Canadian investors rise to RI challenge despite legal limbo

Support for ESG considerations high, but caution on fiduciary responsibilities.

The credit crisis may have put a severe dent in investor confidence, but there’s no evidence Canadian institutional investors are backing away from their long-term commitments to sustainability. The latest figures from the Social Investment Organization, the umbrella group for socially responsible investment in Canada, show that $544 billion in pension and endowment assets was invested under responsible investment policies as of June, 2008, a 26% increase from June, 2006. “These assets are mostly in the large public pension sector, reflecting a consensus among the managers of Canada’s large public pensions that responsible investment represents a prudent policy for investment fiduciaries,” the study concludes. Jordan Berger, a principal with Mercer Investment Consulting and the company’s head of responsible investment for Canada, said recently that despite the credit crunch, Canadian institutional investors appear to be maintaining their support for responsible investing, albeit at a slower pace than some other countries. “Canada has been a little slow to pick up on responsible investment, but there has certainly been a steady increase in interest in the subject,” Berger said at a panel discussion on responsible investment last month in Ottawa. Katharine Preston, manager of proxy voting and ESG at the
Ontario Public Service Employee Union (OPSEU) Pension Trust, with 80,000 members and $11bn in assets under management, says there’s a growing recognition within the Canadian pension community that environmental, social and governance (ESG) issuesaffect investment performance. OPSEU recently introduced its first ever statement of responsible investment principles. Still, Preston admits that it can be challenging to get ESG on the agenda at board meetings, particularly in tough economic times. “It’s an evolutionary process,” she says. Ronald Davis, associate professor of law at the University of British Columbia, says trustees and pension fund managers remain concerned about their fiduciary responsibilities related to ESG. “Trustees are not comfortable using this criteria and many still think it’s risky to be outside the herd. From a legal perspective, [responsible investing] is based on the actions of a prudent investor. Pension funds need to care about ESG. It’s right and it’s popular, but you need to engage pension beneficiaries in the process.” And there are larger issues to consider. Berger says that for many large institutional funds, incorporating ESG requires a “re-think” of the entire pension process: “Climate change is an example of something that can be transformative for humanity.”
Climate changes issues were front and centre at the recent Canadian Responsible Investment Conference in Winnipeg. Mark Jaccard, professor of environmental management at British Columbia’s Simon Fraser University, noted that climate change policies have been virtually ineffective for the past two decades in Canada, largely because governments have been relying on voluntary actions by the public to reduce greenhouse gas emissions, such as the use of energy-efficient appliances and other “green” household programs.

While Jaccard agrees it’s important to promote such initiatives, he believes that effective climate change policy requires a government-mandated price on greenhouse gas emissions. That’s a sentiment shared by Bob Walker, vice president of sustainability at Ethical Funds, Canada’s largest SRI mutual fund company. “We need a price on carbon and it’s got to be a high price,” Walker said at the Winnipeg conference. Ethical Funds has been working on the climate change risks associated with the controversial oil sands projects in Alberta, and has recently called for a moratorium on all new projects in the 140,000 square kilometre region. In a report, Ethical Funds notes that the current market turmoil could be something of a blessing in this respect, as many companies have been forced to shelve oil sands projects due to rising costs, oil price volatility and the recession. “There is now a glorious opportunity for institutional investors to ensure that the oil sands are developed in a less risky and more responsible fashion,” the report states. “If institutional investors want to effect change, the time make their views known to companies is now.” Ethical Funds researchers are spending the summer conducting a study of operating projects in the oil sands and the company plans to establish benchmarking tools to find out which energy companies are mitigating risks. The United Nations Principles for Responsible Investment (UNPRI) has been a key driver for institutional investors looking to incorporate ESG in the investment process. Several of Canada’s largest public pensionfunds, including the Caisse de dépôt et placement du Québec, the Public Service Alliance of Canada Pension Fund, the British Columbia Municipal Pension Plan and the Canada Pension Plan Investment Board, are UNPRI signatories. But it’s been a challenge to bring private sector pension funds on board, suggesting there’s still work to be done before Canadian institutional investors fully embrace ESG concepts. This year, UNPRI is staging its second annual academic conference at Carleton University in Ottawa, providing an opportunity to boost SRI academic research in Canada, an area that has been lacking in the past. “We’re going to be able to bring many of the world’s leading academic experts on this topic together with PRI signatories and stakeholders from Canada, the United States and around the world,” says Tessa Hebb, director of the Carleton Centre for Community Innovation’s Responsible Investment Initiative: “We have deep inter-connections with the investment industry in Canada,” says Hebb, adding that the centre has already lined up 16 business partners. “This is a co-production of knowledge with researchers, the university and our business partners. Knowledge isn’t created in isolated universities, ivory towers, and then issued out to the world to make it great. The capacity for action can only be realized through co-productions.” Sixty papers were presented for consideration and 20 will be presented at the conference, all based on the theme, “The Next Generation of Responsible Investment.”
Doug Watt is an Ottawa-based financial writer/editor and co-founder of SRI Monitor, a Canadian blog for socially responsible investors.