With 15 different client organizations, including nine public sector pension plans, the Alberta Investment Management Corp. has opted to engage, rather than divest, from certain investments, particularly those in the energy sector.
“One of the things we were very clear on, both for ourselves and in talking to clients, is that divestment wasn’t the way we wanted to go,” says Carmen Velasquez, the investment organization’s managing director of sustainable investing. “One of the things we talk a lot about is, if you divest, it’s not real world decarbonization — you’re divesting on paper, but the emissions are still there.”
Read: Russia divestment promises by U.S. pension funds largely unfulfilled
By helping companies move from “grey to green,” the AIMCo is helping investees become more sustainable while retaining the current size of the investable universe, she adds. “We looked at who are the top emitters [in our portfolio] and a lot of them are in the public equity space, but they can also be in the illiquid space. We help a lot of companies within infrastructure, for example, that will be high emitting. . . . It has been interesting for us because there are times where we’ve connected portfolio companies to say, ‘OK, this company is really early in their journey. Will you talk to them about how you did that? Because you’re going to face the same issues.’”
Growing calls
Amid the increasingly apparent effects of climate change and rising geopolitical tensions, calls are growing for divestment from certain assets and industries.
In the first weeks following Russia’s invasion of Ukraine in February 2022, several Canadian institutional investors divested their holdings in the country. The AIMCo and the British Columbia Investment Management Corp. — which, at the time, held roughly $99 million and $107 million, respectively — were the first to divest, followed shortly by the Investment Management Corp. of Ontario and the Ontario Pension Board, which held $115 million and $107 million, respectively.
However, calls for divestment from Russian assets weren’t heeded by all institutional investors. According to a 2022 report by the Associated Press, six months into Russia’s invasion of Ukraine, most of the pledges by U.S. pension funds, university endowments and other public sector holdings to drop Russian investments were unfulfilled. Swift global reaction cut off much of Russia’s economy from the rest of the world, making it nearly impossible for these large institutional investors to divest, as well as private investments such as those in 401(k) accounts.
Read: 91% of Canadian institutional investors say climate change is top ESG concern: survey
Key takeaways
• By engaging portfolio companies instead of divesting from them, institutional investors and money managers can help investees become more sustainable while maintaining returns for plan members.
• With calls for divestment more likely to come from external activist groups as opposed to plan members, institutional investors must carefully assess all divestment decisions.
• Traditional energy assets will continue to be a viable source of investment returns as the world gradually transitions to sustainable energy.
And in the wake of ongoing conflict in the Middle East that flared up again in October 2023, universities across North America have faced growing calls to divest from companies linked to Israel’s military, bolstered by student protests.
In terms of climate change, a February 2024 survey by Millani found a vast majority (91 per cent) of Canadian institutional investors called climate change a leading concern within the environmental, social and governance space.
The City of Montreal is an example of these findings in action. The City, which manages the joint fund of the municipal employees’ retirement plan, said it intends to withdraw all investments from fossil fuel assets, according to a report published by the Canadian Press in May. In the report, Montreal Mayor Valérie Plante said the city is working to repatriate nearly all of its roughly $10 billion worth of investments, of which just 23 per cent is currently managed locally.
Many of the calls for divestment originate with external activists as opposed to plan members, says Arijit Banik, treasurer at York University, noting the university’s endowment fund holds indirect investments in energy assets through public equities.
“Because it’s easier to understand, they’ll usually target equity holdings. In terms of private assets, we don’t have anything that [we can divest from].”
Since 2019, York has increasingly reported on its various assets through the lens of sustainable invest-
ing, including the ESG efforts of its investment managers, he says, adding divestment can be a slippery slope for institutional investors.
“I do feel that if you open yourself up to divestment once, then you’ll always keep coming back to it. It’s not that we have anything fundamentally against the arguments, except that universities should be about promoting open dialogue. Our capital pools should not be about promoting one’s set of political ideologies.”
The role of money managers
Calls for divestment that once targeted investments in energy producers have expanded in recent years to include divestment from related infrastructure, such as oil pipelines.
Read: IMCO, OPB to divest Russian holdings
However, since the transition to sustainable energy sources is a long-term objective, traditional energy will continue to play a role in fuelling the global economy for the foreseeable future. In that regard, institutional investors and their money managers can engage with portfolio companies to help improve sustainability, says Mary Jane McQuillen, portfolio manager and head of environmental, social and governance at ClearBridge Investments.
“There is no silver bullet. We have to work on as many [energy transition] solutions as we can over time [and] those solutions will come from various players and sectors.”
ClearBridge has worked with several energy sector companies in this way, she adds, including helping pipelines to reduce fuel leaks. “If you have thousands of miles of pipe, you’re going to have leaks for various reasons, such as ageing infrastructure. . . . They’re now using technology such as drones to identify and immediately stop those leaks.”
Investment managers can also engage financial institutions that help fund projects and companies involved in controversial sectors. “While they’re not emitting carbon dioxide and methane or digging holes into the ground, banks help finance or get loans to the companies that want to start those projects,” says McQuillen. “We’ve been able to engage banks and have oversight on the types of loans they give and put conditions on those funds [so they’re put] towards the green energy transition. The banks have a big role to play there because they can set terms and give discounts. If your project is more sustainable or greener, you could get lower rates.”
Read: AIMCo, BCI to divest Russian holdings
An engagement approach can also minimize risk while adjusting for the best investment outcome for institutional investment clients, says Pasquale Posteraro, portfolio manager for Desjardins Global Asset Management. “It’s really a powerful lever for change when it comes to encouraging companies to adopt a better sustainable practice. . . . We always favour inclusion over exclusion, because every investment is an opportunity for dialogue, influence and a clear understanding of a company’s strategy.”
To that end, Desjardins established a method to monitor and process portfolio companies’ commitments to sustainability. As of Dec. 31, 2022, more than 55 per cent of the money managers’ sustainability objectives were met.
The importance of data
When engaging with investee companies, the role of data — both qualitative and quantitative — is becoming more central.
In 2016, when the AIMCo began establishing a carbon footprint for its public equities portfolio, it had access to a wealth of data from companies, drawn from sources such as the Carbon Development Project, a not-for-profit organization in charge of a global environmental disclosure system for investors and companies.
However, developing a carbon footprint for the investment organization’s private equity portfolio proved more challenging, according to Velasquez. When the AIMCo adds a new real estate or infrastructure investment to its private equity portfolio, the asset is asked if it would be interested in joining GRESB, the global real estate sustainability benchmark.
“They’ll calculate emissions and from there, the company can know what to do. We now have about 85 per cent [GRESB] coverage within infrastructure on reported emissions. We still have to estimate in other areas where it’s hard to get data, but at least for the assets where we have high emitters, we actually have pretty good coverage.”
The data gathered from these sources has also helped the AIMCo develop a climate taxonomy to identify which portfolio companies are considered green, grey or transition assets, based on emissions and transition readiness.
Read: 67% of asset owners say ESG factors increasingly material to investment policy: survey
However, when tracking sustainability of investments, there are other external factors for institutional investors and money managers to consider, says Posteraro. “Let’s say a company does an acquisition. We really need to funnel and understand that data and really make sure that when we compare it, it’s apples to apples. The result depends on the value and the data they’re using.”
Moving target
In 2015, Simon Fraser University began exploring strategies to de-carbonize its endowment portfolio and, through consultations with asset managers and subject matter experts, settled on adopting carbon reduction targets.
In December 2021, it announced the global equity portfolios for its non-pension related funds — valued at $450 million — would divest from fossil fuel producers. Four months later, the university’s treasury team had reached that target.
Read: 2023 GIC coverage: How Simon Fraser University is divesting global equities of fossil fuels
York University’s Banik takes an alternate view, contending that investment portfolios are naturally inclined to shed companies that are typically targeted by divestment calls, regardless of whether a target has been established. “Things are going to change over time. The portfolio will just naturally have less and less of the companies that people are protesting against because they just won’t be economically viable.
“We know where we have to go ultimately [and] I think the whole idea of target-setting can become a mechanical approach as to what you’re supposed to be doing,” he adds. “That’s not how economies work and that’s not how the industrial civilization that we take part in works.”
Blake Wolfe is the managing editor of Benefits Canada and the Canadian Investment Review.
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