OPTrust's Alison Loat on Their Enhanced Climate Change Strategy

OPTrust released its enhanced climate strategy outlining how it will manage risks and opportunities from a transitioning economy:

Today OPTrust released its enhanced climate change strategy. The strategy outlines how OPTrust will manage risks and opportunities from a transitioning economy and declares OPTrust’s ambition to align its portfolio with the global path towards net-zero emissions by 2050.

"As the world grapples with the growing challenge of climate change, investing sustainably for the long-term health of our pension plan demands addressing climate sustainability," said Peter Lindley, President and Chief Executive Officer at OPTrust. "Our climate change strategy commits to a net-zero portfolio by 2050 and to building the foundation that enables us to embed climate considerations into the way we invest."

OPTrust aims to achieve a net-zero portfolio by 2050, based on the expectation that global progress and momentum continues towards achieving net-zero greenhouse gas emissions over that timeframe. The enhanced strategy is built on four pillars designed to integrate climate considerations across OPTrust’s investment portfolio and operations: investment strategy and selection, asset management, portfolio analytics, and advocacy and disclosure. 

2022-23 priorities include:

• Updating climate scenarios and examining implications to OPTrust’s investment approach, including continuing to advance its pioneering research into the impact of climate on pension assets and liabilities.
• Collecting baseline data on climate metrics for OPTrust’s portfolio and establishing a framework to set appropriate, relevant targets.
• Launching climate due diligence frameworks for use by investment teams across all asset classes.
• Implementing stewardship plans to advance the transition of high-risk assets.
• Continuing to join global peers in advocating for progress on climate policies.
• Continuing to report on our progress, including through our annual Funded Status Report and Taskforce for Climate-related Financial Disclosures.

"Our climate change strategy outlines a clear ambition and approach to align our portfolio with the global path to net zero," said James Davis, Chief Investment Officer at OPTrust. "As a long-term investor, we aim to understand and mitigate emerging risks, including from climate change, as well as recognize and harness opportunities that come along with the transition to a greener economy. With this climate change strategy in place, we will continue to focus on enhancing our portfolio’s resiliency across asset classes now and into the future."

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OPTrust Climate Change Strategy

ABOUT OPTRUST

With net assets of over $25 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan (including OPTrust Select), a defined benefit plan with over 100,000 members. OPTrust is a global investor in a broad range of asset classes including Canadian and foreign equities, fixed income, real estate, infrastructure and private markets, and has a team of highly experienced investment professionals located in Toronto, London and Sydney.

You can download OPTrust's enhanced climate change strategy here. 

It isn't long so I am providing it below:

 

 

 

Earlier this afternoon, I had a chance to speak with Alison Loat, Managing Director of Sustainable Investing and Innovation at OPTrust, to go over this enhanced climate strategy.

I want to thank Alison for taking some time to talk to me as well as Claire Prashaw and Jason White for setting this Teams meeting up and assisting. 

Alison began by giving me a background on this report:

Just to take a step back, OPTrust has a longstanding commitment to social and environmental considerations for a long time. Specifically on climate change, OPTrust dating back to 2018 took very proactive steps to sort out as climate change becomes a bigger thing to our daily lives, what impact will it have on specific investments as well as our overall portfolio.The reason why we call this an enhanced climate change strategy is because it is really building on a lot of that work. 

Obviously as climate science has accelerated and concern for climate change has increased, the attention in the investment industry has blown up, there is a massive interest in it.

So really we see this strategy as part of a continuation of what we have always done and we our focused on building out our capabilities to be much more attuned on what climate change will mean for our overall portfolio over the long term. A lot of the strategy thinking is building out that foundation across all parts of our organization. 

Our principal purpose in all of this is we do know if climate change continues to impact our world, it will impact the macroeconomic variables that matter for our overall portfolio performance, but also individual investments. We really have to look at across the portfolio.

Before we got into the four pillars of the enhanced climate strategy, I asked Alison if they made interim commitments:

There are all sorts of targets and commitments we are seeing people make. We've spoken about the ones we will address next year. A big one of those is putting together a more specific GHG emission target reductions in asset classes but it will also be building on things we are already doing. 

For example, one of the exercises we did this year was going through our portfolio from a bottom-up perspective and identifying our five risk strategies or assets (depending on asset class) and we are putting in place stewardship plans for each of those. Part of that is for us to understand what the carbon exposure is but there is a lot more around the environment that impacts the performance of that investment. For example, in some of our real estate investments, we have to think more about physical risk than we have in the past. In some of our markets, particularly mid market, there's not excellent data thus far, so we may not want to have emission reduction on a business where we don't have baseline data but there is a lot more more we can put in place to manage and monitor the climate risk around that. For example, people working in hotter environments can impact their safety. 

So as we get into the nuances of this, it can often be broader than GHG emission reduction.

We then went into the four pillars designed to embed climate considerations across theirr portfolio and into our actions as a pension fund:

1. Investment strategy and selection
2. Asset management
3. Portfolio analytics
4. Advocacy and disclosure

Alison touched on each pillar in her response:

On the investment strategy and selection, that is the heart of what we do in stewarding our members money. A precise example of something we are developing this year and implementing in 2023 is the climate due diligence framework.  That is something that will allow us to more systematically integrate climate considerations into a new asset or strategy. Keep in mind this will evolve over time but given the evolution and acceleration of understanding of climate in the investment industry, this is an opportunity for us to do that much more systematically and regularly, and again allows us to gather that data in a more comparable and systematic way across our portfolio. So there is an example of investment strategy and selection.

Another piece of this is allocation to those commitments. How you characterize an investment matters a lot. You probably heard about taxonomy, PSP released one, many countries have taxonomies. Canada does not have a public taxonomy yet but it's really important for us to understand our exposure that we can characterize these investments. For example, transition assets, that is recognizing as an active owner you sometimes have to take a high emitting asset and help it transition to a low carbon world and that can take capital. 

In asset management, the example I gave you on how we are stewarding and being intentional around our higher risk strategies and assets, that's an example of the kind of work we are doing there.

For corporate engagement and proxy programs, this is another area where OPTrust has long advanced. For example, in our proxy policies, we have been asking for climate strategies well before I got here, so it's an important part of our proposal, that is a continuation of it, it is something we have done for a long time. A couple of years ago, we added we want targets associated with some of those high risk areas but again, that is building on something we have already done. 

In portfolio analytics, for an organization like OPTrust which is a combination of internal and external and we do invest in the mid market, we have to be thoughtful about how we achieve those targets because we do not have the non proxy data in many parts of our portfolio. Setting targets there will require some creativity and delicacy and hence why we are committed to developing that over the course of next year. 

And advocacy and disclosure, you understand that, it's another area where OPTrust has long been committed. As a smaller investor, it is really important for us that we work collaboratively with multiple different organizations that are on our website, both in terms of engagement in policy discussion but also in terms of engagement in higher risk industries.

And TCFD, last year we really beefed up our disclosure and  we will continue to enhance our approach there. That really is our dedication to transparency and being honest with our members about the work we are doing.

Obviously, in portfolio analytics, there remain some challenges in gathering data from mid market firms and funds.

I asked Alison if the ESG data convergence project which OPTrust signed on to is moving along nicely and she said a quarter of their PE funds have signed on to it, helping them get a broader measure of ESG considerations from their funds. 

Alison specified when they are a significant active owner and have a seat on the board, they can lean into companies to get the data but with funds, they are one of many LPs and that is where you see the power of the ESG data convergence project.  

We talked about real estate and GHG emissions and how it is a "fascinating sector" in the entire climate change discussion and I referred her to my recent discussion with QuadReal's Jamie Gray Donald.  

I also asked her why pensions don't report GHG emissions by asset class.

Alison explained it's very laborious but that is the direction everyone is moving toward and once there is more standardized disclosure across private and public markets, they will be reporting this on a regular basis.

I also think it is really important to review their latest climate scenario analysis report which they did with Ortec. 

Alison talked about the 2023 priorities and she told me they are going to do that report every other year and she added:

Just for your readers this is trying to integrate climate considerations into our overall asset liabilities program. We've been working with Ortec for a number of years. We were asked to share our experience with others and produced a paper. It does show there are material impacts on asset class returns, on interest rates, inflation, etc. As the science gets better, as the data gets better, we will be redoing this study (next year for example and every other year after).

Alright, let me wrap it up there. I want to once again thank Alison Loat for taking the time to speak with me earlier today on their enhanced climate change strategy.

I would also encourage you to read my discussion with Alison on OPTrust's 2021 Responsible Investing Report here.

Below, on Monday, Alison Loat, Managing Director, Sustainable Investing and Innovation, OPTrust, interviewed Ted Maloney, Chief Investment Officer, MFS on the future of sustainable investing as part of an event hosted by the Canadian Leadership Congress. Take the time to watch this.