Wednesday, June 6, 2018

G7 Investors Unite on Global Initiatives?

Nathalie Wong and Josh Wingrove of Bloomberg report, Caisse and Ontario Teachers Unveil G-7 Investor Alliance:
A pair of Canadian pension funds and Prime Minister Justin Trudeau’s government announced an institutional investors’ “leadership initiative” aimed at boosting global efforts on climate change, infrastructure and gender equality.

Michael Sabia, chief executive officer at the Caisse de Dépôt et Placement du Québec, and Ron Mock, chief executive officer at the Ontario Teachers’ Pension Plan Board, unveiled the initiative in Toronto on Wednesday along with Finance Minister Bill Morneau and Environment Minister Catherine McKenna. The group will enhance expertise in infrastructure finance and development in emerging economies, boost roles of women in finance and speed up implementation of climate-related risk disclosure, the Caisse said.

The world needs to invest C$3.3 trillion ($2.6 trillion) in infrastructure annually through 2030 to keep pace with growth, creating an “infrastructure gap” that is particularly critical in capital markets, the Caisse said in a statement. The groups will launch an infrastructure fellowship program, develop diversity policies and set up an advisory committee on climate disclosure.

“This is the start of something that we think is a bit different,” Sabia said in Toronto. The group will focus on collaboration to “take on some big issues,” he said. While the core role is to produce returns, he said “as long-term investors, we know that our returns are affected by the health and strength of countries where we invest.”

The Caisse and Ontario teachers will be joined by partner institutions including Alberta Investment Management Co., Germany’s Allianz SE, London-based Aviva and the California Public Employees’ Retirement System, according to the Caisse statement.

The investors will “promote gender diversity in capital markets, create an infrastructure fellowship program to help develop expertise in emerging and developing economies, and take steps to better recognize and report on the financial risks associated with climate change,” the government said in a statement.

Capital is not “properly aligned with the principles of sustainable development, and we need to change that,” McKenna said Wednesday. McKenna and Sabia lauded recommendations made by the Task Force on Climate-related Financial Disclosures, which was spearheaded by Bank of England Governor Mark Carney, and chaired by Michael Bloomberg, founder of Bloomberg LP.

Other members of the group include Banca Generali S.p.A., Natixis Investment Managers, the Ontario Municipal Employees Retirement System, the Ontario Public Service Employees Union Pension Plan Trust Fund and the Netherlands’ Stichting Pensioenfonds Zorg & Welzijn fund, known as PGGM, according to the Caisse statement.

Those institutions collectively manage more than C$6 trillion, the Caisse said. The groups didn’t pledge any specific investment or new fund. Trudeau will host G-7 leaders later this week in Quebec, with a dispute over U.S. metals tariffs set to dominate the agenda.
Martha Porado of Benefits Canada also reports, Global investors assert support for G7 themes ahead of summit:
Just days before Canada hosts the G7 Summit in La Malbaie, Que., a group of investors, including some of the country’s largest pension funds, has joined together with the federal government to promote three key issues, including increasing opportunities for women in finance and investment worldwide.

“We need to think about how we’re going to ensure half of our population is more successful,” said Finance Minister Bill Morneau at a press conference on Wednesday. He called it a key moment for the public and private sectors to come together. “We don’t have enough women in the fields that are going to drive forward the success of our economy,” he said, adding that pension funds are in a particularly good place to encourage change.

The group of investors is launching a two-pronged approach to increasing opportunities for women in finance worldwide by committing to the development and implementation of diversity policies inspired by global best practices and setting up an internship program with the CFA Institute that focuses on encouraging women studying in developing markets to learn about, prepare for and gain experience in the investment industry.

The group of investors is also focusing on enhancing expertise in infrastructure financing and development in emerging and frontier economies and accelerating the implementation of comparable climate-related disclosures.

The world needs to invest $3.3 trillion in infrastructure annually through 2030 to keep pace with projected growth, according to a press release, which noted the infrastructure gap is particularly critical in emerging markets because of the lack of projects to invest in and the necessary financial and operating expertise. To tackle the issue, the group is launching an infrastructure fellowship program for senior public sector infrastructure managers in emerging and frontier markets.

To address the need for a comprehensive framework for climate-related disclosures, the group of investors is setting up an advisory committee that will assess existing efforts by various organizations that support the adoption of the Financial Stability Board’s task force on climate-related financial disclosures, leverage those efforts into a unified approach and publish sample guidance for other institutional investors.

The group of institutional investors includes the Alberta Investment Management Corp., the Caisse de dépôt et placement du Québec, the Canada Pension Plan Investment Board, the Ontario Municipal Employees Retirement System, the Ontario Teachers’ Pension Plan and the OPSEU Pension Trust.

“Climate change, gender inequality and the infrastructure gap are all significant global problems that need collective action and robust, practical solutions,” said Ron Mock, president and chief executive officer of Ontario Teachers’, in a press release.

“Institutional investors have the resources and the platform to make meaningful contributions in all of these areas. We are pleased that our initiatives align with this year’s G7 themes, while also providing tangible benefits for investors and their members.”

Also in advance of the G7 Summit, a group of 319 investors from around the world, including many Canadian institutions and asset managers, has signed a letter reiterating their commitment to the Paris agreement and their continued efforts in fighting climate change.

The letter urged all governments to act to implement the goals of the agreement “with the utmost urgency.” While the global transition to clean forms of energy is underway, the letter noted, the risks climate change presents will require much more work to ensure the resilience of global society, the economy and the financial system.

Investors around the world are increasingly throwing their economic clout behind the transition to a lower carbon world, as well as considering climate change more significantly in their overall investment processes and risk management strategies, especially when dealing with companies that are high carbon emitters, the letter stated. It also asserted investors’ concern that the current actions taken by governments won’t be enough to achieve the agreement’s goal of “holding the increase in the global average temperature to well below 2 C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 C above pre-industrial levels.”

This “ambition gap” between governments and that goal is of great concern to investors since, as the letter noted, “it is vital for our long-term planning and asset allocation decisions that governments work closely with investors to incorporate Paris-aligned climate scenarios into their policy frameworks and energy transition pathways.”

The letter’s signatories, representing a collective US$28 trillion in assets under management, include the Alberta Investment Management Corp., the Caisse de dépôt et placement du Québec, the Investment Management Corp. of Ontario, the Ontario Municipal Employees Retirement System, the Ontario Teachers’ Pension Plan and the OPSEU Pension Trust.

Regarding a further cause, 130 Canadian and global institutional investors with $2.3 trillion in assets under management are urging Labour Minister Patty Hajdu to enact legislation to tackle enforced and child labour in global supply chains. Among the group is the Canadian Union of Public Employees’ pension plan, the OPTrust, the pension plan of the United Church of Canada and University of Toronto Asset Management Corp..

“We consider a company’s management of environmental, social and governance risks — including human rights-related risks — in our investment decision-making processes,” the statement said.

“In order to do so, however, we require up-to-date, clear and comparable information from companies about their due diligence on priority issues like modern slavery and child labour in their supply chains.”
You can learn more about the G7 Investors Global Initiatives here and read their first news release here.

As stated above, the focus is on three initiatives:
  1. Enhancing expertise in infrastructure financing and development in emerging and frontier economies;
  2. Opening opportunities for women in finance and investment worldwide; and
  3. Speeding up the implementation of uniform and comparable climate-related disclosures under the FSB-TCFD framework.
I don't know the details of how this was started but it's obvious there were conversations that took place between leaders of OTPP and the Caisse and the Prime Minister's Office or Finance Canada.

But it's important to note this is part of something much bigger going on all across the world. In fact, three days ago, Alister Doyle of Reuters reported, Big investors urge G7 to step up climate action, shift from coal:
Institutional investors with $26 trillion in assets under management called on Group of Seven leaders on Monday to phase out the use of coal in power generation to help limit climate change, despite strong opposition from Washington.

Government plans to cut greenhouse gas emissions were too weak to limit warming as agreed by world leaders at a Paris summit in 2015, they wrote. U.S. President Donald Trump announced a year ago that he was pulling out of the pact.

“The global shift to clean energy is under way, but much more needs to be done by governments,” the group of 288 investors wrote in a statement before the G7 summit in Canada on June 8-9.

Signatories included Allianz Global Investors, Aviva Investors, DWS, HSBC Global Asset Management, Nomura Asset Management, Australian Super, HESTA and some major U.S. pension funds including CalPERS, it said.

As part of action to slow climate change, the investors called on governments to “phase out thermal coal power worldwide by set deadlines”, to phase out fossil fuel subsidies and to “put a meaningful price on carbon”.

The investors also urged governments to strengthen national plans for cutting greenhouse gas emissions by 2020 and to ensure that companies improve climate-related financial reporting.

Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change (IIGC), said it was the first time that such a broad group of investors had called for a phase-out of thermal coal, used in power generation.

“There is a lot more momentum in the investor community” to put pressure on governments, she told Reuters. The IIGC was among backers of the statement, delivered to G7 governments and to the United Nations.

G7 nations Canada, Britain, France and Italy are members of a “Powering Past Coal” alliance of almost 30 nations set up last year and which seeks to halt use of coal power by 2030. Japan, Germany and the United States are not members.

The investors wrote that countries and companies that implement the Paris climate agreement “will see significant economic benefits and attract increased investment.” U.S. gross domestic product was $18.6 trillion in 2016, World Bank data show.

Trump doubts scientific findings that heatwaves, downpours and rising sea levels are linked to man-made greenhouse gas emissions and wants to bolster the U.S. fossil fuel industry. Worldwide, coal is now used to generate almost 40 percent of electricity.
And Mike Scott of Forbes reports, $26 Trillion Investment Alliance Calls On US And Rest Of G7 To Scale Up Climate Ambitions:
Some of the world’s biggest investors have called on global leaders to scale up their climate change ambitions, increase investment in the switch to a low-carbon economy and help companies to reduce their climate risks.

The call comes as a new report reveals that the G7 nations – the U.S., France, Germany, Canada, Italy, Japan and the U.K. – are still spending at least $100 billion subsidizing fossil fuels even though they have pledged to end such subsidies by 2025 .

Some 288 investors with more than $26 trillion in assets under management have written to the leaders of the G7 nations ahead of their summit in Canada this week, stating that “the global shift to clean energy is under way, but much more needs to be done by governments to accelerate the low carbon transition and to improve the resilience of our economy, society and the financial system to climate risks .”

“We are concerned that the implementation of the Paris Agreement is currently falling short of the agreed goal of ‘holding the increase in the global average temperature to well below 2-degrees Celsius above pre-industrial levels.’” they added.

The investors, which include Allianz Global Investors, Aviva Investors, DWS, HSBC Global Asset Management, Nomura Asset Management, Australian Super, and Calpers, say that they are doing their part by making significant investments into low-carbon assets, incorporating climate change scenarios and climate risk management into their investment processes and engaging with the largest greenhouse gas emitters.

They now want world leaders to urgently step up their efforts. Specifically, they want world governments to:

1) Achieve the goals of the Paris Agreement

2) Accelerate private sector investment into the low carbon transition

3) Commit to improve climate-related financial reporting

Patricia Espinosa, the executive secretary of the United Nations Framework Convention on Climate Change, called on investors around the world to sign on to the statement.

“It’s extremely encouraging to see so many institutional investors coming together around such a powerful message to governments and the international community,” said Ms. Espinosa. "Leveraging private finance to fund the transition to a low-emissions and low-carbon future in order to meet the goals of the Paris Agreement is a necessity—one that public administrations cannot afford to do on their own.”

The statement has been developed by sustainable investment groups Asia Investor Group on Climate Change, CDP, Ceres, Investor Group on Climate Change, Institutional Investors Group on Climate Change, Principles for Responsible Investment and UNEP Finance Initiative.

A year after major U.S. investors and thousands of other American businesses, cities and states stated that "We Are Still In" the Paris Agreement in response to Donald Trump announcing he would pull the U.S. out of the deal, Mindy Lubber, CEO and President of the sustainability non-profit organization Ceres​, said: “In order to maintain that investor confidence in the shift to the clean energy economy and to low-carbon investment portfolios, policymakers, here and abroad, must commit to supporting ambitious climate action and accelerated sustainable investments.”

The business case for investors to act on environmental risk could not be clearer, and climate change is firmly on the agenda of the investment community, added Paul Simpson, CEO of CDP. ​“This investor statement is a direct call to action to government leaders to accelerate their implementation of the Paris Agreement. Political will to improve climate-related financial reporting is an important step towards keeping the promises made in Paris.”

Investors may be acting to manage the risks to their portfolios presented by climate change, but they could do even more if the right policies were in place, the group said.

“For us to achieve a sustainable and low carbon financial sector we need policy and regulatory frameworks that incentivize for more green investments, but also that help us mainstream sustainability factors into finance institutions ‘core decision making,” said Eric Usher, head of the UNEP Finance Initiative​.

The report on fossil fuel subsidies, produced by the U.K.’s Overseas Development Institute, says that “despite their numerous commitments, not only have G7 governments taken limited action to address fossil fuel subsidies but they have also failed to put in place any mechanisms to define and document the full extent of their support to oil, gas and coal, or to hold themselves accountable for achieving these pledges."

The group has created a G7 fossil fuel subsidy scorecard to address this “accountability gap” and track, for the first time, each G7 country’s progress in phasing out fossil fuel subsidies across seven indicators. The U.S. is the worst offender in the G7, with more than $26 billion in subsidies, followed by Germany ($18 billion), Italy ($17 billion) and Japan ($12 billion). The U.K. is close behind with $11 billion, while France spends $8 billion and Canada $4 billion.

Given the U.S. Administration’s opposition to dealing with climate change, Germany’s ongoing persistence in using coal and the Canadian government’s recent purchase of Kinder Morgan’s Trans Mountain Pipeline, the Investor Agenda statement and the subsidies report are likely to have limited impact. However, given frictions over trade and climate change, it is important that global leaders are aware of the growing momentum behind calls for action to tackle the issue.
I recently discussed whether Canadian pensions will buy a stake in the Kinder Morgan pipeline and I thought the Government of Canada did the right thing to temporarily nationalize this pipeline to get the project going.

I believe pension managers have a duty to first fulfill their fiduciary responsibility to achieve their target rate of return and then focus on being good environmental stewards. The two goals aren't mutually exclusive, far from it, but the first focus has to be on long-term returns without taking undue risk.

Climate change risks are increasingly important to pensions which is why ESG investing has taken off in a big way.

On Wednesday afternoon, I had a scheduled call with HOOPP's CEO Jim Keohane to discuss the seventh annual LEAP Awards where HOOPP honoured the outstanding sustainability achievements and leadership of management teams and tenants in HOOPP’s real estate Canadian portfolio for excellence in energy performance, tenant leadership, stakeholder engagement and technology innovation.

Below, I give you the gist of our conversation:
  • Jim told me HOOPP wasn't invited to be part of this global initiative "probably because we don't have a substantial infrastructure portfolio" but that's fine because like other pensions, HOOPP practices responsible investing and integrates available ESG data and information alongside traditional fundamental analysis incorporating financial and economic information. 
  • In terms of real estate, Jim told me 40 percent of greenhouse gases come from buildings so it's a major contributor to climate change.
  • HOOPP focuses on best environmental standards and takes energy efficiency in its real estate holdings very seriously. Why? Simply put, it adds to the bottom line and makes great sense from a fiduciary and environmental standpoint.
  • He gave me the example of One York Street, a joint project of Menkes Developments and HOOPP, which is their headquarters now. He said it achieved LEED Platinum certification, earning 89 points, the highest score ever awarded to a Toronto building and is the most energy efficient building in Canada.
  • Interestingly, this energy efficiency is good for HOOPP because operating costs were slashed by 60 percent, allowing them to lock in quality tenants for longer at lower leases. Tenants like Sun Life enjoy lower leases but also lower their carbon footprint which is what shareholders want. 
  • Jim told me the building is incredible and the quality of the air is unlike any other building where the vents are on the ceiling and air is "drawn down and sucked right back up" which leads to "stale air and people getting sleepy in the afternoon" (no, it's not just fatigue, the air quality in your building is terrible). At One York, "the vents are on the floor and each area can dial it up or down." 
  • That's great for a new building which HOOPP built from scratch with its partner but what about older buildings in HOOPP"s real estate portfolio? Jim told me they're working with property managers to make them more efficient by focusing on three areas: 1) reducing energy consumption, 2) reducing water consumption and 3) reducing solid waste and recycling more.
  • That's what HOOPP's seventh annual LEAP Awards were all about last night. Property managers were invited to give their best ideas on making properties more sustainable and energy efficient. 
I thank Jim Keohane for taking some time to talk to me, it opened my eyes on how important it is to address climate risks in a real estate portfolio. Jim gave credit to Lisa Lafave, a senior portfolio manager, for starting this LEAP initiative and the whole real estate team led by Stephen Taylor. You can learn more on HOOPP's real estate portfolio here and see highlights of the LEAP Awards on HOOPP's twitter account here.

One thing Jim did convey to me is HOOPP doesn't practice divestments but prefers corporate engagement and he also told me their investments don't begin with ESG factors. Instead, they look at whether investments fulfill their pension obligations and then practice good environmental stewardship but the focus always remains on long-term returns.

Importantly, he gave me the example of the 1990s when pensions were divesting from tobacco, fossil fuels, and more sectors and they ended up being way overweight technology and it hurt them when the tech bubble imploded.

He also told me that alternative energies like solar and wind farms are going to grow (only make up 5 percent of global energy) but they rely heavily on government subsidies so there are risks.

Anyway, it was a fascinating discussion and I really thank Jim Keohane for taking the time to talk to me. One area where I think HOOPP and other pensions should divest from immediately is tobacco, especially since it's called the Healthcare of Ontario Pension Plan (meet Dr, Bronwyn King, she's very smart and highly convincing).

As far as the G7 Investors Global Initiatives, I haven't had a chance to talk to Ron Mock or Michael Sabia but it's fairly new and will wait for more press releases before discussing it with them as it's new.

All I can say is the focus is right, we need more women in finance worldwide, we need more experts in infrastructure and emerging markets and we certainly need better and more timely data on climate factors impacting all investments.

Below, global investors are coming together in support of the Global Development Initiatives."What we’re announcing today is a way to demonstrate the potential of collaboration. By working together as a group of funds in three specific areas, we seek to have greater impact and a more lasting effect", said Michael Sabia, CEO of the Caisse.

Not only is Michael leading the greenfield revolution in infrastructure, he's now part of a group of global investors looking to make long lasting changes in finance and make the world a better place.

I wish this group long-term success and hope this is the beginning of something which will indeed change the world for the better.

By the way, speaking of making the world a better, more inclusive place, CNBC's Julia Boorstin reports on a group of female investors that are looking for ways to bring more diversity to the start-up table. Watch the clip below, it's an excellent report and shows you when it come to gender equality, Silicon Valley is still lagging way behind others but things are slowly changing for the better.


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