Environmental, Social and Governance (“ESG”) Investing has been very topical in the last few years and this article addresses what impact this has had on the UBC Faculty Pension Plan (“FPP”).
There are many definitions of “ESG Investing” (sometimes referred to as Responsible Investing, Socially Responsible Investing, or Impact Investing). There is no clearly accepted industry definition of ESG Investing, so there are a lot of conflicting articles and statistics in this area. For the purposes of this article, we define ESG Investing as an investment-related activity that includes evaluating ESG factors alongside other risk factors in the investment process. There is a wide array of different ESG factors including areas such as pollution, labour practices, shareholder rights and business ethics. How these factors are analyzed and weighted in the investment decision-making process can vary substantially among investment managers.
There are different approaches to ESG Investing with the two most common ones being: i) ESG Integration and ii) portfolio screening. ESG Integration refers to systematically considering financially material ESG information as a complement to the standard investment analysis used to build a portfolio of stocks/bonds. The portfolio screening approach refers to selecting or avoiding investments that meet specific predetermined screening criteria. For example, a Fossil Fuel Free fund would typically screen out investing in companies that are involved in the coal, oil or gas exploration and extraction processes.
The FPP invests the Plan’s assets using external investment firms through their investment pooled fund vehicles. The FPP is usually just one of several investors in any pooled funds. These funds are a cost-effective way of investing and they ease the administrative burden of obtaining broad exposure to different asset classes. The investment firms set the terms and conditions of these pooled funds and the investors, like the FPP, cannot dictate any specific screening criteria on the type of investments that can be held in the pooled fund. The FPP does not invest directly in individual stocks, bonds or real estate.
All of the FPP’s investment managers, in varying ways, integrate the analysis of ESG factors into their investment processes. This is not meant to replace their standard security analysis of stocks and bonds but rather to complement their goal to achieve a better risk-adjusted return result. There has been a significant growth in relevant ESG-related information available that has assisted our managers in better assessing the potential impact of the various ESG factors.
The FPP’s Investment Policy does not specifically direct or prohibit our managers from incorporating ESG factors into their investment process or specifically screening out any certain types of stocks. However, we do support our managers in continuing to assess and integrate financially relevant ESG factors into their investment decision-making process. When selecting and monitoring our investment managers we do require them to satisfy us on how they deal with assessing ESG factors.
An example of how our investment managers incorporate ESG factors into their investment decision-making is with one of our real estate managers, Bentall Kennedy. For the last several years they have won a prestigious international environmental award for their work in making the buildings they hold in our fund as energy efficient as possible. Bentall’s studies have shown that this is also financially prudent as it can reduce building operating costs as well as attract more high-profile tenants who wish to be located in “best-in-class” environmentally-friendly buildings.
Another example of how the assessment of ESG factors is integrated into the investment process is with one of our global equity managers, MFS. A large mining company that MFS held stock in was buying a smaller firm that their ESG team had identified as having significant concerns around bribery and corruption-related issues. Despite MFS directly engaging with management and board members regarding their concerns, MFS concluded these concerns weren’t being adequately addressed. This led to MFS ultimately selling their holdings in the mining company.
Most of the investment firms employed by the FPP are signatories of the United Nations Principles of Responsible Investing (“UNPRI”). These are a set of investment principles around actions that can be taken by a manager to incorporate ESG factors into their investment practices. Being a signatory to the UNPRI reflects on our managers’ interest and commitment to ESG investing. Although their actions are voluntary in nature it is a useful tool for their knowledge base and requires annual reporting on their activities in this area.
In summary, ESG Investing has become more mainstream in recent years in terms of how these factors are both considered and implemented in the investment process of most managers. Companies realize that if they wish their stock to be attractive to investors they have to address these ESG factors and be more transparent in how they are achieving acceptable standards in these areas. Our managers also realize that considering ESG factors in their investment process will continue to play an important role, especially as more and better information is available in this area.
Potential Fossil Fuel Free Balanced Fund option and member survey
The UBC FPP Trustees wish to assess whether there is sufficient member interest and commitment to support potentially adding a Fossil Fuel Free Balanced Fund as an investment option. A survey will be emailed to Plan members later this month to gauge our members’ level of commitment to invest in this potential fund option. Read more