ESG in Our
Investments

ESG Governance in Our Investments

OPB is the administrator of the PSPP, which includes the day-to-day operations of the Plan as well as oversight of the investments of the Plan’s assets. The PSPP’s assets are invested by IMCO according to our Statement of Investment Policies and Procedures (SIP&P), which includes a statement that ESG factors should be integrated into the evaluation of an individual security, asset or external investment manager. OPB is committed to comprehensively integrating ESG to manage investment risk and take advantage of opportunities.

OPB’s Board of Directors includes several members who have significant experience in relevant ESG areas. Additionally, as one of the founding clients of IMCO, OPB nominated two individuals who were selected to sit on IMCO’s Board. Collectively, IMCO’s board members have the necessary skills and expertise to provide effective oversight of IMCO’s strategies, including its work on integrating ESG within its investments. OPB’s Board meets regularly with our IMCO Board representatives.

 

What Is OPB Responsible for Versus IMCO?

OPB is the plan administrator of the PSPP and IMCO is our investment manager.

As the administrator of the PSPP, OPB holds the PSPP’s assets in trust and is responsible for setting the high-level investment policies and strategies, including our SIP&P and Strategic Asset Allocation (SAA) or asset mix, to ensure that the assets are invested in a manner to progress the long-term financial health of the Plan.

IMCO invests the assets according to our SIP&P as well as its core governing policies, such as the Investment Policy Statement for each asset class. OPB then monitors IMCO to ensure that we understand and accept their approach and that it aligns with our expectations, including around ESG.

Why Is OPB Incorporating ESG Into the Investment Strategy?

We believe that companies and investment managers that effectively address ESG issues, including climate change, are more likely to improve shareholder value and improve the Plan’s investment performance over the long term – which helps pension plan members. What’s more, failure to identify and mitigate ESG issues or identify opportunities may hurt long-term investment performance. More information on this is provided below.

How Does OPB Oversee IMCO’s Performance on ESG?

We have an ongoing monitoring program that helps to assure OPB that IMCO is prudently managing the PSPP assets, identifying strong investment opportunities and effectively managing investment risk. This includes monitoring how IMCO incorporates ESG, including climate change.

OPB’s Chief Investment Officer (CIO) and other executives meet regularly with IMCO’s Sustainable Investing leadership team to discuss its progress against key objectives as well as any emerging issues. IMCO’s Sustainable Investing team meets annually with OPB’s Board of Directors to provide an update on its progress against its key objectives.

OPB’s Beliefs

We believe in the importance of being a responsible investor, aligned with our commitment as a signatory to the United Nations Principles for Responsible Investment (PRI). This starts with articulating our beliefs as an organization and institutional investor and extends through our policies governing the portfolio and how it is invested by IMCO.

See page 16 of our 2022–2023 ESG Report for more information about our investment beliefs.

IMCO’s Approach to ESG and Sustainable Investment

IMCO’s Responsible Investing Policy governs how it invests across all asset classes. The application of the Policy is built on four pillars:

  1. ESG integration – recognizes that environmental, social and governance factors can pose material financial risks and, therefore, seeks to factor into the investment due diligence process the ESG criteria that might impact the financial performance of investments;
  2. Stewardship – using investor influence to support long-term value creation and sustainable outcomes, either through engagement with a company’s leadership or through proxy voting on proposals advanced by either management or shareholders at a company’s Annual General Meeting;
  3. Sustainable Investing – investing in opportunities created by sustainability and climate trends; and
  4. Screening – consciously excluding potential investments that conflict with ESG objectives from the portfolio.

IMCO considers all relevant material factors across the investment life cycle. ESG focus areas within IMCO’s investment process include climate change, DEI and corporate governance.

See page 22 of our 2022–2023 ESG Report for more information about IMCO’s Responsible Investing pillars.

Climate Risks and Opportunities Highlights

40%
reduction in IMCO’s portfolio carbon emissions intensity since 2019
44%
of IMCO’s externally managed assets are managed by external managers with Net Zero commitments
68%
of shareholder proposals on environmental and social issues supported by IMCO when casting proxy votes

See page 25 of our 2022–2023 ESG Report for a more comprehensive look at IMCO’s approach to addressing climate change risks and opportunities.

Investing for the Long Term Means Responding to Change

Since the Industrial Revolution, disruptive shifts have impacted how we live our lives, the products we buy and our perception of responsible business practices. How companies respond to these changes ultimately determines how well they perform and whether they survive. Long-term investors like pension funds always need to look to the future, seeking to identify the emerging risks and opportunities for portfolio returns.

Climate Change

OPB Is Working With IMCO to Address Climate Change

OPB believes that climate change poses a material and increasing risk to, as well as significant opportunities for, a range of assets it may invest in, and that comprehensive consideration of the risks and opportunities is necessary to fully evaluate expected returns from investments.

As part of the governance regime, OPB has an ESG Policy that articulates how we address ESG issues, including climate. Given OPB’s recognition of the urgent need to address climate change, climate risk is a prominent part of the Policy. The Policy includes expectations around IMCO’s progress and achievement towards net-zero greenhouse gas (GHG) emissions as well as comprehensive reporting against the Task Force on Climate-related Financial Disclosures (TCFD), a best practice framework for disclosure on climate-related risks and opportunities by investors and companies.

OPB interacted extensively with IMCO as it developed its climate strategy and Climate Action Plan in 2021 to provide feedback and to understand the activities IMCO planned to undertake. OPB continues to interact with IMCO regarding the progress it is making against its objectives.

As part of the 2021 climate strategy and Climate Action Plan, IMCO committed to achieving a net-zero emissions portfolio by 2050 or earlier. IMCO subsequently set an interim target of achieving a 50% reduction by 2030 in emissions intensity from its 2019 baseline as well as making a commitment to invest 20% of its portfolio in climate solutions by 2030.

IMCO’s interim emissions reduction target is aligned with science-based net-zero pathways developed by the Intergovernmental Panel on Climate Change, International Energy Agency, Networking for Greening the Financial System and One Earth Climate Model.

Understanding Greenhouse Gas Emissions

OPB believes climate change poses a material and increasing risk for various assets we may invest in. It also creates investment opportunities in, for example, GHG mitigation or reduction technologies. Acting on these risks and opportunities requires careful consideration of potential hazards and possible benefits and a thorough understanding of metrics and issues related to climate change and GHGs.

Understanding the Path to Net Zero

How Do You Ensure Actual Emissions Decrease?

As do many of its peers, IMCO uses an emissions intensity measure (i.e., metric tonnes of CO2 equivalent emissions per million dollars invested) for its net-zero targets. This makes sense when one acknowledges that IMCO manages assets for several clients with varying asset allocation.

However, one of the drawbacks of an emissions intensity measure is that actual emissions are just one part of the equation. In other words, net emissions could be unchanged but if the value of the assets increases, the intensity measure will go down. It’s equally important to note the fact that a portfolio which is net zero will also have net emissions of zero, so ultimately the intensity and absolute reduction in emissions are aligned.

Additionally, there are a couple of other factors that could cause IMCO’s carbon footprint to fluctuate up and down over the short term, including:

  • Asset allocation: Changes to our SAA may lead to fluctuations in emissions due to varying levels of emissions across the range of asset classes that OPB invests in, as well as differing availability and quality of emissions data across different asset classes and markets.
  • Methodological advancements: Emissions measurement methodologies are expected to continue to improve and become more reflective of actual emissions (currently, estimates are used where data quality is poor or unavailable). Going forward, consideration of changing methodologies and data availability may be required when comparing IMCO’s portfolio emissions over various time periods.

A Work in Progress That Will Vary on an Annual Basis

It’s important to understand that the path to reaching the interim emissions targets, and subsequently, the 2050 net-zero targets, may not always be a straightforward decline with year-over-year, linear emission reductions. While IMCO will, of course, track annual performance, it is important to consider the trend over several years to ensure the general portfolio emission trajectory is tracking down.

How Did IMCO Vote in 2022?

Stewardship

IMCO’s Responsible Investing Policy governs how it invests across all the asset classes and it includes a focus on active stewardship, or using investor influence to support long-term value creation and sustainable outcomes. One of the stewardship approaches is proxy voting, which refers to votes that shareholders in a company cast, usually at an Annual General Meeting, on various corporate issues. Management and shareholders can both put forward proposals to be voted on.

OPB expects IMCO to influence investee companies through engagement and shareholder voting to improve corporate practices. We view proxy voting as an important tool to encourage companies to provide adequate disclosure to shareholders relating to ESG factors, policies and initiatives. IMCO exercises voting rights for all securities OPB has exposure to, in accordance with its Proxy Voting Guideline.

Climate

IMCO voted against 59% of climate resolutions put forward by companies in 2022 as they did not meet the expectations for climate strategies as set out in IMCO’s Proxy Voting Guideline.

OPB and IMCO expect companies we invest in to set a net-zero target by 2050 or sooner (with science-based short- and medium-term emissions reduction targets) and disclose activities in line with TCFD recommendations.

DEI

Both OPB and IMCO are members of the 30% Club Canada and expect at least 30% of a company’s Board of Directors to be represented by women. We also expect boards to consider all forms of diversity in the director recruitment process, not just gender.

In 2022, IMCO voted against or withheld votes from directors at 574 companies due to a lack of board diversity.

Shareholder Proposals on ESG Issues

IMCO voted on 385 shareholder proposals submitted on environmental and social issues and supported 68% of them that met its criteria, including:

  • 94% of the shareholder proposals requesting that our portfolio companies conduct human rights risk assessments, improve human rights standards or policies, and conduct racial equity and/or civil rights audits.
  • 78% of the shareholder proposals requesting portfolio companies to put their climate strategy to a shareholder’s vote and to improve their climate-related disclosure.
  • 88% of the shareholder proposals that requested companies to provide enhanced shareholder rights.

Case Studies

Acting in accordance with OPB’s SIP&P, IMCO incorporates ESG considerations into the investment process, to better manage risk and generate sustainable, long-term returns.

Case study

KingSett Capital: Leader in the Global Real Estate Sustainability Benchmark

Many real estate investments are private assets. It can be significantly more difficult for investors to obtain ESG information on these assets compared to “public” assets such as stocks and bonds. GRESB, formerly known as the Global Real Estate Sustainability Benchmark, was created in response to this challenge. GRESB collects, validates, scores and independently benchmarks ESG data on real assets such as real estate and infrastructure, to allow investors to better evaluate the ESG performance of funds in these asset classes.

In 2022, IMCO’s commercial real estate partner, KingSett Capital, was recognized as a global sustainability leader by GRESB for the second year in a row, ranking first in North America and first globally. According to the World Economic Forum, real estate drives approximately 40% of global carbon emissions and there is increasing interest among both customers and investors in sustainable real estate and the opportunities it presents.

Case study

Kohlberg & Company: Advancing Carbon Footprinting in Private Equity

Private equity investments involve taking ownership, or an ownership stake, in a company that is not publicly traded on the stock market. Investment in private companies can offer investors stable returns and diversification, but private companies’ disclosure of ESG information is often limited, preventing investors from comparing their ESG performance. It can also be difficult – and cost-prohibitive – for smaller private companies to measure the carbon emissions of their business. Despite these challenges, IMCO’s private equity strategic partner, Kohlberg & Company, has succeeded in improving the carbon footprint measurement of its portfolio companies. One hundred percent of Kohlberg’s portfolio companies completed a baseline carbon footprint in 2022, up from 67% in 2021.

Case study

Verisk Analytics: Creating Value Through Governance Engagement

Corporate governance refers to the system of rules, practices and processes by which a company is directed and controlled. Good governance practices underpin a company’s ability to effectively address risks of all kinds, including environmental and social risks. Consideration of a company’s governance is part of IMCO’s ESG integration process.

For example, during IMCO’s pre-investment due diligence on Verisk Analytics, a multinational data analytics solutions provider to international insurance markets, they noted governance issues relating to a classified board structure, and combined CEO and Chair roles, as two key areas for engagement. Following IMCO’s engagement with the company and feedback from other investors, management moved to eliminate the classified board structure, separated the roles of the CEO and Chair effective at the 2022 annual meeting, and refreshed the board by appointing four new directors.

Taking Part in Collective Engagement

Over the course of 2022, IMCO partnered with other investors to engage with portfolio companies, policymakers and the broader financial industry. These efforts included:

Climate Action 100+

As a member of Climate Action 100+, IMCO participates in collective engagements with the world’s largest corporate GHG emitters, encouraging them to take action to improve climate change governance, cut emissions and strengthen climate-related financial disclosures.

ESG Data Convergence Initiative

IMCO has joined over 100 general partners (GPs) and limited partners from across the globe working to streamline the private equity industry’s historically fragmented approach to collecting and reporting ESG data. Data from GPs is aggregated into an anonymized benchmark covering GHG emissions, renewable energy, board diversity, work-related injuries, net new hires and employee engagement, enabling greater transparency and more comparable portfolio reporting in private markets.

30% Club Canada

As a member of the 30% Club Canada, IMCO and fellow investor members wrote a joint updated statement of intent. The new statement calls on publicly traded companies to take prompt and considered action to achieve and exceed a minimum of 30% women on boards and at the executive management level, and to increase the presence of other underrepresented groups on their boards and among their executive managers.

Canadian Coalition for Good Governance

Through its CCGG membership, IMCO promotes good governance practices at Canadian public companies and an improved regulatory environment to better align the interests of boards and management with those of their shareholders. In 2022, IMCO’s Vice President, Head of Responsible Investing, sat on CCGG’s Environmental & Social Committee and supported CCGG’s public policy submissions, guidance and research.

Screening
(Excluded Investments)

OPB recognizes the importance of considering ESG-related risks within our investments. There are several approaches that investors can adopt when companies or sectors are exposed to a high level of ESG risk: they can choose to engage companies to address the risks; or, if the risks are deemed to be too high, they can exclude the companies from investment (also known as screening).

Generally speaking, OPB believes engagement is more effective than exclusion or screening. We believe investors can exert an important positive influence on companies through engagement and proxy voting on ESG, but this is only possible if they retain their seat at the table, which means remaining invested.

To read IMCO’s Screening Guideline, visit IMCOInvest.com.

That said, IMCO has established a Screening Guideline to identify investments where it believes the risks associated with these categories outweigh any potential rewards. These investments are currently identified as follows:

  • entities sanctioned under Canada’s Special Economic Measures Act or United Nations Act;
  • companies involved in the production of controversial weapons such as antipersonnel landmines, cluster munitions, and chemical, biological and nuclear weapons;
  • companies that derive over 10% of revenue (as measured on a three-year rolling basis) from manufacturing firearms and small arms ammunitions for civilian markets;
  • companies that derive more than 10% of revenue (as measured on a three-year rolling basis) from the operation of for-profit prisons and detention centres;
  • companies that derive more than 10% of revenue (as measured on a three-year rolling basis) from the production of tobacco products;
  • companies that derive more than 10% of revenue (as measured on a three-year rolling basis) from thermal coal mining; and
  • companies that derive more than 10% of revenue (as measured on a three-year rolling basis) from Arctic oil and gas production.