How Canada’s large pension funds are approaching green investment disclosures

Read: Canadian green taxonomy plan could boost institutional investments: PIAC

Since the thoroughness of any financial disclosure is reliant on the data at hand, plan administrators depend on the reporting tactics of investee companies — and there’s still a long way to go for data to match the push for increased disclosures.

Better data needed

Bertrand Millot, head of sustainability at the Caisse de dépôt et placement du Québec, says he wants to see a more direct effort by financial market regulators at all levels to ensure an appropriate amount of disclosure by companies on their environmental impact and the risks they face from the effects of climate change. “Companies need to disclose more and disclose uniformly. This is why adhering to uniform standards is a good idea. . . . If companies don’t disclose, we don’t have any information.”

In addition to satisfying investors, it’s important for disclosures to help enact change because what is measured and accounted for serves as the basis for the standards that can be acted upon.

The only way leading companies and those looking to invest in them will understand and manage their environmental risk is if its measured and shared appropriately, he adds.

The reliance on reporting data from companies means institutional investors are at the whim of what a company decides to share, says Amir Akbari, assistant professor of finance and business economics at McMaster University. More accurate and concise data will help investors, researchers and the public understand what constitutes a green asset, since currently, environmental impact is measured with subjective methods, he adds. “It’s a very long way to go there.”

Read: Competition Bureau to speed development of guidance on new greenwashing rules

There also needs to be improvements to the specificity of the data shared by investee companies, including more material information in their disclosures, says Mary Jane McQuillen, portfolio manager and head of the environmental, social and governance investment program at Franklin Templeton Investments’ subsidiary ClearBridge Investments. “Some companies disclose very helpful information, some companies disclose nothing.”

Instead of offering meaningful information, there are still too many companies providing obtuse data that doesn’t directly translate to what the investment impact is.

“They’ll disclose something that sounds very sustainable,” she says, citing the example of companies that disclose the use of energy from renewable sources when, effectively, those sources only account for a small portion of a company’s total energy use. “[My response would be], ‘Thank you for telling us that, but what are you doing with [the rest] of your business? I want to know how that’s affecting my investment in you.’”

Sustainability disclosures connected to internal targets

The Caisse began to transition away from a carbon-dependent economy in 2015, following a visit by its former president and chief executive officer Michael Sabia to the United Nations Climate Change Conference, during which the Paris Agreement was originally signed.

This change was marked by four new guiding pillars at the investment organization, including the consideration of climate change in investment decisions, pursuing investments in green assets, decarbonizing its portfolio and engaging with companies, the public and government to push for responsible investment policy and increase understanding of these investments.

Read: Expert panel: How transition investments can help institutional investors reach net zero

At the time, the Caisse was aiming to reduce its portfolio’s overall carbon footprint by at least 25 per cent by 2025. By 2021, the Caisse had already exceeded its initial targets, he adds.

After helping launch the United Nations-convened Net-Zero Asset Owner Alliance in 2019 as a founding member, the Caisse established new environmental commitments. Currently, the investment organization is looking to triple its green investments by 2025 and to cut emissions by 60 per cent by 2030.

In its 2023 sustainable investing report, the Caisse’s president and chief executive officer Charles Emond said close to 80 per cent of the total portfolio, or $330 billion, is invested in low-carbon or low-intensity assets.

Looking ahead, Millot knows pension funds face an iterative process with no real end in sight, as new goals and metrics continue to get propped up both internally and externally. “It’s a balance of ambition and prudence.”

Investors want to know more before they disclose

Like any other investment consideration, organizations are interested in guaranteeing effective due diligence so they may be able to communicate the risk and opportunity associated with a green investment.

McQuillen says investors are committed to reconciling their fiduciary duty with a proactive approach to incorporate long-term and sustainable factors in their process.

Read: ESG standards helping institutional investors realize positive annualized returns: study

“Asset owners want disclosure because they want to understand what they own, where the risks [and opportunities] could be.”

Many institutional investors have joined different alliances or networks that affirm their commitment to enhance sustainability disclosures and, in the process, also improve their own reporting commitments, she says. While these partnerships are critical, regulatory framework will be needed to create meaningful change in how companies consider their environmental disclosures.

How pension funds think of sustainability

The sophistication of sustainability reports by Canadian pension funds is a direct result of the emphasis on environmental changes and their impact on the health of the investment portfolio.

The Caisse is taking steps to improve its reporting as it represents a corporate alignment across teams to prioritize their green investment results. “There is more and more demand . . . . people [ask] us to be more transparent, provide more information about what we do and how our dollars are actually geared to try to improve the planet.”

More organizations are adding elements to their sustainability reports that show the public how strong their commitment to this long-term strategy really is. As part of its 2023 sustainability report, the Alberta Investment Management Corp. said it would commit to increased transparency efforts by way of four different reports — an integration report, a stewardship report, a climate-related financial disclosures report and a global real estate sustainability benchmark report for general ESG performance.

The AIMCo’s report noted the real estate sector faces increased risks from physical damage by extreme weather hazards since these are fixed location assets. Because of these imminent risks, the investment organization elected to screen all private, direct equity and debt investments in commercial real estate for physical clomate risk hazards as part of its due diligence process.

Read: How will growing anti-ESG sentiment in the U.S. impact Canadian institutional investors?

At the University Pension Plan, disclosure reports help to monitor ESG factors that can affect the performance of the portfolio, says Brian Minns, senior managing director of responsible investing at the organization, adding he wants to see increased accuracy in reporting. “We develop policies, frameworks and different practices to help us incorporate these considerations of material issues into our practices.”

Transition assets help shape outlook for environmental disclosure

Transition investments — defined as assets with a strategy in place to effectively reduce their carbon footprint or improve their overall environmental impact with clear and specific goals in mind — play a critical role in the emergence of sustainability disclosures since most industries are still at the early stages of measuring environmental impact.

However, there needs to be increased clarity around how to measure transition strategies and what exactly constitutes a green asset, says Minns. Moving forward, he wants to see the development and implementation of a new category that could help track the trajectory of decarbonization that characterizes an investment as a transition asset.

“The sooner we can have those definitions and they can be globally accepted, the more that will facilitate the flow of capital in the economy and between investors and those that are seeking to decarbonize.”

New metrics pave way for clear, consistent reporting

On Jan. 1, the International Sustainability Standards Board — an association formed in 2021 under the International Financial Reporting Standards Foundation — introduced its first standards, IFRS S1 and IFRS S2.

These new investment metrics pull from initiatives such as the Climate Disclosure Standards Board, the Task Force on Climate-related Financial Disclosures and the Climate Disclosure Standards Board. An organization committing to these new standards will have to provide a thorough set of sustainability-related financial disclosures, including risks and opportunities arising from climate-related events with both physical and transition risks.

The impact of these measures can already be seen in Canada following the launch of the first proposed standards by the Canadian Sustainability Standards Board in March. These standards borrow heavily from the ISSB’s sustainability metrics and align with their international counterparts.

In a public statement, Charles-Antoine St-Jean, chair of the CSSB, said the goal of these new metrics is to empower organizations so they may communicate their sustainability performance clearly and effectively, as well as push forward with meaningful changes to ensure a more sustainable future.

Read: New York City pension funds reach deal with RBC over clean energy funding disclosure

The trickling down of these international investment metrics are helpful for Canadian organizations to have a starting point which can be used to then build out their own internal measurement mechanisms, says Minns. “We don’t just start from scratch [and] a lot of work has been done [to] lay out what should be disclosed.”

A regular criticism volleyed at ESG investment guidelines is the confusion from several metrics resulting in ineffective results by companies wanting to improve their status. Despite institutional investors backing the ISSB guidelines, it’s possible these standards may add to a pile of rulings and cause confusion among investee companies. When the Caisse meets with corporate leaders, it suggests companies just pick one sustainability metric, says Millot. “Pick one [and] do it well, as opposed to do nothing or try to satisfy everybody.”

The role of plan member feedback

Canadian pension funds have increasingly engaged in the public disclosure of their environmentally minded investments and actions through a variety of sustainability reports. At some organizations, these reports have evolved from standard reporting disclosures to sophisticated documents containing thorough information for the public.

“An important aspect of putting these reports together is understanding who our audience is and what they want to know,” says Minns.

Read: Canadian pension leaders urging sustainability regulator to modify new disclosure guidelines

Once the target audience has been considered, he says organizations must ask themselves why they’re conveying the information, while balancing how much they’re willing to disclose compared to how much stakeholders want to see.

Indeed, some reports include surveys of plan members to gauge their interest about sustainability topics and showcase their questions about the role of ESG standards or the financial impact of climate-related investments. As part of its inaugural ESG report, the Ontario Pension Board asked plan members to share their thoughts on the importance of ESG in the investment mandates of the plan. The investment organization said the feedback would help inform its communications strategy.

The UPP makes attempts at engaging plan members directly through surveys, online forums and from time-to-time direct dialogue, says Minns. “I really value those dialogues with our members a lot . . . and it really helps us understand what’s important to them.”

Similarly, consultation with stakeholders helps the Caisse to ensure alignment on investment strategies across the board, says Millot. “In the end, what really matters is returns.”

Bryan McGovern is an associate editor at Benefits Canada and the Canadian Investment Review.