Behind OMERS' Carbon Footprint Analysis

Joe Marsh of Capital Monitor takes a look at what is behind OMERS' carbon footprint analysis:

  • Ontario Municipal Employees’ Retirement System (Omers) was one of the first Canadian pension funds to calculate its investment portfolio’s carbon footprint.
  • It was a labour-intensive process, partly because half the C$105bn pension fund is directly invested into real assets and emissions data is hard to source.
  • Omers is committed to reducing carbon intensity within its portfolio by 20% by 2025, but chooses not to set longer-term goals, such as net zero by 2050.
Canada’s big public pension funds are widely viewed as global leaders in both direct and responsible investing. Ontario Municipal Employees’ Retirement System, which manages at least 90% of its C$105bn ($87bn) of assets in-house, is a member of this influential group and has underscored its sustainability credentials in various ways.

Most recently, Omers committed in its annual report in late February to reducing the carbon intensity of its portfolio by 20% by 2025, after completing its first ever total portfolio carbon footprinting exercise.

The methodology for the analysis was based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and includes scope 1 and 2 emissions. The former are direct GHG emissions and the latter indirect ones from the purchase of power, heat or steam.

The footprint – calculated for C$80bn of public and private assets as of 31 December 2019 – was 58 tonnes of carbon dioxide equivalent (tCO2e). And the weighted average carbon intensity was 199 tCO2e per million Canadian dollars in revenue.

The February announcement came soon after eight of Canada’s biggest pension plans called on companies and investors to provide consistent and complete ESG information to strengthen investment decision-making and better assess and manage their ESG risk exposures. Omers was a key driver of this initiative. Its chief executive Blake Hutcheson hosted the initial ‘virtual cocktail’ in April last year, says Michael Kelly, head of the fund’s sustainability committee.

Omers has also been ramping up its focus on the social aspects of ESG investing, Kelly told Capital Monitor during an in-depth interview last month.

But central to the discussion was the fund’s first ever exercise to measure its portfolio’s carbon footprint. 

Scope of coverage

“It was a six- to nine-month process, and it was pretty labour-intensive,” Kelly says, adding that it involved a team of around a dozen people internally. “But we will redo it every year and we think it’ll get easier.

“Many companies measure the carbon footprints of their own operations. But we own hundreds of companies in a portfolio. So we engaged external advisers to help us.”

The scope of coverage by asset class is as follows:

  • Capital markets: public equities and private debt investments with a market value of greater than C$100,000 and all single name equity derivatives. Exclusions include government bonds, cash and short-term notes, FX and interest rate products as well as some externally managed funds with low visibility.
  • Infrastructure: all private investments with a market value of greater than  C$100m.
  • Private equity: all private investments with a market value of greater than C$100m.
  • Real estate: all property assets across multiple asset types: office, retail, multi-residential, hotels and industrial, excluding non-strategic assets.

To help analyse the public market assets, such as listed stocks and bonds, Omers engaged Trucost, a carbon data and measurement provider. Where emissions data was not available, Trucost provided estimates based on its own calculations.

According to Omers’ website: “Trucost collects the disclosure of GHG emissions for a large universe of public companies globally. In the absence of disclosure, Trucost uses its proprietary Environmentally Extended Input-Output model, which combines industry-specific environmental impact data with quantitative macroeconomic data to estimate emissions.”

On the private market side, Omers had to source the data itself because it isn’t necessarily publicly available, Kelly says. That was a major task, because about half of the fund’s balance sheet sits in direct holdings of real assets, such as the UK’s Thames Water or the Port of Melbourne in Australia (see pie chart below).

“We have access to [such data] through our seats on company boards or otherwise through our ownership interest,” Kelly adds. Individuals covering different asset classes helped do deeper dives into Omers’ investment holdings. 


The fund also hired PwC to audit the findings in the period between when it set the carbon-reduction goal in December and announced it in March.

Another firm that closely contributed to the process is sustainability consultancy ERM. Omers and fellow Canadian fund Alberta Investment Management Corporation jointly hold a majority stake in the London-based firm, which they have now agreed to sell to private equity firm KKR.

“[The portfolio carbon footprint] will still be somewhat labour-intensive [to calculate in the future], but it’s important enough that we want to do it,” Kelly says. “It’s the only way that we can track how we’re doing against our goal on carbon reduction. We’ll see year-over-year if the progress is moving towards that and, if not, we’ll have to course-correct.” 

Shorter-term commitments preferred

When Omers decided internally on the carbon reduction target in December, Kelly says, only one major Canadian pension plan – CDPQ – had publicly set such a goal. Since then, two others – British Columbia Investment Management Corporation and Ontario Teachers’ Pension Plan – have done so.

However, Omers has not set a longer-term net-zero-emissions objective for its portfolio. It has preferred to make a more feasible, shorter-term commitment that is aligned with the Paris Climate Agreement, Kelly explains. This legally binding international treaty aims to limit global warming to well below 2 degrees Celsius and preferably to 1.5, compared to pre-industrial levels.

“Our thinking was that we wanted something that explicitly governs our behaviour today and for the next five years,” Kelly says. There has already been a slight drop in its overall energy-sector exposure, for instance (see table below). 


“[But] we’ll look at the longer-term commitments as well,” he adds. For instance, Omers could potentially use of tools such as carbon offsets to abate any remaining emissions in the portfolio.

Certainly, there are concerns that many organisations are announcing net-zero targets without really having an idea of how they are likely to achieve them. Indeed, the chairman and CEO of Brazilian cosmetics group Natura admitted as much about his company’s own targets, in a recent interview with Capital Monitor. 

Measuring impact

Of course, measuring the ultimate impact of sustainable investments is no easy task, as Kelly acknowledges.

“When you’re going into an investment, it’s hard to quantify some of these factors, because they don’t lend themselves to the kind of spreadsheet analysis you’d normally do around revenue growth and that sort of thing,” he says. “But for us as a pension plan, they are still financial metrics – just not as quantifiable as others.” Kelly did not provide any specific examples.

To some extent the true impact value of an investment will be priced in, he suggests.

For example, the value of renewable energy assets is rising because of supply and demand and as result of the transition to cleaner sources of power. “Assets that, let’s say, have better ESG metrics or ESG ‘hygiene’ are attracting more interest than assets that don’t,” Kelly says.

“The proof will be in the exit value of some of these assets, and the next institutional investor that’s buying them we know will be looking even harder at ESG factors than maybe they are today,” he adds. “The easiest way to assess this is in asset pricing.” 

Standardisation required

Of course, pricing sustainable assets appropriately will become a great deal easier when there are widely adopted standards of ESG disclosure and ratings. That is what drove the so-called ‘Maple eight’ Canadian pension fund CEOs to publicly set out their stance on this issue.

“We felt we needed better information on both climate and ESG factors generally,” Kelly says. Hence the call for more standardised disclosure and advocating for TCFD for climate reporting and for Sustainability Accounting Standards Board (SASB) for broader ESG issues, he adds. 

“There’s a lot happening in the space. The World Economic Forum has come out with standards, for example. And now the IFRS is developing the International Sustainability Standards Board, which I think will incorporate SASB and some of the other groups emerging.”

Kelly sees the IFRS as being an influential initiative and that is likely to make a major announcement at the UN Climate Change Conference in Glasgow in November.

Ultimately, companies need to be addressing climate risk more in their annual reports, he adds.

“The more standardised the disclosure process is, the easier it will be for smaller companies to understand what they’re being asked to do,” says Kelly. “Right now, maybe it’s overwhelming, because if you’re not in this space all the time you’re not sure which disclosure programme to follow.” 

Getting more social

While climate risk is a big focus of Omers’ investment strategy – partly because of its large exposure to the energy sector – the fund is taking note of the S in ESG too.

The social aspect of sustainable investing is increasingly coming to the fore, says Kelly. The Covid-19 pandemic has notably shone the spotlight on issues such as social inequality and community relations.

In 2018, Omers had defined what it means by E, S and G for its portfolio managers as they seek to integrate these factors into the portfolio, Kelly says. “I’m looking at our policy around the S part," he adds. "We think about things like labour practices, government and community relations, inclusion and diversity, health and safety.”

In fact, Omers is putting a greater focus on diversity and inclusion beyond its investment strategy too – in respect of its contracts with service providers. It wants to know that the people working on its accounts are representative of the communities they live in. Plus the law firms the fund uses give annual reporting on their inclusion and diversity issues, says Kelly.

Such action taken by respected and influential asset owners can only help drive improvements in sustainable investing best practice. 

This is an excellent interview with Michael Kelly, OMERS Chief Legal & Corporate Affairs Officer who also chairs the Sustainable Investing Committee, which oversees OMERS approach to matters such as environmental, social and governance (ESG) integration in its investing activities.

Michael has big responsibilities at OMERS but he also has a great team which includes Katharine Preston, Vice President, Sustainable Investing:

Katharine joined OMERS in 2019 as VP – Sustainable Investing. Her responsibilities include: helping OMERS evolve its sustainable investing practices; and liaising with OMERS investment, risk and communications teams on matters such as ESG integration, climate risk, and stakeholder communications and reporting.

Prior to joining OMERS, Katharine served as Director, Responsible Investing at OPTrust, an Ontario-based public sector pension plan. At OPTrust, Katharine was instrumental in defining a strategy for integrating ESG factors into investment practices and leading the development of a Climate Change Action Plan. Earlier in her career, she held positions with Innovest Strategic Value Advisors (now part of MSCI), and Stantec Inc.

Katharine holds a Bachelor of Engineering, Civil and Environmental Engineering from McGill University, and an MBA from the Schulich School of Business, York University. She also holds a Certificate in Fundamentals of Alternative Investments from the Chartered Alternative Investment Management Analyst Association (CAIA).

Recall, in April, I went over how OMERS is targeting a 20% carbon intensity reduction by 2025.

Blake Hutcheson, OMERS' President and CEO.shared this with me:

  • Last year, OMERS undertook its first total portfolio carbon footprinting exercise based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). "We set out target reduction date at 2025 to make it tangible for all our employees."
  • But even before they undertook their carbon footprinting exercise, OMERS was already spearheading change in its portfolio. Blake told me he spent 10 years as head of Oxford Properties and under his watch, they became a leader in sustainable investing. "We had a dedicated team that was set up 10 years ago focusing on sustainable investing and we quickly became leaders consistently ranking high on the Global Real Estate Sustainability Benchmark (GRESB) and 90% of our buildings have achieved an industry-leading green building certification for their region and asset class." (see Oxford's Sustainability Report here).
  • Importantly, Blake added this: "It's a win, win, win. A win for our clients, a win for our investors and a win for our employees and it pays dividends over the long run."
  • In Infrastructure, he mentioned Bruce Power which they own 50% of and it provides 35% of the energy to Ontario (clean energy). He also mentioned OMERS important investment in Leeward Renewable Energy (see my coverage here).
  • I asked him about Private Equity where they have investments in 20 portfolio companies and he explained their sustainable investment policy applies to all their public and private investments. 
  • He told me Michael Kelly who is OMERS Chief Legal & Corporate Affairs Officer also chairs the Sustainable Investing Committee which oversees OMERS approach to matters such as environmental, social and governance (ESG) integration in its investing activities. Katharine Preston who joined OMERS two years ago as Vice President, Sustainable Investing reports to Mr. Kelly. In her role, she assists OMERS with evolving its sustainable investing practices and liaises with OMERS investment, risk and communications teams on matters such as ESG integration, climate risk, and stakeholder communications and reporting (she's great, met her two years ago at a conference in Mont-Tremblant). 
  • Blake also told me OMERS is part of the the Investor’s Leadership Network (ILN) which is taking the lead on sustainable investing. He spoke highly of Charles Emond, CDPQ's CEO who is the co-chair at the ILN CEO Council (along with Jean Raby) and said this is an important organization to bring about critical change to sustainable investing (see my recent conversation with Charles Emond  here).

I remember Blake spoke highly of Michael Kelly and told me we should arrange a chat one day. 

When I read the above interview with him, I get the clear sense they undertook a "labour-intensive" process to really measure their GHG emissions across public and private companies.

That's not easy, especially on the private side (48% of their total assets are private) where they had to source the data itself because it isn’t necessarily publicly available. 

They gained access to this data through their seats on company boards or through their ownership interest and also  hired PwC to audit the findings in the period between when it set the carbon-reduction goal in December and announced it in March. 

Moreover, ERM, the leading environmental and sustainability advisor globally which AIMCo and OMERS recently sold to KKR, contributed to the process.

As Michael Kelly notes:

“[The portfolio carbon footprint] will still be somewhat labor-intensive [to calculate in the future], but it’s important enough that we want to do it,” Kelly says. “It’s the only way that we can track how we’re doing against our goal on carbon reduction. We’ll see year-over-year if the progress is moving towards that and, if not, we’ll have to course-correct.”  

Importantly, this isn't a science, it's an evolving process and it's hard work, which is why I applaud OMERS for taking this deep dive in its portfolio to see where it can reduce its carbon footprint.

While the targets are short-term, Kelly also talked about long-term targets:

“Our thinking was that we wanted something that explicitly governs our behaviour today and for the next five years,” Kelly says. There has already been a slight drop in its overall energy-sector exposure, for instance.

“[But] we’ll look at the longer-term commitments as well,” he adds. For instance, Omers could potentially use of tools such as carbon offsets to abate any remaining emissions in the portfolio.  

While there was a slight drop in its overall energy exposure, I caution my readers, Canada's large pensions are not divesting from energy and actually boosted their stakes in the last quarter of 2020.

In my opinion, there's way too much focus on energy and the narrative of the debate is all wrong.

Energy companies are not only important contributors to Canada's prosperity, they are vital to the world's growth and I personally want to see a healthy allocation to this sector as long as it's warranted and the risk-adjusted returns are there. I prefer engaging with these companies than divesting from them.

What else? I like the fact that OMERS is committed to the social aspect of sustainable investing.

Today, I was reading something BCG put out on how private equity can catch up on diversity

Collectively, private-equity-owned firms make up a powerful economic force. In the US, they generate about 5% of GDP and in 2019 employed almost 9 million people. So in the push for business to increase diversity, equity, and inclusion (DEI), these firms could make a big difference. Yet PE-owned companies are behind their publicly traded counterparts in taking action. This needs to change.

PE-backed companies certainly have a significant opportunity to lead in diversity and inclusion. The nature of PE portfolio companies—their ownership structure, focus on near-term action, and smaller size, all of which allow them to be more nimble—could prove a big advantage in accelerating change.

In fact, when these firms do implement DEI programs, they have an even more positive impact on all employees than in publicly traded companies. For example, BCG analysis found that at PE-owned firms, about two times as many white men reported personal benefit from diversity initiatives than at publicly traded companies.

Given the diversity dividends—from increased resilience to enhanced innovation—as well as the risks of inaction, such as reputational damage and an inability to retain top talent, PE firms need to lead the way.

You can read the rest of the comment here

For me, any organization (public or private) that refuses to take diversity & inclusion seriously at all its levels will be left behind.

It's as simple as that. The world is changing, more people than ever are on social media, they have heightened awareness and concerns about these topics and rightfully so, they all want and demand equal opportunity and equal representation.

There's a moral aspect to this too, we can't talk about a "just society" when we don't make sure we are giving everyone the respect and opportunities they deserve in spite of their religion, color of their skin, gender, disability or sexual orientation. 

Alright, let me wrap it up there. I did notice BCI put out its 2020 ESG Annual Report.

Take the time to read it here, it's excellent.

You can also read about sustainable investing at OMERS here.

Unfortunately, I can't cover it all here, I do my best but there's way too much to cover, so take the time to read more about how Canada's large pensions are addressing ESG investing. 

As I keep stating, they're all doing a great job but it is an evolving process, one that will only gain strength and momentum in the coming years.

Below, a fairly recent ICPM interview with Kim Thomassin, Executive Vice-President and Head of Sustainable Investments at CDPQ. 

I also embedded another ICPM interview with Barb Zvan, the Inaugural President and Chief Executive Officer of the University Pension Plan Ontario (UPP) and former Chief Risk and Strategy Officer for the Ontario Teachers' Pension Plan.

Great interviews, take the time to watch therm. Kim and Barb have done a lot to advance sustainable investing in Canada, having co-authored the final report from the Expert Panel on Sustainable Finance along with Tiff Macklem and Andy Chrisholm. 

If Canada's large pensions are taking the lead on ESG investing, it's in large part because of the monumental work of these two ladies that worked very hard to provide the right framework and foundations so everyone can start taking sustainable investing more seriously.

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