OTPP's CIO on Achieving Net Zero Emissions by 2050

Paula Sambo of Bloomberg reports one of Canada’s largest pensions vows net zero emissions by 2050:

The Ontario Teachers’ Pension Plan committed to reaching net-zero emissions across its investment portfolio within three decades.

Ontario Teachers’ will increase investments in climate-friendly projects, ensure companies in its portfolio manage and report their emissions every year and work with them to reach carbon neutrality by 2050, said its chief investment officer. The fund manages C$205 billion ($161 billion) of retirement savings for educators in Canada’s most populous province.

“This entails a sustained effort from our end, first in growing our investments in smart climate and energy solutions,” CIO Ziad Hindo said in an interview. “We have already been expanding our capabilities to identify, evaluate more and more opportunities on the green side.”

The pledge comes about two months after the heads of eight leading Canadian pension plan managers called on companies and investors to provide “consistent and complete” environmental, social and governance information to strengthen investment-decision making. The group, which included Ontario Teachers’, collectively manages C$1.6 trillion in assets.

The Teachers’ fund also plans to issue more green bonds, using the proceeds for climate opportunities. The Toronto-based fund manager issued its first green bond last year, which Hindo said was “very well-received” by market participants.

“It was a signal that the market is really trusting our commitment to deploy more and more capital into greener assets,” he said. “You’re going to see more and more investors willing to participate in investing in green bonds, because it is aligned with their responsible investing practices.”

Commitment Credibility

Advocacy group Shift Action for Pension Wealth & Planet Health said that while it was “pleased” with Ontario Teachers’ “critical first step” on dealing with climate-change risks, a commitment to net-zero emissions has little credibility on its own without concrete steps to achieve the goal.

“Without a plan for major changes to the way the pension fund makes investment decisions, a net-zero commitment runs the risk of becoming a cynical example of greenwashing,” the group said in a statement.

Ontario Teachers’ will release concrete targets and potentially five and 10-year plans in the coming months to help get to net zero emissions by its deadline, Hindo said.

“This is a journey, it has a lot of complexity, but we are absolutely committed to playing our part in helping the world transition,” he said.

Ontario Teachers' Pension Plan put out a press release announcing its commitment to net-zero emissions by 2050:

Building on over a decade of climate change efforts, Ontario Teachers’ Pension Plan Board (Ontario Teachers’) today announced its commitment to achieve net-zero greenhouse gas emissions by 2050. This is a meaningful decision that advances Ontario Teachers’ mission to deliver retirement security for its members, while creating a positive impact for its partners and the communities where it operates.

“As a global pension plan, we will leverage our scale and influence to transition to a low-carbon economy and create a sustainable climate future,” said Jo Taylor, President and CEO. “With coordinated action net zero by 2050 is an ambitious but achievable goal. We are committed to playing our part alongside other organizations and governments around the world to effect significant, positive change.”

Climate change is one of the greatest challenges faced by society and businesses today. The effects of global warming, from rising sea levels and devastating floods to disrupted weather patterns and destructive storms, are clear and wide-ranging.

“While the transition to the low-carbon economy presents many challenges, it also presents many opportunities to earn the returns we need to pay our members’ pensions while more broadly benefiting society and the environment,” said Ziad Hindo, Chief Investment Officer.

Over the coming months, Ontario Teachers’ will hold itself accountable by establishing concrete targets for portfolio emissions and our investments in climate solutions and will report on its progress annually. Key elements of Ontario Teachers’ net-zero approach will include:

  • Increasing investments in climate-friendly investments and solutions;
  • Ensuring portfolio companies manage and report their emissions annually;
  • Working with portfolio companies to achieve net zero emissions by 2050;
  • Use the proceeds from our green bond offering to invest in climate friendly opportunities;
  • Increasing the resiliency of our assets with physical risk assessments of our direct holdings; and
  • Advocating for clear climate policies and partnering with global organizations to effect change.

“This is a long-term journey and the actions we take now will be a defining feature of the resiliency of our business and the value we create over time for our members, partners and communities where we operate and invest,” concluded Taylor.

Additional Resources

About Ontario Teachers’
The Ontario Teachers' Pension Plan Board (Ontario Teachers') is the administrator of Canada's largest single-profession pension plan, with $204.7 billion in net assets (all figures at June 30, 2020 unless noted). It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an annual total-fund net return of 9.5% since the plan's founding in 1990. Ontario Teachers' is an independent organization headquartered in Toronto. Its Asia-Pacific regional offices are in Hong Kong and Singapore, and its Europe, Middle East & Africa region office is in London. The defined-benefit plan, which is fully funded as at January 1, 2020, invests and administers the pensions of the province of Ontario's 329,000 active and retired teachers. For more information, visit otpp.com and follow us on Twitter @OtppInfo.

Alright, so Ontario Teachers' is setting an ambitious target of achieving net-zero greenhouse gas emissions by 2050. 

It's part of a group of investors committing to this goal. Last September, I discussed how in one of the boldest actions yet by the world’s largest investors to decarbonize the global economy, an alliance of the world’s largest pension funds and insurers – responsible for directing more than US$ 2.4 trillion in investments – committed to carbon-neutral investment portfolios by 2050.

There are a lot of reasons as to why large pensions and other large institutional investors are committing to decarbonize the global economy.

First, climate change represents a big risk to their portfolio over the long run (defense). Second, it offers unique opportunities to invest in new technologies addressing climate change (offense).

But the major reason, and I'm going to be totally honest here, is Big Tech is taking the lead on decarbonizing the global economy and whenever Amazon and other tech giants set ambitious goals to decarbonize by a certain date, large global investors have no choice but to pay attention and follow suit.

As a friend of mine put it: "The world is headed here. You're either going to be there or you're not but it's a huge risk fighting this trend, it's much easier embracing it."

Anyway, on Friday, I did get to briefly chat with Ziad Hindo, OTPP's CIO. 

Let me thank him and thank Dan Madge, Senior Manager, External Communications at OTPP for setting this call up on brief notice.

Ziad told me OTPP takes responsible investing very seriously.  In fact, their website states:

At Ontario Teachers’, our approach to responsible investing is rooted in sustainability and is embedded in the way we do business.

To achieve stable returns to meet our pension promise, our long-term strategy includes taking a systematic approach to identifying, assessing and managing environmental, social and governance (ESG) risks and opportunities. For that, we use four responsible investing principles:

  • Integrate: We integrate ESG considerations into our investment process to manage risk and add value.
  • Engage: We engage with companies we invest in to promote change and nurture success.
  • Influence: We use our influence as a global investor to create a supportive and sustainable business.
  • Evolve: We evolve to build our institutional knowledge and to keep ahead of the curve.

Ziad reminded me that back in 2017, OTPP introduced its Low Carbon Economy (LCE) Transition Framework in 2017 to help them visualize the potential impacts of climate change under a range of future scenarios, and to identify the catalysts driving the scenarios and provide insights that help them make better investment decisions as they navigate the uncertain path to a low-carbon economy.

[See their case study "Using our Low Carbon Economy Transition Framework to understand the impacts of large-scale drought".]

In a nutshell, climate change represents a real risk to OTPP's portfolio across public and private markets, and they want to commit to decarbonize their portfolio to play defense and offense by investing in new disruptive technologies along with their investments in renewable investments.

In fact, here is what Ziad told the Globe and Mail:

“We’re expanding our capabilities to evaluate and invest in more climate-smart and green economy related opportunities,” Ziad Hindo, Teachers’ chief investment officer, said in an interview. “We want to invest in those solutions that will help accelerate the shift away from fossil fuels. So you’re going to see a very important commitment from here to grow our investments in that sector.”

On the investment side, Ziad gave me specific examples:

  • OTPP partnered up with Abu Dhabi Investment Authority and the Equis management team to invest US$1.25 billion in EDL. EDL is focused on developing, constructing and operating primary and hybrid renewable energy and biomass generation, power grid distribution and transmission and waste infrastructure assets in Australia, Japan and South Korea.
  • Joining Alphabet Inc. (Google’s parent company) and Sidewalk Labs to launch Sidewalk Infrastructure Partners (SIP), a new company focused on delivering next-generation infrastructure in North America (see details here).  
  • Along with PSP Investments, investing in Cubico Sustainable Investments, a world leader in providing renewable energy, the fastest-growth energy source, across the Americas, Europe and Oceania. 
  • Along with Partners Group and CDPQ, acquiring Techem, a global market leader in the provision of heat and water sub-metering services.
  • Investing in Pony.ai, an autonomous driving company, in a new investment round led by  Teachers’ Innovation Platform (TIP), bringing that company's valuation to US $5.3 billion.

There are more deals in the pipeline and Ziad told me the issuance of a €750 million 10-year inaugural Green Bond last November went very well and they plan to issue more.

Recall what Ziad said back then:

“We believe a transition to a net zero economy is underway. This is expected to bring a host of attractive investments to Ontario Teachers’ that enable and support this transition, with the objective of earning strong risk-adjusted returns while also having a positive impact. OTFT’s green bond issuance allows us to access capital to support the much-needed investments to transition towards a sustainable future.”

The future has already begun. Ziad told me he works with Stephen McLennan who leads the newly-created Total Fund Management department, which integrates Ontario Teachers' portfolio construction approach with their treasury and funding capabilities.   

He was very clear, however, in stating this: "We will issue more Green Bonds when we ascertain there are excellent opportunities to deploy that capital to obtain an excellent risk-adjusted return." 

I did interject at one point in our conversation to state I believe there's a bubble going on in ESG investments in public markets and that I separate responsible investing which is here to stay from ESG investing which is prone to bubbles.

Also, unlike tobacco, I firmly do not believe that pensions should divest from oil & gas.

Ziad was careful to state this: "You cannot achieve carbon neutrality without investing in new technologies" and that the path to decarbonize isn't about divesting from traditional energy sources.

Truth be told, I'm a little bit concerned about ESG manias and other manias in public markets where euphoria is rampant these days, no thanks to central banks running amok.

But that's a topic I'll cover again on Friday when I go over markets.

Let me once again thank Ziad Hindo, OTPP's CIO, and Dan Madge for taking some time to chat with me on Friday, I always enjoy my conversations with them.

Below, climate change is the largest systemic risk in the view of many long-term investors, and investors are pioneering ways to address this risk, including work to apply existing risk statistics specifically to climate projection and to pioneer new estimates. Projections like these about the impact of climate change on investment performance would represent enormous progress because they would advance beyond general uncertainty and instead make climate change a specific component of risk management. 

This FCLT Global session featured Kim Chong, Head of Risk Management at the Hong Kong Monetary Authority, Chris Goolgasian, a portfolio manager and Director of Climate Research at Wellington, and Deborah Ng, Head of Responsible Investing and Director of Total Fund Management at the Ontario Teachers’ Pension Plan (Deborah speaks at minute 5).