On Vestcor's Inaugural Responsible Investment Report

Vestcor recently released its inaugural Responsible Investment Report:

Fredericton, NB – Vestcor Inc. (Vestcor) has released its inaugural Responsible Investment Report, outlining the active investment related activities that we have committed to under the direction of our publicly posted set of Responsible Investment Guidelines (the Guidelines).

The intent of this report is to fulfill the core principle of Transparency that is outlined in the Guidelines; it is also formatted in-line with our other noted core principles including Active Ownership and Engagement, and to illustrate the Incorporation of Environmental Social and Governance (ESG) Information into our investment processes. It represents the next step in Vestcor providing best practice risk monitoring tools to assist our clients in developing and meeting their own responsible investment objectives.

The report also highlights two case studies that demonstrate our active investment activities in both sustainable long-term real estate assets and renewable energy infrastructure opportunities, to support the long-term investment objectives of our clients.

Finally, the report provides climate related greenhouse gas emissions disclosure for our consolidated core public securities investment portfolio utilizing the guidelines of the Task Force on Climate-related Financial Disclosures (TCFD). Vestcor looks forward to continuing to utilize TCFD information in our investment decision process as companies work towards meeting their global climate targets, and we plan to update this report on an annual basis.

In short, the Responsible Investment Report speaks to our leadership in and our commitment to providing our clients with investments in stable sustainable long-term assets that continue to meet their investment objectives.  View the report at Vestcor.org/responsibleinvestment.

ABOUT VESTCOR

A Partner in Creating and Delivering Sustainable Financial Security.

Vestcor is an independent not-for-profit company located in Fredericton, New Brunswick which provides global investment management services to 10 different public sector client groups representing approximately $21.0 billion in assets under management as at December 31, 2021, and administration services to 11 public sector pension plans and 4 employee benefit plans.

Vestcor’s team of more than 140 service professionals provides innovative, integrated, cost-effective investment management and pension and benefit administration services solutions to public sector entities.  Vestcor currently services the requirements of over 106,000 individual plan members and 140 participating employer groups.

Further information about Vestcor including the 2021 Annual Report, is available online at Vestcor.org.

It has been a while since I covered activities at Vestcor, a pension plan that is very similar to CAAT Pension Plan both in size, non-profit model, transparency and the way it is managed.

I did briefly chat with John Sinclair, its President and Chief Executive Officer, this summer after they released their annual results for 2021:

Vestcor Inc. (Vestcor) released its 2021 Annual Report, which is now available at vestcor.org/annualreports. Through 2021, the organization continued its long-term record of success in investment performance and administration service delivery. Vestcor, an independent not-for-profit company based in Fredericton, NB, offers global investment management and pension and benefit administration services to a number of public sector entities.

Even with the ongoing challenges brought on by the global COVID-19 pandemic, assets under its management again reached a new all-time high of $21.0 billion in 2021, equating to an overall gross return of 9.46% (or $1.9 billion), while the gross return for pension clients specifically was 9.48%. Most importantly, the overall gross longer term four-year pension investment performance of 7.52% per annum continued to exceed the targets set by shared risk/target benefit pension plan clients, which require Vestcor to abide to lower risk approaches, as compared to traditional defined benefit pension plans.

Adding to this success was a significant return secured above clients’ investment policy benchmarks. This active management by Vestcor’s highly specialized employees led to an outperformance of client benchmarks by a record 2.23% during the year, adding $426 million in value to clients, after the deduction of investment management fees.

“We are very pleased to once again share how our not-for-profit design allows us to provide low management fees without compromising the returns of our clients.” said John A. Sinclair, President and Chief Executive Officer. “In addition, our efforts to attract and retain the specialized workforce required to succeed in our industry is evident through our continued active management returns, which creates value above our clients’ investment benchmarks.”

Vestcor’s clients benefit greatly from the cost-efficient, not-for-profit model. In 2021, the management expense ratio was 0.13%, well below the average expense ratio of its peers. Administration service fees remained the second most cost efficient   as compared to a select group of national peers.

The administration service team continued to adapt to the challenges arising from the COVID pandemic, ensuring services to clients and their 106,000 members were uninterrupted. While volumes and member inquiries increased significantly through the year, processing times for pension estimates, retirements, terminations, and marriage breakdowns remained strong.

Vestcor is run very well. John Sinclair, Jon Spinney (CIO) and the entire team there are doing an outstanding job delivering long-term value to their pension clients.

Today, I want to go over its inaugural Responsible Investment Report, outlining the active investment related activities they have committed to under the direction of their publicly posted set of Responsible Investment Guidelines.

I get a lot of smaller pension plans asking me about responsible investing guidelines and reports and will refer them to Vestcor's documents which are available in both English and French. 

I like documents that are simple, well written and not too long, which is why I enjoyed reading through this inaugural RI Report.

As you can see from its table of contents below, it's a short document that covers all the pertinent information:

I encourage everyone to read this entire report but below I will cover some things I found interesting.

First, on integration of ESG information:

Vestcor’s internal investment staff are responsible for conducting the necessary due diligence, including the consideration of ESG related issues with respect to their specific investment decision making process. 

This due diligence typically involves reviewing and analyzing public disclosure documentation, third party research reports, and direct interaction with corporate management teams. In addition to the information received from collaborative partners mentioned earlier, we also have access to a variety of specific ESG data sources from multiple providers to supplement their own due diligence in the management and monitoring of portfolios and during the investment decision making process. 

In 2021, the Responsible Investing Committee decided that each internal investment team will provide a report to the Committee on at least an annual basis as to the use of such ESG information in the management of all the team’s internally managed strategies during the year. During 2021, each team reviewed available data and made determinations of the appropriate level of integration for each strategy/team.

For public market investment teams, Vestcor uses a predominantly internally managed approach, with limited engagement with external managers. 

In Private Markets, Vestcor’s teams invest client assets using a combination of 3rd party managers, coinvestments alongside like-minded partners, and direct investments. Each of these investment methods produce unique opportunities to consider and deploy best practices from an ESG perspective. 

When investing in a third-party fund structure, we delegate specific investment decisions to a fund manager. As such, Vestcor does not have direct input into the investment decision making, but rather, selects the underlying manager. As part of our manager selection process, we gather specific information from managers to ensure they are employing a thoughtful and systematic approach to integrating environmental, social and governance (ESG) considerations into their investment decision-making and asset management processes. An increasing number of fund managers are now adopting respective ESG policies that reflect growing global concerns about climate change and the value of diversity, equity, and inclusion (DEI) initiatives. These are some of the elements that we will consider, amongst others, during our diligence of fund managers prior to making a commitment to a limited partnership.

In contrast, for direct and co-investments, we maintain investment decision making authority and use this ability to target assets that not just provide superior risk adjusted returns but also are aligned with our long-term views on climate and other ESG risks. Over the past three years, renewables as a category have increased from 12% of our private infrastructure portfolio to 18% at the end of 2021.

Vestcor's inaugural RI report also provides two case studies worth looking at:

Case Study: Increasing our Commitment to Renewable Energy 

Vestcor has a long history of investing in infrastructure assets that contribute to the transition away from fossil fuel combustion and towards sustainable renewable energy sources. We have invested alongside partners in run-of-river hydro assets, wind energy assets and solar energy assets in geographies spanning from Canada and the United States, Australia and Continental Europe.

During 2021, we continued our approach to seeking high quality opportunities in these areas and we were successful in co-investing alongside Igneo Infrastructure Partners to acquire a 50% ownership stake in Terra-Gen. 

Based in California and New York, Terra-Gen develops, constructs, owns and operates utility-scale wind, solar and battery storage projects throughout the United States. Terra-Gen’s portfolio spans more than 30 generating and storage facilities located primarily in California, with additional locations in Colorado, Minnesota, New York, Texas and Wyoming. 

The company currently operates more than 1,800 megawatts of facilities and has over 3,000 megawatts in its development portfolio. The underlying nature of Terra-Gen’s assets strongly supports ESG goals and in particular the push towards decarbonizing energy sources.

For direct investments, our internal team uses their greater influence over the management of portfolio companies to make improvements in areas such as energy and water consumption. A significant component of our direct Real Estate portfolio in particular features best in class certifications on energy efficiency including both BOMA and LEED certifications.  

Case Study: Investing in Sustainable Real Estate Assets 

Office buildings are ubiquitous to our modern economy, and they contribute large amounts of greenhouse gas emissions, either through their construction or operations. It is important that efforts be made to improve energy consumption as well as other resources.

Vestcor is proud to invest in assets that focus on improving energy and water usage as well as waste diversion. In 2021, we acquired a 50% ownership stake in Place de Ville, a 1.2 million square foot office and retail complex in downtown Ottawa. 

Place de Ville is a well-positioned, transit-oriented office complex and is amongst the highest caliber of Class A buildings in Ottawa. It benefits from a strategic location in the nation’s capital and is a preferred choice for the Federal Government. Sitting on top of the Lyon LRT station, occupants utilizing public transit have easy access to the site while contributing to the removal of vehicle from our roads. 

Place de Ville has numerous green amenities, including:

• Annually participating in Earth Hour 
• Annually reporting to the Carbon Disclosure Project 
• Annually reporting to the Global Real Estate Sustainability Benchmark (GRESB) Survey 
• BOMA 360 Certified 
• WELL Health-Safety Rating Certified 

More work remains to be done and Vestcor and its co-owner are committed to investing in capital improvements that will improve the sustainability of the asset while at the same time provide the expected financial returns. 

On climate-related disclosures (TCFD Report), I note the following:

Country signatories to the 2015 Paris Climate Accords (including Canada) are expected to significantly reduce carbon emission levels by roughly 50% before 2030 and be in a net-zero position by 2050. Considering that approximately two hundred other global parties have made similar commitments, it will require the support of all stakeholders in the global economy to realize upon these goals. 

Vestcor has therefore developed the following reporting framework to assist management and our clients monitor and manage the related environmental carbon exposure transition risk within their investment portfolios. Our investment management process and guidelines require access to consistent timely disclosure on these risks and exposures to ensure our investment portfolio managers are investing in opportunities that will provide our clients with sustainable value well into the future. 

We are encouraged that the International Financial Reporting Standards (IFRS) is in the process of consolidating a number of existing reporting frameworks into one integrated set of reporting standards under the direction of a new International Sustainability Standards Board (ISSB). We will also continue to closely monitor the work, guidelines, and regulations of other international, national, and provincial regulatory bodies who may provide additional guidance in this area. 

In the interim, as the ISSB develops its ultimate framework, Vestcor is pleased to provide the following inaugural report utilizing the guidelines of the Task Force for Climate Related Financial Disclosure (TCFD). 

Through this report, Vestcor provides TCFD type reporting and disclosure with respect to our investment activities to assist our clients better understand their own climate related risk and exposures, and in turn assist them in developing and monitoring strategies to reduce risk and exploit potential investment opportunities. 

It is important to point out that this is Vestcor’s inaugural TCFD report, it will be the first time we have reported on the climate risk exposure metrics discussed herein. The analysis in this report is conducted on a consolidated basis of all Vestcor’s investment management clients, and is based on 2021 year-end securities holdings. We expect that this material may lead to the development of separate client-based reports and the determination of specific exposure reduction targets in the near future through discussions and consultations with our clients.

The report discusses governance, climate-related risks and opportunities, scenario analysis, risk management and ends with the 2021 carbon footprint metrics and targets:

This year we completed the assessment of our total portfolio carbon footprint for the first time (for portfolio coverage methodology please see “Notes on Carbon Footprint Metrics”). Our carbon footprint calculation methodology is aligned with the guidelines recommended by the TCFD. Industry guidance and best practices in carbon footprint calculation methodology have been a developing process, and we expect our methodology to continue to evolve over time alongside these developments. 

Methodology 

In our carbon footprint analysis, the primary commonly used metrics are Financed Carbon Emissions (tonnes of CO2 equivalent per million dollars invested) and Weighted Average Carbon Intensity (WACI). We also reviewed metrics such as specific carbon-intensity based exposures to sectors, exposure to companies with carbon risk management efforts, among other metrics. 

The scope of the metrics disclosed in this report are based on all Vestcor publicly listed equity holdings from equity and equity-like long-only portfolios and bonds in all corporate fixed income portfolios (for portfolio coverage methodology, please see “Notes on Carbon Footprint Metrics - AUM in Scope”). The calculation of these metrics is based on assets held as of December 31, 2021. Emissions data used in the calculation is based on the most recently available data at the time of the analysis.

Consistent with the TCFD’s recommendations, below we report metrics on greenhouse gas (GHG) emissions including Scope 1 (direct emissions that occur from sources owned or controlled by a company) and Scope 2 emissions (indirect GHG emissions associated with the purchase of electricity, consumed by the company). 

Climate Metrics 

The following metrics were calculated on $11,111 million of assets under management out of $21,018 million of Vestcor’s total portfolio as of December 31, 2021:

Targets 

We recognize that the TCFD recommends organizations to describe their key climate-related targets and their performance against these targets. Since this is our inaugural Responsible Investment Report, the purpose of the report is to form a baseline for further discussions and engagement with our clients and stakeholders on related issues including target setting specific to their own portfolios, as our climate risk related processes continue to evolve. The analysis in this report also provides us with a baseline to monitor the climate transition reduction progress of the portfolio over time as investee companies work towards meeting public carbon reduction targets

So, the disclosure, which is based on guidelines from the task force on climate-related financial disclosures, found Vestcor financed 628,374 tons (570,051 tonnes) of carbon emissions in 2021, equivalent to about 204.5 tons (185.5 tonnes) for each US$1 million it invested.

Once again, I really enjoyed reading Vestcor's inaugural Responsible Investment Report and look forward to seeing its upcoming reports.

Below, a recording of the New Brunswick Public Service Pension Plan's Annual Information Meeting which took place on September 22, 2022 in Fredericton, New Brunswick.

You can fast forward to minute 31 to see the presentation from John Sinclair, Vestcor's President and Chief Executive Officer. Pension geeks should take the time to watch it all.