OPTrust Looking to a Sustainable Future

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OPTrust, one of Canada’s largest defined benefit pension plans, released its 2019 Responsible Investing (RI) Report, Looking to the Future:
The report details the Plan’s RI results and philosophy, as well as the introduction of the new Sustainable Investing and Innovation (SII) team that will build on OPTrust’s record of responsible investing. Highlights of the report and OPTrust’s 2019 RI results include:
  • Received an A+ rating for the Fund’s strategy and governance approach to responsible investing from the Principles for Responsible Investment (PRI)
  • Expanded OPTrust’s Green Bond holdings with a $100 million investment in Ontario government Green Bonds
  • Awarded top ranking in the GRESB 2019 Global Sustainable Index for portfolio company Globalvia
  • Maintained an active ownership program, including voting at more than 2,000 company meetings in over 50 countries
  • Partnered with the Investor Leadership Network, and committed to accelerating progress on gender diversity issues in the companies and other partners in which OPTrust invests
  • Strengthened reporting in accordance with the Task Force on Climate-related Financial Disclosures (TCFD)
“We are focused on sustainability, of the Plan and of the planet,” said OPTrust President and CEO, Peter Lindley. “This is reflected in our commitment to overcome the unique challenges we face as long-term investors for the financial benefit of our members and society."

The report details OPTrust’s progress in measuring total fund exposure to climate risk. In 2019, OPTrust worked with an external partner to conduct their first bottom-up climate risk assessment on a near-total fund basis. This includes beginning to measure and disclose portfolio emissions and establishing a baseline.

“As a pension plan, we are long-term investors and our role is to look far ahead at challenges and opportunities that could affect our members’ retirement security across multiple generations,” said OPTrust CIO, James Davis. “The world is changing at an increasingly rapid pace, but our approach to responsible investing embraces that change and recognizes challenges also bring opportunities.”

OPTrust reached another milestone in 2019 through the introduction of the Sustainable Investing and Innovation team. The team will focus on managing long-term sustainability issues through a capital allocation mandate. With an initial focus on innovations arising from climate change, the SII team will enable OPTrust to more proactively identify and act on emerging climate risks and opportunities.

ABOUT OPTRUST

With net assets of almost $22 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan (including OPTrust Select), a defined benefit plan with over 96,000 members. 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 view OPTrust's 2019 Responsible Investing Report here.

Earlier today, I spoke with Alison Loat, OPTrust's Managing Director of Sustainable Investing and Innovation about this report.

I'd like to thank Alison for taking some time to chat with me as well as Claire Prashaw and Jason White of OPTrust's Communications team for setting this call up.

Before I get to Alison's comments, I do want to go over a few things from the report.

Michael Grimaldi and Sharon Pel, Chair and Vice-Chair of OPTrust's Board, state the following in their message:
OPTrust’s responsible investing (RI) program is a key component of its Member-Driven Investing strategy that acknowledges the impact of environmental, social and governance (ESG) factors on the Plan. The responsible investing program ensures material ESG considerations are integrated into OPTrust’s investment decision-making processes and ownership practices.

OPTrust’s reputation as a leader in responsible investing was furthered in 2019 with several notable accomplishments. A Spanish transport infrastructure manager in which OPTrust invests received the top ranking in a global sustainability index. OPTrust partnered with the Investor Leadership Network, and committed to accelerating progress on gender diversity issues in the companies and other partners in which it invests. The organization signed the PRI Investor statement on deforestation and fires in the Amazon, among other significant activities during the year highlighted in this report.
For his part, Peter Lindley, OPTrust's President and CEO, shared this message:
The world continues to experience dramatic rapid change and pension funds are increasingly navigating a complex investing environment to keep plans sustainable.

At OPTrust, we invest based on the interests of our 96,000 members. Our investment strategy is designed to preserve the Plan’s funded status so that we can provide members with secure retirement income. OPTrust’s role is to look far ahead at challenges and opportunities that could affect members’ retirement security across multiple generations.

As a long-term investor, our responsible investing program recognizes that environmental, social and governance (ESG) factors have the potential to affect the Plan’s funded status and reputation whether we’re invested in infrastructure, real estate, private or public markets.

We are an engaged investor, working actively with companies to improve performance on issues that can impact the fund’s long-term value from increasing board diversity to divesting from tobacco to assessing climate change exposure.

A few years ago, we embarked on a journey to ensure our portfolio remains resilient to the challenges presented by climate change with the launch of our Climate Change Action Plan. During 2019, we made progress on this front, beginning the first of three phases of a total fund risk assessment and strengthening internal climate risk awareness through education sessions for our investment groups. We have increased our investments in renewable energy, sustainable real estate and green bonds.

We recently announced the creation of the Sustainable Investing and Innovation team that will build on our current approach to responsible investing, while putting capital to work in innovative areas that support OPTrust’s long-term sustainability with a focus on climate change.

With an exceptional team behind every investment decision, our members can be confident that their pensions are sustainable for the long term.
For his part, James Davis, OPTrust's Chief Investment Officer, shared this in the report:
As previously noted, we recently announced the creation of a Sustainable Investing and Innovation team that will build on our current approach to responsible investing (RI), while also identifying new opportunities to invest in sustainability. This reflects our commitment to overcome the unique challenges we face as long-term investors for the financial benefit of our members and society. 

With increased global attention on climate change and stakeholder capitalism, OPTrust continues to build on our RI foundation so we continually focus on creating long-term value by incorporating emerging best-in-class RI integration across our investment portfolio. This includes completing an initial measure of carbon exposure and prioritizing climate change adaptation, diversity and human capital development in our engagement activities.

We recognize that there are opportunities in these areas, and our new team is mandated to develop and deliver against an investment strategy that puts capital to work in innovative areas that support the long-term sustainability of OPTrust’s overall portfolio, starting with capturing opportunities stemming from climate change. The focus will be on complementing existing investments where we can tap into the expertise of our investment professionals while pursuing opportunities that are currently underrepresented in our portfolio. 

Through this work, we remain committed to building our leadership in responsible investing in a meaningful way.

Launched in late 2019, OPTrust’s new Sustainable Investing and Innovation team is uniquely positioned to look beyond responsible investing to identify and capitalize on investment opportunities across asset classes in support of sustainability.
As I stated, I had a chance to discuss OPTrust's 2019 Responsible Investing Report with Alison Loat, OPTrust's Managing Director of Sustainable Investing and Innovation.

Alison was quick to point out that she came in at the tail end of 2019 and gave credit to OPTrust's investment team for this entire report.

I began by asking her about her background and she shared this:
  • Before joining OPTrust, she was a member of the founding management team FCLTGlobal, a not-for-profit organization that works to encourage a longer-term focus in business and investment decision-making. James Davis, OPTrust's CIO and "chief climate risk officer", was the one who enticed her to join the organization.
  • Prior to FCLTGlobal, Alison was a senior fellow and instructor at the University of Toronto where she taught two courses to graduate students at the Rotman School of Management, the Faculty of Medicine and the School of Public Policy. She helped established a health policy research center and worked with the initial team that set up the School of Public Policy and Governance (now part of the Munk School).
  • Alison is the co-founder of the Samara Centre for Democracy and was the executive director from 2008 to 2015. She is also the co-author of the best-selling book Tragedy in the Commons. The Samara Centre’s early work was used to develop federal legislation on democratic reform, improve politics curricula, the orientation of newly elected MPs and initiatives to improve citizens’ participation in politics. 
  • She also sits on the Board of Ai Media Global, a global technology company that makes educational, workplace, conference and media content accessible to everyone.
Interestingly, Alison told me she doesn't come from a "traditional investment background," and in my humble opinion, that gives her a major advantage over those that do.

She strikes me as an extremely well-informed and thoughtful person who really understands responsible investing on multiples levels, not just through the investment lens.

She comes across as a very nice, intelligent and articulate lady who is enjoying the challenges of her new role and is looking forward to working collaboratively with the investment teams at OPTrust.

The fact that she also sits on the board of an organization which makes educational, workplace, conference and media content accessible to people with disabilities tells me a lot about her character and values.

I'm a huge proponent of accessibility and inclusiveness for all, especially people with disabilities who are facing increasing challenges due to COVID-19 but who are also the one group that could have helped revolutionize the workplace long before the pandemic hit (if only people in power bothered listening to them):









I say this now that Twitter just announced that its employees can work from home "forever" as if this is some revolutionary concept (it isn't, it's 2020, most people are now working from home):



While more people working at home won't help the plight of commercial real estate, it will help our society rethink work norms and how to make opportunities more accessible to everyone, including people with disabilities.

Anyway, my conversation with Alison focused on her responsible investing strategy at OPTrust and then I asked her to step back and tell me how she sees things more broadly for the industry.

As far as her new strategy at OPTrust, it was previously discussed in this Benefits Canada article and most of it is outlined in the 2019 Responsible Investing Report, so here are the three main strategic themes when it comes to sustainable investing:
  1. ESG Integration: ESG factors can affect investment risk, return and reputation. Understanding the significance of these factors is an important part of their investment process. Their investment teams seek to identify, assess and manage ESG risks and opportunities to ensure the Plan remains fully funded and sustainable for the long term. These approaches are increasingly integrated into their investment strategy across the Plan’s public and private asset classes. 
  2. Climate Change Action Plan: In 2018, OPTrust launched its Climate Change Action Plan (CCAP), a five-year plan which defined eight broad actions to guide the fund’s management of climate change risks and opportunities. Now partway through the CCAP’s term, OPTrust’s senior leadership has reaffirmed the organizational focus on climate change and prioritized renewal to ensure continued alignment with current best practice. Meanwhile, all investment teams are engaged in the integration of climate risks and opportunities within their respective investment strategies. 
  3. Focus on Innovation: 2019 marked the introduction of the Sustainable Investing and Innovation (SII) team, establishing a mandate of building on the fund’s strong Responsible Investing foundation and allocating capital towards managing long-term sustainability issues. With an initial focus on innovations arising from climate change, the SII team will enable OPTrust to more proactively identify and act on emerging climate risks and opportunities. 
That last part on innovation was interesting. Alison told me she has a small team now so the initial focus is on climate change but it might eventually be broadened to cover other themes.

She told me they will initially go through funds to tackle innovation in climate change but as they grow, they will look at making direct investments in portfolio companies down the road.

Interestingly, I asked her if ESG integration is easier in public markets as opposed to private markets and here is how she answered me:
  • In public markets, it's easier to find data but the quality of the data varies and it's not always materially relevant. Still, they fulfill their responsible investing commitments through corporate engagement, proxy voting and collaborative advocacy, all detailed in the 2019 Responsible Investing Report.
  • In private markets, data is harder to come by, however, OPTrust takes active ownership and holds board or observer seats in its portfolio companies and engages with them directly. This direct engagement allows them to convey their responsible investing priorities directly.
  • Thus, while data is more widely available in public markets, corporate governance and active direct investing in private markets allows them to relay their thoughts directly to management and make significant recommendations. (You should also read an earlier coment of mine on impact measurement in private equity.)
  • She gave me examples in Infrastructure, Private Equity and Real Estate where OPTrust’s Real Estate Group has achieved environmental certification (LEED or BOMA) on 58 per cent of their eligible Canadian direct real estate holdings and has implemented comprehensive data collection programs that monitor energy efficiency, water usage and waste management to identify potential areas of improvement and benchmark performance against indstry standards. 
We ended by conversing on where she sees ESG right now for the broader industry:
  • Alison told me we are at an "important inflection point" and that the COVID-19 crisis is only going to accelerate ESG integration across public and private markets. This is something Gordon Power, chief executive and chief investment officer of Earth Capital, discussed on my blog in early April.
  • She noted that a lot of governments are attaching sustainability goals/ criteria to their stimulus packages.
  • Across the pension industry, she said ESG approaches vary and referred to something someone at CDPQ told her, "it's like making a stew" but the end goal is the same and the secular trend in sustainable investing remains intact.
  • She noted that there is ample evidence the performance of ESG compliant companies is better over the long run, something which Mark Wiseman and Tariq Fancy discussed in detail in a recent post of mine. (By the way, Mark recently accepted a position working with Hillhouse Capital as a part-time Senior Advisor and his focus will be on specific projects that include improving reporting, ESG assessment and implementation, corporate communications processes, and other strategic advisory work. ) 
  • Interestingly, she noted the focus in ESG will move from the environment to social governance aspects like worker safety and compensation. She also brought up great points on cybersecurity and privacy concerns as large tech companies start to contact trace people to track their movement.
  •  Lastly, she said that COVID-19 crisis will only bring all these issues to the forefront.
I couldn't agree more and brought up some interesting developments I've noted on my Twitter account:



















On that note, I once again thank Alison Loat for taking the time to talk to me and thank Claire Prashaw and Jason White for setting up this conference call through Microsoft Teams.

Below, an older (2014) interview featuring co-founder of the Samara Centre for Democracy Alison Loat discussing Canada's failing democracy and the book she co-authored with Michael MacMillan, Tragedy in the Commons.

Like I said, she's a very intelligent lady who understands the bigger picture and I'm sure she will add a lot of unique insights and value in her new role at OPTrust. Also, she might not have an investment management background but she can lean on OPTrust's strong investment team whenever she needs to.

Also, earlier today, Chamath Palihapitiya, CEO of Social Capital, was interviewed on CNBC's Squawk Box discussing why the Fed's policy will only exacerbate wealth inequality and accelerate the deflationary supercycle. Great interview, he provides a lot of food for thought even if I don't agree with everything he said.

Third, Dr. Anthony Fauci tells Sen. Patty Murray (D-WA) that if states and areas reopen prematurely, there could be "really serious" consequences.

Lastly, former FDA Commissioner Scott Gottlieb says we’re in the second inning of coronavirus epidemic and we will face a ‘different threat’ in the fall. “We can all take a breather in the summer. I’m very worried about fall when we come back but I’m hopeful that infections start to break off later in the summer,” he said.

This morning he said we will see more cases as the US economy reopens but we need to pay more attention to the hospitalization rate even if it's a "lagging indicator" in terms of the virus's trajectory.




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