UPP's Barb Zvan on Building a Sustainable Pension Plan From Scratch
In 2020, Barbara Zvan took on a unique challenge, becoming the first CEO and President of the University Pension Plan Ontario (UPP). While most pension plan CEOs have faced the challenge of integrating ESG factors into their investment plans and business models, Zvan had the opportunity to build them into the foundations.
But her approach was also informed from the lessons learned of a long career at the interface of investment, business and government. Before joining UPP, Zvan had spent 25 years at the Ontario Teachers’ Pension Plan (OTPP), rising to the post of Chief Risk and Strategy Officer.
She also sat on the Canadian federal government’s Expert Panel on Sustainable Finance, its Sustainable Finance Action Council (SFAC) – an advisory body consisting of Canada’s 25 largest financial institutions – and now plays a leading role at Climate Engagement Canada (CEC).
Direct value creation
A defining characteristic of larger Canadian pension schemes such as OTPP is their willingness and ability (often enshrined in founding mandates) to make direct investments in partnership with asset managers. Co-investments appeal to pension funds, explains Zvan, by helping to improve the risk and return profile of large-scale, long-term investments.
“We were able to get exposure to inflation protection, for example, through the infrastructure and real estate portfolio. It gave us the ability to be on boards to influence value creation and risk management. That’s important because these pension plans have to take risk to meet their liabilities and to keep it affordable,” she says.
Now Zvan is looking to leverage the experience of OTPP and other larger Canadian pension plans at UPP, which has a much smaller pool of assets (C$13 billion; US$9.5 billion). UPP initially provided pension plans to three universities, adding new clients at a rate of one a year since.
To explore the case, Zvan co-authored a paper that analysed how Canada’s C$200 billion-plus AUM pension schemes used their resources and expertise to capture value through co-investments while addressing four groups of risk: concentration and reputation risk; operation and development risk; government interference; and weak governance structure.
One example cited is Caisse des Dépots et Placements du Quebec’s investment in Montreal’s new metro system, during which the pension fund leveraged relationships with government, contractors and the public to help ensure stakeholder buy-in at the land expropriation stage, minimising costs and delays that could have compromised long-term returns.
Along with schemes of a similar size to UPP, Zvan is exploring how co-investing can still offer advantages – but with a twist to the existing model. Sector expertise is important, partly to be able to make the right choices, she says, but also to demonstrate the credibility in the market to ensure plans are offered the deals that offer the best fit.
“One of the key risk management attributes of doing private markets deals that you are tied into for a long time is having that deep sector expertise upfront in your risk management and your assessment,” she says.
UPP has focused on mid-market transactions, partly to avoid competition with large rivals, in sectors such as infrastructure – focused on climate-aligned solutions, including both green and transition assets – residential and industrial real estate in developed markets, as well as buy-out opportunities.
The key, says Zvan, is investing in “institutional knowledge” over the long term.
“To keep that partnership with the general partner (GP) going, you need a really strong pit crew. These deals don’t happen just by the investor teams alone. You need a strong legal group, tax group, operational due diligence group, and responsible investment group,” she adds.
Access to derivatives and synthetic securities was also a key prerequisite, the report observed, to enable smaller funds to supply liquidity at short notice.
ESG as talent attractor
Operational from July 2021, ESG factors were built into UPP’s approach “from the get-go”, rather than integrated into existing processes. Although UPP did inherit managers and portfolios from their founding three clients, there were no common technologies or policies, giving Zvan and team carte blanche to build from the ground up.
Internally, this meant hiring the people with the right skills and capabilities, as well as implementing thorough due diligence upfront.
“Everyone we hired is very aligned to what we’re trying to do around the integration of material ESG factors into the investments. We would say it’s a talent attractor,” says Zvan.
Externally, it meant working with managers that bought into UPP’s climate investment transition framework, and were willing to go on a journey of ongoing improvement.
Not only should managers regard climate as a systemic and financially material risk, and make some kind of measurable net zero commitment; UPP also asks them to identify areas of improvement on an annual basis, by leveraging an industry benchmark, for example, or addressing an aspect of their governance structure.
“It’s continual and it’s to ensure progress,” says Zvan.
Inevitably, UPP’s priorities have evolved as its assets have grown – focusing initially on balancing asset mix and securing inflation protection – with its panel of managers shifting accordingly. In parallel, the plan has moved away from pooled to segregated vehicles, in order to exercise greater control and influence, particularly from a sustainability perspective.
“This is something we’ve been doing quietly in the background, so we can vote the way that we want, exclude the way we want and engage directly with companies,” Zvan says.
UPP’s approach has been commended in the latest Canadian Pension Climate Report Card, published annually by Shift, a charity. The plan was awarded a B+ ranking, based partly on meeting its 2025 emissions intensity reduction target a year early, but also the robustness of its climate stewardship and climate transition investment frameworks.
Shift nevertheless encouraged UPP to include time-bound criteria and reinforce escalation as part of its Paris-aligned, outcomes-based climate engagement activities, as well as setting tougher expectations, backed up by climate-related resolutions or votes against directors. It also called on the plan to strengthen its fossil fuel exclusions, including a commitment to a “time-bound and managed phase-out of existing fossil fuel assets”.
Climate collaboration
To meet its target of reaching net zero financed emissions by 2040, UPP has been engaging with portfolio companies on climate and other sustainability issues directly and via a number of collaborative fora, both domestic and internally focused.
For a relatively small scheme to manage the impact of its investments on the climate, partnership with other investors is essential, asserts Zvan. As well as CEC, UPP has worked with the Institutional Investors Group on Climate Change and Climate Action 100+. The common thread of the initiatives in which they participate is a clear and well-understood area of focus, she says.
Another critical success factor for collaborative initiatives is flexibility, says Zvan. “One size does not fit all; maintaining flexibility in how they participate and how they contribute is key,” she observes.
The three initiatives cited all include asset managers in their membership, who are both competitors and subject to obligations to shareholders and a network of regulators. Asset owners may not be competitors, but are subject to similar considerations, also differing according to factors such as culture and investment horizon. In the case of CEC, the initiative has expanded to include international investors alongside domestic ones, the better to present a range of perspectives to high-emitting corporates.
Zvan says collaborative investor initiatives must regularly review the effectiveness of their support for the engagement teams of participating institutions, including by monitoring impact. This involves close coordination but also “deep dive research” into targeted areas such as capex alignment.
“You have to measure progress. The benchmark assessment element of these initiatives is so important,” she says.
UPP has also stepped up its bilateral engagement and stewardship capabilities, as part of its efforts to encourage portfolio firms to maintain momentum across climate-related governance, strategy, targets and disclosures.
A significant step this year was the filing of a shareholder resolution at Alimentation Couche-Tard, asking the Quebec-based retailer to disclose an emissions reduction strategy. The resolution, which follows an extensive engagement process, asked the firm to set medium-term targets for material Scope 1 and 2 emissions reductions, in line with its peers, as well as setting out its approach to tackling Scope 3 emissions.
In early September, more than a fifth of independent shareholders in Couche-Tard supported UPP’s resolution, making it the most supported climate-related proposal at the firm in seven years.
“Couche-Tard has already acknowledged that its fuel and energy business faces material risks from the ongoing transition — including regulatory changes, shifting market demand, evolving technologies and changing consumption patterns — but management isn’t telling shareholders how it intends to manage these risks,” said Sarah Couturier-Tanoh, Director of Shareholder Advocacy at the Shareholder Association for Research and Education, which co-filed the resolution.
UPP is also increasing its scrutiny of directors, monitoring their effectiveness at overseeing climate risk, and reserving the right to vote against them at future AGMs if they fall short. “That’s a very powerful tool,” says Zvan.
Systemic engagement
The importance UPP places on stewardship stems from its investment beliefs, which include the principle that UPP’s ability to deliver returns to beneficiaries depends on healthy and functioning financial, social and environmental systems.
This implies a system-based approach to stewardship which emphasises the role of government in creating an enabling policy environment that encourages the private sector to address systemic risks, such as climate change.
Zvan believes governments are moving too slowly, to the detriment of carbon-intensive sectors and firms that struggle to profitably transition to net zero. But her work on Canada’s SFAC has deepened her understanding of the “different worlds” inhabited by the public and private sectors, as well as the size, complexity, and fragmented nature of government.
Effective engagement with government requires “an appreciation of what they’re up against,” says Zvan. “Continuous sharing back and forth is important,” she adds, allowing that this need is more evident in Canada, where the federal system requires as many as 30 separate rule changes in order to implement, for example, a country-wide approach to sustainability disclosures.
“Local investors can provide insight, but it’s really important for the government to hear from the foreign investors too,” Zvan adds.
It’s not just dealing with regulators in 13 provinces that makes it hard to align Canada’s economy with net zero and planetary boundaries. The country has long relied on its extractive and often carbon-intensive industries for growth and jobs, contributing more than 8% to GDP in 2024.
This means policy action and clear guidance to major industries are particularly important. Canada’s scorecard is mixed in terms of providing the signposts to a more sustainable economy, such as a taxonomy that helps investors to support firms in transition.
Last December, the Canadian Sustainability Standards Board (CSSB) adopted the International Sustainability Standards Board’s climate and general sustainability disclosure standards late last year. The Office of the Superintendent of Financial Services’ B-15 regulation, updated in February to conform with CSSB standards, lays out clear expectations for federally-regulated financial institutions. SFAC’s recommendations, including on a transition-focused taxonomy, have been adopted. Prime Minister Mark Carney expects the taxonomy to be effective for Canada’s most carbon-intensive sectors next year.
Governance and oversight of transition guidance remains an issue, suggests Zvan, seeing a need for a permanent body, independent from government, to engage with the private sector on transition planning.
Less positively, the Canadian Securities Administrators, which is the coordinating body for the country’s securities regulators, has put on hold disclosure requirements for public companies, favouring voluntary adoption instead. Geopolitical headwinds have not helped, acknowledges Zvan.
“The trade issues are real. Canada exports a significant amount, much more than the UK and Europe, to the US. And so that is taking up a lot of time and attention for corporations, for financial institutions, as well as our federal government. The reality is, we have to keep this progress going,” she says.
This discussion was released last week but I only had a chance to listen to it today and it's excellent.
Now, I would separate the discussion in two parts, how was UPP created, what is unique to this plan, where is their focus and how did they ramp up in the middle of Covid.
The second part is on sustainability and its importance at UPP and how they are tackling this issue inside their organization and influencing peers to vote on certain proposals like asking Couche-Tard to set medium-term targets for material Scope 1 and 2 emissions reductions, in line with its peers, as well as setting out its approach to tackling Scope 3 emissions.
Admittedly, Couche-Tard is the last company I think of when it comes to climate change and climate disclosure but if UPP proposed this proposal, they did their homework and feel strongly about it.
Also, I am a big believer in science-based climate proposals and more importantly, on striking the right balance between climate initiatives and future economic prosperity.
So, when Shift goes after UPP or other pension plans for investing in oil and gas or pipeline firms, it doesn't just rub me the wrong way, it makes my blood boil because in my humble opinion, we have dithered far too long listening to climate activists and need to reintroduce logic and sensible policies that will create jobs and create economic prosperity.
"Keep it in the ground” is just idiotic, it's a slogan which needs to be laid to rest once and for all.
Again, these are my opinions, I don't agree with every pension fund manager on all climate issues but I definitely listen to their views and Barb is an expert worth listening to.
So, without rambling on here, please take the time to listen to her discussion with Chris Hall.
Below, in this video, CEO Barbara Zvan explains how the University Pension Plan Ontario was designed to be green “from the get-go”, while maintaining a laser focus on value creation. Most pension plan CEOs have faced the challenge of integrating ESG factors into their investment plans and business models, but Zvan highlights how UPP leveraged its opportunity to build them into the foundations.
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