the abc’s of esg: environmental, social and governance factors in pension plan investing · 2016....

The ABC’s of ESG: Environmental, Social and Governance

Factors in Pension Plan Investing

Hosted by the Ontario Regional Council May 14, 2015

TWENTY Toronto Street Conferences and Events Toronto, ON

Ontario Regional Council 2

To ESG or Not to ESG…

Stephanie J. Kalinowski Partner

Hicks Morley


Agenda • The new Ontario PBA requirements for SIPPs • Fiduciary duties and plan investing • What do plan administrators need to do?

Ontario Regional Council

• Effective January 1, 2016, SIPPs must include information about whether ESG factors are incorporated, and if so, how

• SIPP must be filed with the Superintendent of Financial Services within 60 days of January 1, 2016

• Administrators must submit SIPP filings electronically through FSCO’s pension portal starting in 2016

• Effective July 1, 2016, member, former member, and retiree statements must state that the administrator must establish a SIPP that contains information about whether ESG factors are incorporated into the SIPP and if so, how

Ontario PBA Amendments


• Not the same as a requirement to take ESG factors into account

• Or is it?

Ontario PBA Amendments


• Environmental, Social and Governance factors • No definition in the PBA • Goes beyond a purely financial analysis • Not the same as SRI

What is ESG?


• Prudent person rule codified in Ontario PBA: 22. (1) The administrator of a pension plan shall exercise the care, diligence and skill in the administration and investment of the pension fund that a person of ordinary prudence would exercise in dealing with the property of another person.

(2) The administrator of a pension plan shall use in the administration of the pension plan and in the administration and investment of the pension fund all relevant knowledge and skill that the administrator possesses or, by reason of the administrator's profession, business or calling, ought to possess.

Fiduciary Duties and Plan Investing


• Is it a breach of fiduciary duty to take ESG factors into account?

• Is it a breach NOT to take them into account? • Evolution of treatment of non-financial factors



• Cowan v. Scargill, [1985] Ch. 270 • U.K. National Coal Board ("NCB") mineworkers pension

plan • Equal number of trustees appointed by union and NCB • Union trustees objected to permitting oil and overseas

investments, based on general position taken by union • NCB-appointed trustees sought order from court



• The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries…When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests. In the case of a power of investment…the power must be exercised so as to yield the best return for the beneficiaries, judged in relation to the risks of the investments in question; and the prospect of the yield of income and capital appreciation both have to be considered in judging the return from the investment.



• How much weight should they be given? • Can ESG factors be used to exclude certain investments

outright? • To what extent can the views of plan members be

considered?



• I am not asserting that the benefit of the beneficiaries which a trustee must make his paramount concern inevitably and solely means their financial benefits, even if the only object of the trust is to provide financial benefits…..But I would emphasise that such cases are likely to be very rare, and in any case I think that under a trust for the provision of financial benefits the burden would rest, and rest heavy, on him who asserts that it is for the benefit of the beneficiaries as a whole to receive less by reason of the exclusion of some of the possibly more profitable forms of investment.



• Court held that a policy designed to benefit the domestic coal mining industry was too remote to be directed at the best interests of the beneficiaries



• Other UK cases • US cases • Manitoba • UN PRI

Evolution of ESG


• Understand fiduciary duties as they apply to investing • Consider what you may already be doing

– Ask investment managers how they define and measure ESG factors

• Develop a definition of "ESG" for the SIPP • Review your decision-making process

– Understand the financial impact of decisions – Does the plan itself contain restrictions?

• Document your decisions

What Should Plan Administrators Do?


• You have a year to comply but… • Don't ignore it! • Don't leave it until the last minute!

What Should Plan Administrators Do?

The ABC’s of ESG: Environmental, Social and Governance

Factors in Pension Plan Investing

Hosted by the Ontario Regional Council

May 14, 2015

TWENTY Toronto Street Conferences and Events

Toronto, ON

The Role of ESG in Institutional Portfolios

Andrew Sweeney

Vice-President

Phillips, Hager & North

ACPM Seminar 2015

Lots of Unfamiliar TerminologyIt is Easy to be Confused….

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ACPM Seminar 2015

What is ESG?A Definition

“ESG” refers to Environmental, Social and Governance factors relevant to an

investment which may have a financial impact on that investment

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ACPM Seminar 2015

ESGWhat it isn’t, What it is

� ESG is not:

� Socially Responsible Investing (SRI)

� Ethical Investing

� Values-based judgments of a security or sector

� Negative screening to eliminate companies or sectors

� Fossil Free or Carbon Light

� ESG is:

� Enhanced analysis of companies

� Better understanding of overall risk – both financial and non-financial

� Proxy voting and company engagement

� Working with other managers and owners to address ESG issues

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ACPM Seminar 2015

What is ESG?A Detailed Definition

EE SS GGEnvironmental:

� Climate change

� Sustainability

� Air & Water Pollution

� Water scarcity

� Biodiversity and habitat protection

� Site rehabilitation

Social:

� Human rights

� Community impact

� Health & safety

� Child and forced labour

� Employee relations

Governance:

� Board independence

� Board accountability

� Executive compensation

� Shareholder rights and voting

� Anti-corruption

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ACPM Seminar 2015

� Magna historically had poor governance

• Multi-voting share structure

• Excessive executive compensation

• Founder invested in personal projects

� Shareholders campaigned to improve Governance

• Spirited debate on how to accomplish change

� Simplified share structure to single class

� Stock has performed tremendously since governance changes

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40

60

80

100

120

140

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Share

Price C

$

Magna InternationalAn Example of ESG Benefiting Shareholders

Magna Share Price

Source: RBC GAM, Factset, as of December 31, 2014Photograph : Artist Solby , 2007's Memorial Day Weekend on Arlington Park Race Course, Chicago, Illinois. http://commons.wikimedia.org/wiki/File:Horserace_520133030.jpg

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“By Slooby from Chicago, U.S.A., upload by Herrick (Race Time !) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons”

ACPM Seminar 2015

ESG Complements Traditional Financial Analysis

ESG Analysis

TraditionalFinancial Analysis

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Is ESG Good For Your Portfolio?Can it Improve Returns and Lower Risk?

“There is a strong consensus in the literature that corporate governance is linked positively to firm value”

- Anita Anand, University of Toronto

“Academic studies find that strong corporate environmental performance shows a positive link to market-based financial outperformance”

• 100% of studies show that strong ESG standards correlate with lower cost of capital

• 89% of studies show that strong ESG standards correlate stock price outperformance

– Deutsche Bank, Sustainable Investing Report 2012

Source: The Value of Governance, February 2013, Anita Anand, Professor of Law, University of TorontoSustainable Investing Report Deutsche Bank https://institutional.deutscheawm.com/content/_media/Sustainable_Investing_2012.pdf

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ACPM Seminar 2015

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Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

Ind

ex

ed

Pe

rfo

rma

nce

BP plc S&P 500 Integrated Oil & Gas Producers Subindex

BPLongstanding ESG Issues

1. BP had a poor safety record

• Texas City refinery fire in 2005: 15 fatalities and 170 injuries

• Prudhoe Bay pipeline leak in 2006: leaked 5000 barrels in Alaska

2. Deepwater Horizon exploded in 2010

• 11 fatalities and 15 injuries

• 5 Million barrels of oil spilled

• $28B spent by BP on cleanup/litigation

• Potentially $18B in additional penalties

BP Share Price Relative to S&P 500 Integrated Oil & Gas ProducersJan ‘05 – Dec ’14

Source: RBC GAM, Factset, as of December 31, 2014

1.

2.

Annualized Performance

6.5%

-4.4%

AA+ AA A

S&P Credit Rating

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ACPM Seminar 2015

� This forced Nike to address sustainability

� ESG factors are built into Nike’s business model

� Nike has improved its brand AND delivered results for shareholders

NikeTurning Around A Negative Social Legacy


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“Nike has become synonymous with slave wages, forced

overtime, and arbitrary abuse.”

- Phil Knight, Founder of Nike, 1998 National Press Club

ACPM Seminar 2015

NikeTurning Around A Negative Social Legacy


$0

$20

$40

$60

$80

$100

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

US

$

Nike Share Price

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“Our motivation for driving sustainability into the business was really

looking at the advantage it would give us in terms of business potential.”

– President & CEO Mark Parker, 2013

ACPM Seminar 2015

ESG has Broad ApplicationIt is Not Just About Equities

� Corporate Debt

• ESG factors which impact creditworthiness

� Sovereign Debt

• Political risk, corruption, social unrest

� Infrastructure, Private Equity, Real Estate

• Long term nature of assets

� Hedge Funds

• Transparency

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ACPM Seminar 2015

UN Principles for Responsible Investment What is it?

� 1,355 organizations representing over US$45 trillion have signed up to the UN PRI, including 61 Canadian asset owners and managers

� Signatories work towards implementation of six guidelines and report on progress towards full compliance

� These are not rules, but rather aspirational guidelines

� A core principle is the integration of ESG into investment processes

� The UN Principles for Responsible Investment (UN PRI) is a set of voluntary guidelines for investment owners and managers wishing to address ESG issues

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ACPM Seminar 2015

What is Happening Globally?Formal ESG Integration is Common in Europe

� Recent survey of 1,300 European pension funds found:

• 90% agreed that ESG factors have a material impact on performance

• 80% consider the ESG-related policies when selecting managers

� Proposed EU “Shareholder Rights Directive” will require all asset owners and asset managers to have a policy on shareholder engagement

� In 2009 UK law firm Freshfields concluded that “integrating ESG considerations into investment analysis . . . is clearly permissible and is arguably required in all jurisdictions.”

� In 2014 UK Law Commission stated that trustees should take ESG into account “where . . . ESG issues are financially material”

Source: European Commission http://ec.europa.eu/internal_market/company/shareholders/indexa_en.htm. UNEP Finance Initiative; A Legal framework for the integration of environmental, social and governance issues into institutional investment, October 2005. UK Law Commission Fiduciary Duties of Investment Intermediaries http://lawcommission.justice.gov.uk/areas/fiduciary_duties.htm

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How Investment Managers Integrate ESG

� Provide Portfolio Managers/Analysts with ESG research

• Sustainalytics, Maplecroft, MSCI

� Proxy voting

• Exercise rights by voting proxies meaningfully

� Engagement

• Meet Management/Board to understand how a company manages/mitigates risk

• Shareholder proposals

� Coordinate with other Investors

• Canadian Coalition for Good Governance (CCGG), Responsible Investment Association (RIA), UN PRI

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ACPM Seminar 2015

Key TakeawaysAn ESG Checklist

� Develop an ESG policy or incorporate ESG criteria into your SIPP

• Look to your consultant, managers and peer group

� Determine how your managers incorporate ESG considerations

� Integrate ESG criteria into your manager selection process

� Ask for regular reporting on ESG and Proxy voting

� Provide reporting to your stakeholders

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Questions?

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Disclaimer

This presentation is intended for institutional investors only.

This document has been provided by Phillips, Hager & North Investment Management (PH&N IM) for information purposes only and may not be reproduced, distributed or published without the written consent of PH&N IM. It is not intended to provide professional advice and should not be relied upon in that regard.

PH&N IM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when printed. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by PH&N IM, its affiliates or any other person as to its accuracy, completeness or correctness. We assume no responsibility for any errors or omissions. The views and opinions expressed herein are those of PH&N IM as of the publication date and are subject to change without notice. This information is not intended to be an offer or solicitation to buy or sell securities or to participate in or subscribe for any service. No securities are being offered, except pursuant and subject to the respective offering documents and subscription materials, which shall be provided to qualified investors. This document is for general information only and is not, nor does it purport to be, a complete description of an investment in any RBC, PH&N or BlueBay funds. If there is an inconsistency between this document and the respective offering documents, the provisions of the respective offering documents shall prevail.

Commissions, trailing commissions, management fees and expenses all may be associated with the funds mentioned in this presentation. Please read the offering materials for a particular fund before investing. The performance data provided are historical returns, they are not intended to reflect future values of any of the funds or returns on investment in these funds mentioned in this presentation. Further, the performance data provided assumes reinvestment of distributions only and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. The unit values of non-money market funds change frequently. For money market funds, there can be no assurances that the fund will be able to maintain its net asset value per unit at a constant amount or that the full amount of your investment in the fund will be returned to you. Mutual fund securities are not guaranteed by the Canada Deposit Insurance Corporation or by any other government deposit insurer. Past performance may not be repeated.

The amount of risk associated with any particular investment depends largely on the investor’s own circumstances. Investors should consult their professional advisors/consultants regarding the suitability of the investment solutions mentioned in this presentation.

This document may contain forward-looking statements about general economic factors which are not guarantees of future performance. Forward-looking statements involve inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement. All opinions in forward-looking statements are subject to change without notice and are provided in good faith but without legal responsibility.

PH&N IM is a division of RBC Global Asset Management Inc. (RBC GAM Inc.). RBC GAM Inc. is the manager and principal portfolio adviser of the Phillips, Hager & North (PH&N) investment funds. RBC GAM Inc. is registered with the various securities commissions of Canada as a portfolio manager, which permits it to provide discretionary investment management services to its clients, and as an exempt market dealer which permits it to act as a dealer for prospectus exempt trades in certain circumstances. RBC GAM Inc. is also registered as an Investment Fund Manager in Ontario, British Columbia, Quebec and Newfoundland and Labrador and as a Commodity Trading Manager in Ontario.

Each of RBC GAM Inc. and BlueBay Asset Management LLP (BlueBay) is a wholly-owned subsidiary of Royal Bank of Canada, and an affiliated company and may be considered as related issuers and/or connected issuers under applicable securities legislation.

®/™ Trademark(s) of Royal Bank of Canada. Used under licence. IC1501015

© RBC Global Asset Management Inc., 2015.

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Vancouver, British Columbia

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C A L G A R Y

Alberta Stock Exchange Tower

620 – 300 5th Ave S.W.

Calgary, Alberta

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The ABC's of ESG Session A DC provider’s perspective

H. H. Kerr Vice President and Associate General Counsel

Sun Life Financial


• Means different things to different investment managers – ESG has become shorthand for addressing investment methodologies that

actively employ sustainability measures in their practices – ESG continues to evolve as each investment manager has a different

interpretation – Integrating ESG factors into investment decisions may offer investors long-

term performance advantages across all asset classes

What is ESG?

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• Negative screening (Socially Responsible Investing (SRI)) – Excluding companies from the investment universe based on criteria relating

to their products, activities or policies • Integrated analysis

– Proactive consideration of ESG factors in investment research and decision making

• Positive screening – Preferentially investing in companies based on criteria relating to their

products, activities or policies

Responsible Investing Strategies

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• Active ownership – Investors using their rights influence (e.g. voting rights) to enact change in

company management – Divestment (i.e. not owning fossil fuels, tobacco, etc.) -- A portfolio manager

could sell holdings when their ESG advocacy with a company they own does not meet objectives

• Thematic investment – Selecting assets on the basis of a particular investment theme (eg. Climate

change, demographic change) • Impact or Community investing

– Target ESG investments to traditionally smaller, overlooked individuals or communities

Responsible Investing Strategies (cont’d)

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• Through SLF’s core investment platform, we offer 3 “socially responsible” funds (represent less than 1% of our total core investment platform assets): – MFS Responsible Balanced – MFS Responsible Canadian Equity – MFS Responsible Global Equity

• Investment strategy seeks to maximize both financial return and social good • Company screens (MFS research & Third Party - MSCI ESG Research & Rankings )

– Annual Revenues: Companies that derive revenue from the manufacture and sale of tobacco products, alcoholic beverages, armaments, pornography or from the provision of gaming facilities

– Employment standards: Companies with significant operations and/or suppliers that do not adhere to local employment standards, and do not address the issue

– Environment: Companies whose negative impact on the environment is greater than the average of their peers

SRI options on Sun Life’s core platform

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• Where offered, they are generally offered with other investment alternatives • Tend to be used by universities or those familiar with similar investment options

within their DB plans or endowments/foundations • Same or similar pricing to non-SRI options • Performance over the last five years ending March 31, 2015 (annualized):

– MFS Responsible Canadian Equity: • SRI return of 8.9% outperformed non-SRI equivalent by ~0.2%

– MFS Responsible Global Equity: • SRI return of 14.3% outperformed non-SRI equivalent by ~1.2%

– MFS Responsible Balanced: • SRI return of 9.8% outperformed non-SRI equivalent by ~ 0.3%

Other observations SRI vs. Non-SRI

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• Our regular selection and monitoring questionnaires ask about ESG principles • We monitor manager, client and consultant feedback and industry practices • ESG factors don’t have a significant impact on a manager’s selection or ongoing

evaluation

ESG – Platform management approaches

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• As part of governance process, Sun Life asks all Core investment platform managers : – Do you incorporate ESG factors into your investment process? If so, please

describe how they are taken into account. – Has your firm signed the United Nations Principles for Responsible Investing?

• In general, three categories of responses: 1. Non- UN PRI signatories and/or do not incorporate or consider ESG 2. UN PRI signatories, and despite ESG being considered/incorporated

elsewhere within the firm, there is no direct inclusion in the process for specific funds on our platform

3. UN PRI signatories; provide detail on incorporation of ESG factors

ESG responses of SLF platform managers

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• Manager A - We collect and analyze data pertaining to the ESG research and through our analysis, we have determined that ESG factors have not proved to be a consistent source of predictability up until this point. As a result, these factors are not directly incorporated into our investment decision framework, however, we do continue to monitor these indicators closely. Our parent company is a signatory on the UN PRI.


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• Manager B The investment process is built on a rigorous, bottom-up approach that examines the traditional measures of value with emphasis on a company’s current price relative to its long-term, future earnings potential. Ultimately, Manager B seeks to invest in a diversified set of stocks it considers underpriced relative to their future potential. The driving factor of the decision to purchase or sell a stock is long-term valuation, however, ESG factors and where they may have a potential economic impact are an input in our analysis.


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• Member communication on SRI options is currently limited to fund descriptions provided by the investment manager, as well as the use of the word “Responsible” in the actual fund names

• Balance adequacy of member

disclosure with ensuring information related to investments does not overwhelm plan members

ESG and plan member communications

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• SIPP preparation and ESG disclosure

• Disclosure options: 1) ‘We have not incorporated ESG factors into our investment policies.’ 2) ‘We have incorporated ESG factors into our investment policies by investing

through PH&N.’ 3) ‘We have incorporated ESG factors into our investment policies by selecting

only SRI funds.’

Interactions with plan sponsors

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• Continue to explore managers/investment options which incorporate heightened ESG practices to address changing needs of plan sponsors and their members

• Continue to gather appropriate information from investment managers in order to support sponsors and members with appropriate disclosure requirements

• Do not foresee exercising judgment on how managers incorporate ESG factors, however, we expect most to have some level of integration or consideration of ESG factors in future

• Monitor pension legislation changes as they relate to plan member communications

Future of ESG and our platform

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For more information and to register, please visit www.acpm-acarr.com 48

Upcoming Events

ACPM 2015 National Conference Kelowna, BC ● September 15th to 17th 2015

Ontario Regional Council Annual Golf Tournament June 1st 2015

http://www.acpm-acarr.com/



the abc’s of esg: environmental, social and governance factors in pension plan investing · 2016....

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