Keith Tomchuk, senior investment consultant at Towers Watson and Andrew Sweeney portfolio vice president at Phillips Hager & North agree that environmental, social and governance (ESG) issues could pose investment risks and opportunities for pension plans and other institutional investors alike. These factors continue to grow ever more important as companies are more exposed to positive and negative publicity and scrutiny in both news and social media as information travels quicker than ever before.

A clear and consistent definition of ESG is hard to come by partly due to regional differences as well as diverging regulatory framework and guidelines depending on the jurisdiction an organization operates in. A wide variety of jargon that surrounds the ESG landscape muddy the waters and leads to confusion as well. Buzz words like green bonds, carbon light, impact investing, community investing, positive and negative screening, sustainable development investing, continue to make ESG harder to understand.

What most advocates agree on, however, is that for organizations with a pension plan/or money to invest it is beneficial that they have educated themselves, considered ESG and taken a position on it to be prepared for what will come.

In the Scandinavia, UK, and Australia, pension plans and investors in general are further ahead in the ESG area. They have developed policies, procedures and dedicated areas of websites specifically on ESG. They also have carefully considered views and opinions from a company perspective, related to how they invest and conduct themselves ethically, socially and from a governance perspective. As a result, language in these policies and statements from organizations in these jurisdictions tend to be more firm around their beliefs and attitudes when it comes to ESG.

Andrew shared his definition on ESG as environmental, social and governance factors relevant to an investment which may have a financial impact on that investment. He pointed to examples where a governance issue (Magna International example) could lead to suppressed value of a company from a shareholder perspective, or where an environmental issue (BP Deep water horizon scandal) seriously hurts both shareholder value through fines but also through goodwill and the company’s public image.

Furthermore, he argues that ESG from an North American perspective does not necessarily include Socially Responsible Investing (SRI), ethical investing or specific screening but rather the focus on the long term sustainable value of companies is what should be considered in a larger environmental, social and governance framework.

Keith agrees that long term investment horizon must be the focus and it means emphasis on sustainable investing which in turn supports long-term and inter-generational investment returns.

But what is sustainable investing? What does ethical investing and socially responsible investing actually mean?

Keith told the CPBI audience how ethical investing typically means excluding certain industries and corporate behaviours. Sustainable investing is more broad in terms of considering the wider ESG issues that can create investment hazards and opportunities. Examples include health and safely, governance issues like board compensation, and areas where the directors or management can find themselves in a conflict of interest situation. In Keith’s view, SRI focuses more on the best in class companies.

He furthermore highlighted that this is a changing landscape going forward and the future is by no means certain. Specific areas where we might see change include technological development, changing regulations, better science and evidence of weather patterns, social awareness and political pressure.

One interesting challenge that relates to Calgary and Alberta specifically is the debate around stranded assets. It is relevant both in protecting long term value and considering sustainable and environmental investments and managing those risks. Consider if governments adopt stricter regulations around emissions from fossil fuels and hence how much can be burned. That would arguably affect values of fossil fuel assets significantly, which loops back into the long term investment strategy for plan sponsors.

The speakers both agree the following three steps are a good way for investors prioritize their ESG actions:

1) Understand the issues (education, best practice, regulatory framework)

2) Define your position (explore investment beliefs and define a policy)

3) Engage with your investment manager (monitor, and is there a fit and re-engage)

Although North America has been slower to adopt ESG regulation and guidelines than other regions, the largest pension plans in Canada have now incorporated ESG factors in their policies.

As a plan sponsor it is quickly becoming imprudent to simply ignore the risk factors around ESG.

– Stian Andersen