OTPP's Annual Responsible Investing and Climate Strategy Report

Today, Ontario Teachers' published its Annual Responsible Investing and Climate Strategy Report:

Ontario Teachers’ Pension Plan Board (Ontario Teachers’) today published its Annual Responsible Investing and Climate Strategy Report. The report provides an overview of our responsible investing and corporate governance activities, and how we are harnessing our capital to make a real-world impact while earning attractive investment returns to help fulfill the pension promise to plan members.

“We are living during a period of rapid geopolitical, environmental, and social change, while at the same time stakeholder expectations of companies are higher than ever. Against this backdrop, it has never been more important to invest responsibly and with a clear sense of purpose,” said Ziad Hindo, Chief Investment Officer. “While integration of Environmental, Social, and Governance factors have long been central to our investment approach, we are increasingly seeking broader opportunities to use our capital and expertise to deliver a lasting positive impact.  We believe our focus on investing to make a mark around the world will deliver better risk-adjusted returns over the long term.”

In the report, Ontario Teachers’ provides an overview of its multifaceted climate strategy, which includes helping our portfolio companies decrease their emissions, investing in green assets, helping high emitters decarbonize, issuing green bonds, understanding, and mitigating physical and transition risks, and developing partnerships to amplify our efforts.

Key highlights on the delivery of our climate strategy noted in the report include an update on how we invested or committed over $5 billion into green or transition assets in 2021, advanced against our bold interim net-zero targets by reducing our portfolio emissions intensity by 32% in 2021 vs. its 2019 baseline, and our newly-stated intention to selectively invest around $5 billion in high emitting businesses (referred to as High Carbon Transmission assets) with the express goal of helping them rapidly decarbonize.

“Our climate strategy is designed to drive real-world impact.  We recognize the urgency of climate change and have a multiple faceted strategy to reduce emissions in our investments and support the transition to a net-zero future,” said Jo Taylor, President and Chief Executive Officer. “In addition to our broad climate strategy, we are targeting to allocate around $5 billion toward High Carbon Transition assets, and to use that capital to increase our impact on high emitting businesses while also providing solid investment returns for our members.”

Additional highlights from this year’s report include:

• Further details on our progress against our interim emissions intensity reduction targets.
• How we applied our influence on private company boards to achieve our target of having over 30% representation of women across all the board seats we control, one year ahead of our target.
• How we used our voice for changing, voting on approximately 300-environmental, social or governance-related shareholder proposals.

The actions we are taking today position us to continue delivering retirement security for our members while shaping a better future for all. We look forward to sharing more on our journey toward a more sustainable and equitable future.

About Ontario Teachers’

Ontario Teachers' Pension Plan Board (Ontario Teachers') is a global investor with net assets of $242.5 billion as at June 30, 2022. We invest in more than 50 countries in a broad array of assets including public and private equities, fixed income, credit, commodities, natural resources, infrastructure, real estate and venture growth to deliver retirement income for 333,000 working members and pensioners.

With offices in Hong Kong, London, San Francisco, Singapore and Toronto, our more than 350 investment professionals bring deep expertise in industries ranging from agriculture to artificial intelligence. We are a fully funded defined benefit pension plan and have earned an annual total-fund net return of 9.6% since the plan’s founding in 1990. At Ontario Teachers’, we don’t just invest to make a return, we invest to shape a better future for the teachers we serve, the businesses we back, and the world we live in. For more information, visit otpp.com and follow us on Twitter @OtppInfo.

Take the time to read OTPP's Annual Responsible Investing and Climate Strategy Report, it is excellent.

If you need more evidence that Jack Mintz is completely wrong about ESG adding to pension plan woes, read this report carefully as it outlines why Teachers' is committed to responsible investing and feels it can make a lasting, positive impact on the world and deliver better risk-adjusted returns over the long run to contribute to the stability of the plan's funded status.

The report discusses how Teachers' is evolving its approach to responsible investing:

We have long been guided by our Responsible Investing Principles, which are deeply embedded in our internal processes and a consideration at all stages of our investment lifecycle. We incorporate an analysis of environmental, social and governance  (ESG) risks and opportunities into all investment decisions and will continue to do so in the future.

Building on our strong foundation of success, we will harness the power of our investment capital and stewardship to make a real-world impact. As leaders in the evolving sustainability landscape, we seek to contribute to increasing measurable, positive social and environmental impacts of our investments. This integrated component of our investment approach will grow over time and is how we will make a lasting, positive impact on the world.

Next, take the time to read CIO Ziad Hindo's letter:

I note how he begins by stating:

The investment environment we operate in today is complex and challenging. We are living during a period of rapid geopolitical, environmental, and social change, while at the same time stakeholder expectations of companies are higher than ever. Against this backdrop, it has never been more important to invest responsibly and with a clear sense of purpose.

Our strategy and actions are evolving to reflect this reality. Traditionally, environmental, social and governance (ESG) factors have been an important consideration when we assessed potential investments. While we will continue to thoroughly assess ESG risks and opportunities as part of our investment decision-making processes, we are increasingly evolving our thinking to consider how we can use our capital in a way that has clear and measurable real-world environmental and social benefits while creating value for our members. 

Thus, as part of our bold plan to reach $300 billion in net assets by 2030, our actions will expressly look to create a lasting, positive impact on the world. We believe doing this will result in better risk-adjusted returns over the long term and contribute to the stability of the plan’s funded status.

Ziad then explains their approach on tackling climate change:

Tackling climate change requires a wholesale effort from multiple stakeholders from government to businesses to consumers. Investors have a key role to play, too. 

Effective financial management of climate risk and opportunity is essential to our purpose of providing lifetime retirement income to our plan members. In order to do this, we believe it is important to invest in a way that helps accelerate the transition to a low-carbon economy. 

To maximize our impact, we have developed a multi-pronged climate strategy, which includes: helping our portfolio companies decrease their emissions, investing in green assets, helping high emitters decarbonize, issuing green bonds, understanding and mitigating physical and transition risks, and developing partnerships to amplify our efforts. While this report addresses each of these strategy components, I’ll touch on the first three here. 

Decarbonizing the portfolio: Last year was a significant one for us as we committed to reach net-zero greenhouse gases by 2050 and introduced bold interim emissions intensity targets to keep us focused on making progress in the nearer term. Due to efforts across the portfolio, we have seen solid progress so far, having reduced the emissions intensity of our portfolio by over 30% compared to our 2019 baseline. This is a good start, but much work remains to be done to get us to where we want to be. 

Helping high emitters decarbonize: Recognizing the urgency of the climate crisis, we have committed to actively investing in select emissions intensive assets with the express goal of helping them decarbonize faster. These investments, which we are referring to as High Carbon Transition (HCT) assets, will allow us to make a significant real-world impact through decarbonization of high-intensity businesses while also making good returns. We plan to have an initial allocation of around $5 billion to HCT assets. Read more about our approach to investing in HCT assets, including how we plan to measure progress and report on these distinct assets, on page 16. 

Significantly increasing green investments: Equally important to transitioning to a low-carbon future is deploying capital into green companies that stand to benefit from the transition. In 2021 alone, we invested over $3 billion toward green assets and we are targeting to further grow our green investments from approximately $33 billion to $50 billion. Examples include a stake in environmental markets innovator and natural resource manager GreenCollar and a portfolio of renewable energy assets from NextEra Energy. In addition, we issued €1.25 billion in green bonds in the last two years. Proceeds are being invested in assets that will form parts of a more sustainable economy.

 

 

The report provides examples of how Teachers' is investing in great green companies to decarbonize its portfolio, like building a sustainable energy future with NextEra:

 

And how Teachers' real estate subsidiary, Cadillac Fairview, is also contributing to its net-zero journey:

I also note how Teachers' is committed to promoting diversity, equity and inclusion at public companies and within its organization and achieving its board diversity target among private companies, highlighting a conversation with Maria Morsillo, Senior Managing Director, Value Creation & Analytics, Infrastructure & Natural Resources (INR):

 

The work they have done at OTPP expanding gender diversity at the boards of their private companies is phenomenal. OTPP is also committed to gender diversity within its organization. 

You should also note how OTPP is investing in electric grids to accelerate energy transition by reading their Power Shift report here.

Lastly, I note their plans for tomorrow which is how they end the report:

As a purpose-driven investor we are continuing to focus on our climate goals to best manage our portfolio and to create a sustainable, positive impact in the world by: 

1. Actively reducing GHG emissions and accelerating the global energy transition through investments that make a real-world impact;
2. Driving regenerative resource usage through investments that deliver positive environmental impact;
3. Complementing our existing green bond impact metrics to better track progress on climate action and climate solutions; and
4.  Developing a more complete accounting of financed emissions for sovereign debt and portfolio company scope 3 emissions.

As we create value for our members, we will use our scale and influence to create better social outcomes over the long-term by focusing on: 

1. Identifying investable opportunities that make a positive social impact while delivering on our pension promise to our members;
2. Driving community and employee engagement to help create equal opportunities; 
3. Advancing our corporate citizenship efforts in support of a more equitable future; and 
4. Partnering with key organizations to advance diversity, equity and inclusion initiatives. 

Take the time to read the Annual Responsible Investing and Climate Strategy Report and see all the highlights here.

I am just highlighting some things but the report delves into more detail and is very well written.

I want to emphasize something I said earlier this week when going over Jack Mintz's article on ESG,  Canada's large pension funds are leaders in sustainable investing and they are delivering outstanding long-term results.

There is no question that responsible investing is enhancing the long-term returns of these pensions and this is why they are taking it seriously as part of their fiduciary duty and as part of investing with purpose.

Ontario Teachers' is a leader in responsible investing and doing its part to harness its capital to make a real-world impact while earning attractive investment returns to help fulfill the pension promise to plan members. 

This is all part of investing to make a mark and Teachers' is committed to make a lasting, positive impact on the world and deliver better risk-adjusted returns over the long run for its plan members.