Whether the aim is to reduce material risk, align pension investments with the organization’s overall philosophies or address a moral imperative, no pension fund wants to go through the trouble of diving in only to find its assets aren’t as green as it thought.
With no standardized metric in existence, the word “green” could have a variety of definitions. An extreme example is a Chinese power company, Tianjin SDIC Jinneng Electric Power Co. Ltd., which issued one billion yuan worth of green bonds to finance a 2,000-megawatt coal-fired power plant in August 2017.
So how can plan sponsors steer clear of greenwashing, a term referring to strategies and vehicles labelled as being environmentally friendly but with shaky validity at best? And how can consultants and money managers prepare for the questions pension funds are becoming more likely to ask?
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Part of the challenge is getting service providers on board in the first place. In the case of Simon Fraser University’s academic pension plan, trustees have faced a number of challenges in their search to align its investments more fully with environmental stewardship, even after identifying certain funds that looked to be a good place to start.
“For the low amount of assets that we’re putting into them . . . it often was going to be too expensive to pay the listing fee to get our record keeper to carry those funds,” says Stephanie Bertels, co-chair of the university’s defined contribution plan.
As the search continues, she has discovered two types of money managers. There are those that anticipate questions on environmental issues and are ready, at least in part, to begin to answer them. Then there are those that don’t understand why an issue like climate change would be up for discussion during a meeting.
Consultants, Bertels adds, also have some catching up to do, especially in dealing with a plan like hers. “A lot of trustee boards rely on asset consultants, and many have been remarkably slow to develop expertise in this, and that’s unfortunate.”
Detective work
In an effort to standardize the trustees’ selection process for the fund’s service providers as it grows, Bertels has created questions to ensure they discuss the same issues with every asset manager.
When approaching managers, Bertels asks how they factor environmental issues into their asset selection process. She also asks to see their proxy voting policy and the records of votes they’ve made in the past. At the moment, there’s more visible activity on issues of corporate governance, while environmental and social matters have tended to be a lower priority, she says. If a manager is truly serious about implementing environmental strategies, it will show up in its proxy votes, she adds.
THE RAPID GROWTH OF GREEN BOND ISSUANCES WORLDWIDE
2016:
US$93.4 billion
2017:
US$155 billion
2018:
US$250 billion*
* Projection for 2018
Source: Moody’s Investors Service Inc.
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One way various investors assert their greenness is by becoming a signatory of the United Nations Principles for Responsible Investment, says Nalini Feuilloley, the organization’s head of Canada.
Feuilloley says investors should be thorough in evaluating firms that tout their commitment to standards, such as the UN principles, but aren’t ready with the details of how they could apply them with a pension plan’s specific strategies in mind.
“Dig deeper than the byline,” she says, suggesting that while a vocal commitment to responsible investing is commendable, investors should look to identify the person or team at the firm whose responsibility it is to act on those policies.
The need for nuance
As the Chinese example shows, asset management and consulting firms aren’t the only places where there may be a gap in green credentials. But when it comes to not living up to their purported greenness, not all scenarios are as obvious. Poland, for example, issued a second round of sovereign green bonds in January 2018, but the country’s widely used coalbased energy infrastructure was enough to deter Switzerland-based Lombard Odier Investment Management from subscribing to them.
A nuanced scenario like that isn’t one where Canadian pension plans would feel comfortable taking such a confident view, says Irfan Hassan, a manager and research associate at Morneau Shepell Ltd. There’s a sense, he notes, that smaller plans are in a wait-and-see mode and are still reluctant to take the first step on environmental issues. Even for Canada’s largest pension funds, the approach is far from complete, he says.
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There’s a similar need for nuance in assessing whether greenwashing is taking place on the equity side, says Eoin Fahy, head of responsible investing at Dublin-based KBI Global Investors Ltd.
“Nowadays . . . [managers] look at green performance criteria for every stock we invest in. Perhaps there will be cases where a company is not particularly green, but it still makes it into the portfolio because while it scores badly on green issues, it scores so well on other areas that there might still be a case for putting it into the portfolio.”
For Fahy, it comes down to evaluating whether an equity fund is effectively living up to its marketing. “If the fund in question . . . is being marketed as a green only fund that only invests in the best of the best in class and you see a stock in there that you know is not very good on green issues, then I think you can be very suspicious. But if it is a fund that is marketed as, ‘We take green issues into account in every part of our investment process’ . . . then some less than obviously green stocks would be acceptable.”
In its case, investment firm Unigestion eliminates the need to rely on the willingness of companies to be transparent about their carbon footprints, as one environmental data point, by hiring a third-party research firm to suss out the right information.
“What we really liked about [the firm’s] methodology was that they did not rely on companies’ publications but referred to a very granular, sector-based model of emissions and then apply it based on the income statement of the company,” said Alexandre Marquis, head of client portfolio management for equities at Unigestion. “Thus, they would be able to estimate emissions for a wide range of companies.”
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The data Unigestion uses in making investment decisions includes several types of carbon releases: direct emissions from the company, as well as those from both its energy and non-energy suppliers. It then adjusts the data to create a standardized unit of measurement, called carbon intensity, that it can apply regardless of a company’s size.
“Obviously, a very big company will have more emissions than a small one, if they have a similar business,” Marquis noted. “In a practical way, it gives instantly what is the amount of carbon [and other greenhouse gases] a company needs to emit when generating US$1 million of revenues. This really gives the carbon efficiency of the company.”
Martha Porado is an associate editor at Benefits Canada.