Canada's Top Eight Pensions Unite on ESG Disclosure

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Tim Kiladze of The Globe and Mail reports Canada’s top pension funds issue rare joint call for better ESG disclosures:

The heads of Canada's eight largest pension funds, collectively responsible for $1.6 trillion is assets, are banding together for a rare joint request, pleading with corporations to beef up their environmental, social and governance disclosures by reporting the data in a standardized fashion.

ESG factors such as diversity initiatives and carbon footprint disclosures, have become crucial investment criteria for institutional money managers in recent years, but the way these companies report these risks and commitments is akin to the Wild West.

To streamline decision-making, Canadian pension fund chief executive officers have worked for the past six months to mutually agree on the best frameworks for companies to use -- those from the Sustainability and Accounting Standards Board and the Task Force on Climate-related Financial Disclosures.

The leaders backing this initiative include the CEOs of the Canada Pension Plan Investment Board, the Caisse de dépôt et placement du Québec, Ontario Teachers' Pension Plan and PSP Investments, which manages the pensions of federal government employees and the Royal Canadian Mounted Police.

Many of the funds have already been vocal about improving ESG disclosure, but the joint request marks the first time all eight have come together. "We're going to have a lot more impact changing behaviors if we speak as eight organizations representing $1.6-trillion," PSP Investments CEO Neil Cunningham said in an interview. 

The initial spark came in May when pension fund heads got together for their biannual meeting with the Governor of the Bank of Canada. In a discussion among themselves afterward, Mr. Cunningham expressed frustration with the "alphabet soup" of organizations that made disclosure recommendations. What the funds wanted, he said, was "a consistent, transparent means of measuring ESG impacts and risks."

Canadian corporations not only lag their U.S. counterparts by a wide margin in disclosing climate risks, according to Montreal-based ESG consultancy Millani, but of those that published a sustainability report in 2019, the disclosures varied widely.

Roughly two-thirds of companies used what is called the Global Reporting Initiative, or GRI, to guide their reporting, according to Millani, while about one-third used an ESG framework from the Sustainability and Accounting Standards Board, or SASB.

The SASB standards, which the pension funds back, were published in late 2018 after six years of research, and they include 77 industry-specific frameworks. They also include climate-related financial disclosure recommendations released in 2017 by the Task Force on Climate-related Financial Disclosures, or TCFD.

The TCFD was created by the former Bank of England governor Mark Carney in 2017, and the organization's goal is to help investors, lenders and insurers understand which companies will endure or even flourish as the environment changes and new technologies emerge, according to its mission statement.

PSP's Mr. Cunningham stressed that tracking such details is crucial for making investment decisions. "Companies that are more involved and understand ESG risks better, and disclose risks better...tend to outperform those that don't," he said. "The ability to identify those outperformers will increase our returns, and then benefit our beneficiaries. This is just smart investing."

The full list of Canadian pension funds backing the request is: Alberta Investment Management Co., British Columbia Investment Management Co., the Caisse, CPPIB, Healthcare of Ontario Pension Plan, Ontario Municipal Employees Retirement System, PSP and OTPP.

Bank of Canada Governor Tiff Macklem is also endorsing the push. "A strong commitment to environmental sustainability, diversity and inclusion and good governance principles will not only make our economy and financial system more resilient, it's also the right thing to do," he said in a statement. "Leadership from Canada's financial sector is essential as we focus on building an enduring and more equal economic recovery from the pandemic."

Maiya Keidan of Reuters also reports Canada pension funds with combined $1.2 trillion under management ask companies to standardize ESG reporting:

Canada’s eight biggest pension funds on Wednesday threw their weight behind global efforts to improve corporate sustainability reporting, urging companies and their investment partners to report environmental, social and governance (ESG) data in a standardized way.

In the first joint statement of its kind, CEOs of the top pension funds, which manage C$1.6 trillion ($1.2 trillion) in assets, demanded increased transparency from companies.

“How companies identify and address issues such as diversity and inclusion, human capital, board effectiveness and climate change can significantly contribute to value creation or erosion,” the statement released by Ontario Teachers’ Pension Plan, Canada Pension Plan Investment Board and the Public Sector Pension (PSP) Investment Board and others said.

They asked the companies to use the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures framework to further standardize ESG-related reporting.

BlackRock, the world’s largest asset manager, in October called for harmonized sustainability accounting rules and standards globally.

Earlier this autumn, the International Financial Reporting Standards (IFRS) Foundation said it was looking into standardization and comparability of reporting on sustainability and climate-change issues.

“For us to achieve the objectives of disclosure, we have a louder voice banding together and it’s the first time we’ve done that,” PSP Investments’ CEO Neil Cunningham told Reuters by phone, adding that the eight funds coming together “is more powerful than eight separate voices in the wilderness.”

Other funds that are part of the group include: the Ontario Municipal Employees Retirement System, Healthcare of Ontario Pension Plan, Caisse de dépôt et placement du Québec, British Columbia Investment Management Corporation and Alberta Investment Management Corporation.

Paula Sambo of Bloomberg News also reports that top Canadian pension funds ask for better ESG disclosures:

The heads of eight large Canadian pension funds are pleading with companies to improve their environmental, social and governance disclosure by giving investors “consistent and complete” data.

The leaders backing the initiative include the chiefs of the Canada Pension Plan Investment Board, the Caisse de depot et placement du Quebec, Ontario Teachers’ Pension Plan and PSP Investments, which manages the pensions of federal government employees and the Royal Canadian Mounted Police. Collectively, the funds manage C$1.6 trillion ($1.2 billion) in assets.

“How companies identify and address issues such as diversity and inclusion, human capital, board effectiveness and climate change can significantly contribute to value creation or erosion,“ the group said in a statement.

“Companies have an obligation to disclose their key business risks and opportunities to financial markets and should provide financially relevant, comparable and decision-useful information.”

The funds said they’re committed to strengthening ESG disclosure within their own organizations and to allocating capital to investments best-placed to deliver sustainable value over the long term.

CPP Investments posted a press release stating the CEOs of eight leading Canadian Pension Plan investment managers call on companies and Investors to help drive sustainable and inclusive economic growth:

Today, the CEOs of Canada’s eight leading pension plan investment managers, representing approximately $1.6 trillion in assets under management, are joining forces to help shape a future defined by more sustainable and inclusive economic growth.

For the first time, the CEOs of AIMCo, BCI, Caisse de dépôt et placement du Québec, CPP Investments, HOOPP, OMERS, Ontario Teachers’ Pension Plan, and PSP Investments have issued a joint statement. Together, they call on companies and investors to provide consistent and complete environmental, social, and governance (ESG) information to strengthen investment decision-making and better assess and manage their collective ESG risk exposures.

The signatories further commit to strengthening ESG disclosure within their own organizations and to allocate capital to investments best placed to deliver long-term sustainable value creation.

The joint statement declares, “How companies identify and address issues such as diversity & inclusion, human capital, and climate change can significantly contribute to value creation or erosion. Companies have an obligation to disclose their key business risks and opportunities to financial markets and should provide financially relevant, comparable and decision-useful information.”

The signatories recognize that while companies face a myriad of disclosure frameworks and requests, it is vital that they report relevant ESG data in a standardized way to provide clarity and improve data flow. They ask that companies measure and disclose their performance on material, industry-relevant ESG factors by adopting the Sustainability Accounting Standards Board (SASB) standards and the Task Force on Climate-related Financial Disclosures (TCFD) framework.

The statement recognizes the ongoing impact of the COVID-19 pandemic and recent events that have highlighted long-standing inequalities revealing business strengths and shortcomings concerning social inequity, including systemic racism, environmental threats, and board effectiveness. The signatories call on companies and investment partners to seize the tremendous opportunity available at this historic moment to actively take steps to drive lasting change.

“We are inspired by this opportunity to help confront the most urgent challenges facing our global community and create more inclusive economic growth. We encourage other parties committed to our vision to join us on this journey towards a more sustainable future for all,” the statement concludes.

MEDIA QUOTES:

“When you approach investing with a long-term view as we do, sound ESG practices are imperative to achieving strong, risk-adjusted returns. Seeking transparent and standardized disclosures is something we will continue to do, in the best interest of our clients and all Albertans.” – Kevin Uebelein, Chief Executive Officer, AIMCo

“BCI is committed to companies that create long-term value for our clients. Transparency is key, and we need comparable and consistent ESG disclosure to allow us to make informed investment decisions.”  – Gordon J. Fyfe, Chief Executive Officer/Chief Investment Officer, BCI

“Increased transparency and standardized reporting on ESG matters will help investors better assess company risks and long-term performance and ultimately contribute to building a stronger and more sustainable economy for all. We are happy to see all major Canadian pension funds working together in pushing this important initiative forward.” – Charles Emond, President and Chief Executive Officer, Caisse de dépôt et placement du Québec

“CPP Investments is a strong supporter of both the Sustainability Accounting Standards Board (SASB) and the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). By aligning their reporting with these standards, companies can help global investors like CPP Investments to better understand, evaluate and assess potential risk and opportunities related to environmental, social and governance (ESG) factors.” – Mark Machin, President and Chief Executive Officer, Canada Pension Plan Investment Board

“As a global investor and the pension provider for Ontario’s healthcare workers, HOOPP is committed to sustainable investing. We are proud to be joining other major Canadian pensions in pushing for enhanced and standardized reporting of environmental, social and governance (ESG) information. This pledge is a call to action for both investors and businesses to work together for a better future.” – Jeff Wendling, President and Chief Executive Officer/Chief Investment Officer, HOOPP

“Capital allocation plays a critical role in the transition to a lower-carbon economy. At OMERS, we actively assess risks and opportunities through an ESG filter to identify investments that will generate long-term, stable returns in the context of this transition. Greater transparency and comparability of relevant data is essential to making informed allocation decisions.” – Blake Hutcheson, President and Chief Executive Officer, OMERS

“Our objective is to invest in companies that build a better future for their employees and communities while at the same time provide the appropriate risk-adjusted returns to help us meet our promise to our members. Providing clear guidance to companies on the sustainability frameworks that we support will help unlock the consistent and comparable information we need to make prudent investment decisions.” – Jo Taylor, President and Chief Executive Officer, Ontario Teachers’ Pension Plan

“Our investment approach is anchored in our commitment to act in the best interests of our contributors and beneficiaries. We believe a concerted ESG approach on standardized disclosures will give the industry new insight to inform risk models and investment decisions. At PSP Investments, we are proud to join this initiative.” – Neil Cunningham, President and Chief Executive Officer, PSP Investments

“A strong commitment to environmental sustainability, diversity and inclusion and good governance principles will not only make our economy and financial system more resilient, it’s also the right thing to do. Leadership from Canada’s financial sector is essential as we focus on building an enduring and more equal economic recovery from the pandemic. I applaud the commitment expressed today by Canada’s leading pension plan investment managers.” – Tiff Macklem, Governor, Bank of Canada.

“SASB welcomes the leadership of Canada’s eight largest pension plan investment managers in advancing investor-focused sustainability disclosure. By asking companies to use SASB Standards, along with the TCFD recommendations, this group is helping improve the availability and comparability of sustainability information and contributing to more resilient markets.” – Janine Guillot, Chief Executive Officer, Sustainability Accounting Standards Board

“We applaud these Canadian pension funds for their efforts in contributing to a more resilient global economy. By asking companies to disclose in line with the TCFD and SASB frameworks, they are paving the way for convergence around a common set of disclosure principles and furthering Canada’s leadership in this area.” – Mary Schapiro, Head of the Task Force on Climate-related Financial Disclosures Secretariat and Vice Chair for Global Public Policy at Bloomberg LP

In a statement posted on LinkedIn, OMERS CEO Blake Hutcheson explains the need for better reporting of ESG data:

Today, alongside our friends at Canada’s leading pension plans, we announced a shared commitment urging businesses to provide consistent and complete environmental, social, and governance (ESG) information to strengthen investment decision-making and better assess and manage collective ESG risk exposures. 

At OMERS, we invest to deliver secure, sustainable returns to our 500,000 members across Ontario over the long term. Applying an ESG lens to the assessment of risk and value is essential to achieving this; for this lens to be truly effective, businesses need to accurately measure and report ESG data.

Currently there is a lack of rigorous ESG data from many businesses globally for investors to adequately inform investment decisions. In order to drive sustainable value for our members, we rely on the transparency and comparability of data that this statement calls for. While companies face a myriad of disclosure frameworks and requests, in our view it is vital that they report relevant ESG data in a standardized way to provide clarity and improve data flow.

We therefore join our peers to urge companies to utilize Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures to provide a common standard for the disclosure of their performance on material, industry-relevant ESG factors.

As we call on businesses to improve reporting of ESG data, we too commit to strengthening ESG disclosure at OMERS and to increasingly allocate capital to investments best placed to deliver long-term sustainable value creation.

CDPQ's President and CEO, Charles Emond, posted this on LinkedIn (translated from French):

Working with Maple 8, Canada's largest pension plan managers, I am pleased that the CDPQ is committed to achieving ambitious sustainability goals, transparently disclosing environmental, social and governance issues, and encouraging industry to do the same. I am convinced that to strengthen our economy and provide a just and inclusive future for all, it is more necessary than ever to work together to address the climate challenge.

I'm not going to go over what every CEO said but the press release above from CPP Investments states their comments.

Take the time to read the joint statement below:

The key request is for companies to measure and disclose their performance on material, industry-relevant ESG factors by leveraging the Sustainability Accounting Standards Board (SASB) standards and the Task Force on Climate-related Financial Disclosures (TCFD) framework to further standardize ESG-related reporting.

The joint statement states:

While the SASB standards focus broadly on industry-relevant sustainability reporting, the TCFD framework calls for climate-specific disclosures across several reporting pillars (governance, strategy, risk, and metrics and targets). Both are useful to investors and informative to companies working to frame their ESG reporting.

Alright, what are my thoughts? In a nutshell, I absolutely agree with this initiative and I'm glad Canada's top eight pensions got together to issue a joint statement.

I would have liked to have seen more large Canadian pensions like IMCO, OPTrust, CN Investment Division, Trans-Canada Capital and CAAT join the top eight but for some reason it was only the top eight pensions.

Regardless, the message and intent behind this push for more ESG disclosure are right on target but now we have to wait and see how companies are going to respond. Most of them will respond favorably, but some will ignore the plea for more ESG disclosure based on well known reporting frameworks (SASB and TCFD).

Beyond climate-related risks, however, the joint statement said it will look at how companies identify and address issues such as diversity and inclusion, human capital, and board effectiveness which can significantly contribute to value creation or erosion.

I'm not an ESG expert but I track one on Twitter, Mark Wiseman, Chair of AIMCo' Board:

Clearly ESG is all the mania lately and from an investing point of view, I see some speculative mini ESG bubbles out there.

But what Canada's top pensions are asking for here is to standardize ESG disclosure so they can assess companies' impacts and risks and be able to make well informed investment decisions over the long run.

Canadian companies should answer their call, we lag behind others in terms of ESG disclosure and that can jeopardize large companies looking to attract foreign investment. 

Bottom line: it's 2020, we need to tackle ESG in a very standardized, transparent and comprehensive way.

This is especially important if we are to rebuild a more sustainable and inclusive world post-pandemic.

Each part of E-S-G is important. If companies don't take each part seriously, they will jeopardize their long-term growth prospects. 

People are watching, consumers and investors want to support and invest in companies which are taking ESG seriously, so I would take this request from Canada's top eight pensions very seriously. 

Below, a 2018 clip where Martin Kremenstein, head of retirement and ETF solutions at Nuveen, explains how ESG metrics serve as an indicator of quality and can be used as a risk management tool.

Also, six years ago, Chris McKnett made the case for ESG investing, showing how strong financial data isn't enough, and revealing why investors need to look at a company's environmental, social and governance structures. Great clip, think OPTrust's Peter Lindley told me about him. 

Lastly, back in June, AFME hosted a webinar where panelists discussing due diligence and disclosure requirements and practices around environmental, social and governance considerations as well as the challenges and projections within these key areas.

Update: Joy Williams, Senior Advisor at Mantle314, a boutique consulting firm with over 60 years of combined experience in climate work, shared this with me after reading this comment: 

Thanks for covering this! Ever since I started, the biggest complaint or challenge has been the alphabet soup of reporting. And because each system has their pros and cons and history and tenure, there has never been a clear "winner". But except for TCFD, none have been created for investment decision-useful information. 

However, I'd like to offer my thoughts on why it's just the top eight weighing in on this. Having spoken to many investors of all sizes, it continues to be almost only the largest ones with enough dedicated resources to do this type of work. Until there are ESG and climate change "champions" within each organization, it will be very hard to change the culture and overcome inertia. 

Lastly, the one change I hope better corporate disclosure does bring about is involvement from the analysts and portfolio managers outside of the dedicated responsible investing teams. This was something I started to see happening when I was at OTPP, but sadly, the responsible investing conferences (back in 2019!) were still full of responsible investing people like me instead of investment analysts. 

I thank Joy for sharing her wise insights and she's right, more pensions need to dedicate the resources to responsible investing and portfolio managers outside of the dedicated responsible investing teams need to be more involved in ESG matters.  

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