OTPP's CEO on the Winding Road to Net-Zero
- For institutional investors, the path to net zero is not straightforward – but it is navigable.
- Earning both financial and environmental returns can be done, but it requires commitment, creativity and trade-offs.
- Here are 3 central questions investment managers should consider as they make this journey.
Now, more than ever, investors have a dual responsibility to earn returns and make the world a better place.
At Ontario Teachers’ Pension Plan, we look after the retirement security of 329,000 teachers and this investing philosophy guides our thinking every day. We are one of the world’s largest pension plans and this scale means we can influence and effect real change in the world.
That is why we recently set a target to achieve net-zero emissions by 2050. As an allocator of capital, a builder of businesses and an active, engaged owner, we have a responsibility to maximize the impact of our net-zero journey.
The challenge is balance – balancing our broader responsibility to the world while delivering on our fiduciary duty to look after every one of our teachers.
Striking this balance is not easy for us, or for any other investor. In fact, there is no straight path towards net zero. Instead it is a winding road requiring commitment, creativity, and often, difficult trade-offs.
For me, this issue revolves around three central questions.
1. To engage or divest?
Investors are often asked if they will immediately divest holdings in companies that do not support the transition to net zero. I understand that instinct. And the fact is, it is easy to divest. But divestment does not fix the problem, it just passes it onto someone else.
At Ontario Teachers’, we support engagement over divestment. We believe in working with our partners to solve problems and build better, more sustainable businesses.
For investors this means working with companies they invest in to support their journey to net zero: from measuring emissions and setting reduction targets to developing transition plans and delivering on them. It means acknowledging that not everyone is starting their sustainability journey from the same place. Fossil fuels, for example, are much more deeply embedded in the fabric of some economies than others and therefore decarbonization is much harder.
We must deal with these realities as they are, not how we would like them to be.
The move towards net zero is particularly challenging for companies that extract, sell or transport fossil fuels. A transition away from these businesses is underway, but they will remain an essential part of the global economy for years to come. Engagement gives investors the chance to work together to achieve a fair transition.
Fundamentally, we believe it is better to retain a seat at the table than to walk away and hope others will do what is required.
2. Save the planet or generate returns?
For investors, the climate debate is often framed as a choice between climate action or returns; in other words, returns will suffer if you back sustainable businesses. Yet this is not a binary choice.
The transition to net zero creates major new investment opportunities – from the electrification of vehicles and carbon capture technologies to renewable energy and sustainable infrastructure.
It also creates risk. What makes a good investment today may not be the case tomorrow. Consumer preferences and government regulation are increasingly rewarding companies with more sustainable business models. This trend will continue to accelerate in the coming years.
Ultimately, institutional investors need to work alongside their portfolio companies, fulfilling their stewardship role by investing in solutions that contribute to a low-carbon future and delivering stable, long-term returns.
3. Who are the key partners on this journey?
Global investors cannot do this alone. There are many credible pathways to a net-zero future, but every path requires increased policy action from governments and regulatory bodies worldwide.
Only governments can create a predictable and stable regulatory environment that encourages and supports investors to take big bets on decarbonization. We need public policy that incentivises investors to take the right kinds of risks and we need a clear set of standards to properly measure and assess progress toward the net-zero goal. This is essential to the successful delivery of the net-zero transition.
The journey also requires strong partners. Partners who share a common vision, set of values and long-term outlook. Partners who are committed to working together to build businesses with lasting value.
Underpinning all of this is technology. New technologies and operating models are necessary to support the transition, but many are not yet at scale. Investors need to be there to support and, where possible, accelerate their development, guided by a clear, focused strategy for the long term.
All of this requires conviction and a resolve to make the tough decisions. The opportunities presented by the net-zero transition are immense, but so are the challenges. Working together, we can overcome these challenges, and do our part to secure the planet’s future.
This is an excellent comment by Jo Taylor, it is fair, balanced and very well written. He highlights the opportunities, risks and challenges presented by the net-zero transition.
And he's absolutely right, global investors cannot achieve this alone, governments need to create a predictable and stable regulatory environment that encourages and supports investors to take big bets on decarbonization.
In other words, if we are to transition to a net-zero economy, we need to have a coordinated plan of action which outlines the respective role of the public and private sector.
Ontario Teachers' Pension Plan, CPP Investments, CDPQ, BCI, AIMCo, OMERS and the rest of Canada's large pensions are not going to solve climate change.
They're doing everything they can to measure and identify long-term risks and have begun a long journey to decarbonize their respective portfolios but they need to strike a balance, always focusing on delivering the requisite returns.
I've already spoken with OTPP's CIO Ziad Hindo on how they will achieve net-zero emissions by 2050.
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.
Last week, I spoke with Gordon Fyfe, BCI's CEO, when I covered their climate-related targets for public markets.
Gordon also told me they believe in engagement, not divestment and he added: "Divesting only transfers the carbon to someone else's balance sheet and it's typically investors who are not practicing ESG."
He's absolutely right, Canada's large pensions engage with their portfolio companies and that's the right approach.
In his comment above, Jo Taylor explicitly states the following:
For investors this means working with companies they invest in to support their journey to net zero: from measuring emissions and setting reduction targets to developing transition plans and delivering on them. It means acknowledging that not everyone is starting their sustainability journey from the same place. Fossil fuels, for example, are much more deeply embedded in the fabric of some economies than others and therefore decarbonization is much harder.
We must deal with these realities as they are, not how we would like them to be.
The move towards net zero is particularly challenging for companies that extract, sell or transport fossil fuels. A transition away from these businesses is underway, but they will remain an essential part of the global economy for years to come. Engagement gives investors the chance to work together to achieve a fair transition.
Fundamentally, we believe it is better to retain a seat at the table than to walk away and hope others will do what is required.
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