spend his millions opposing President Donald Trump. A Steyer aide calls it "crowdsourcing the resistance."

Steyer is a man with a mission. He forced Stanford's endowment to divest from coal and appeared at a CalSTRS board meeting a couple of years ago to discuss climate change, divestment and sustainable investment strategies as part of the Investment Insight Program.

Steyer isn't an idiot, far from it, he ran one of the best multi-strategy hedge funds in the world and has an enviable track record. But he's increasingly talking gibberish and needs to take it down a notch even if he has a clear environmental agenda and one against Trump.

As far as climate change, I firmly believe in global warming but there are some reputable environmental scientists in Canada who contacted me stating the evidence is far from clear as whether it exists and what exactly is causing it (although the official position is clear in stating otherwise). Clearly we need to be cognizant of which factors impact climate change in order to sustain the environment for future generations.

But the reality is wind and solar won't save us and pensions still need to invest in fossil fuels, no matter how angry that makes environmental activists. Also, most pensions including OPTrust already invest in alternative energy. The Caisse keeps blowing millions into wind farms but I'm not sure how profitable these investments truly are (I assume they are but they need to be more transparent on the returns of these investments).

Back to OpTrust. I commend this assessment and think other large pensions should follow suit to do their own comprehensive assessment on climate change and their approach to responsible investing.

I also agree with Hugh O'Reilly's philosophy that the best way to impact change is by investing in the very industries we are concerned about, whether it's oil and gas, big pharmaceuticals or tobacco and firearms.

The other thing I want you to bear in mind is that big oil companies aren't stupid, their executives also inhabit this planet and they too follow the strictest environmental standards when building a pipeline or drilling for oil. It's simply not true that oil and pipeline companies don't care about the environment, that is absolute nonsense and if people only knew how modern pipelines are built, they too wouldn't jump to silly conclusions.

[Note: The world’s largest asset manager, BlackRock, is buying $3.7 billion in funds that invest in pipelines, power plants and wind farms, expanding on a bet that investors will want to back more infrastructure projects around the world.]

What else did Hugh O'Reilly tell me? The focus on OPTrust is on funded status, not shooting the lights out in terms of returns. In fact, compensation of senior executives is focused on funded status and a portion of every employees bonus is related to this too. Hugh and Jim Keohane even wrote an op-ed on the need to place funded status front and center at all pensions.

This assessment on climate change doesn't change that focus, it emboldens them to be better in terms of responsible investing in order to better align their interests with those of their beneficiaries over the long run. Again, it's more complicated than simply divesting out this or that industry which is why I urge you to take the time to read the position paper here and the accompanying Mercer report here.

Below, OPTrust President and CEO Hugh O’Reilly notes the importance of innovation and different perspectives at OPTrust Global Pension Leadership Summit.

I thank Hugh for graciously taking the time to discuss this position paper with me. He also told me that he strongly believes in my views on diversity in the workplace and thinks diversity is the best way to counteract "group think" which really scares him.

I totally agree and will once again urge all of Canada's large pensions, big banks and other private and public organizations to do a lot more to promote real diversity at all levels of your organization. Beyond the law, there is a social, moral and economic imperative to do so and many minorities, especially people with disabilities, are struggling to find work.

This is a national tragedy, one that we should all be ashamed of, so I urge all CEOs, don't talk about diversity, do something about it and back it up with solid initiatives, public reports and statistics showing you take diversity seriously at all levels of your organization (not just lower levels).

Lastly, I embedded the June 2015 CalSTRS's Investment Committee where Tom Steyer appeared to discuss climate change, divestment and sustainable investment strategies as part of the Investment Insight Program. It is worth listening to his views but keep in mind his environmental agenda (I would also question some of his figures).


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