The heads of Canada’s eight largest pension funds, collectively responsible for $1.6-trillion in assets, are banding together for a rare joint request, pleading with corporations to beef up their environmental, social and governance disclosures by reporting the data in a standardized fashion.
ESG factors, such as diversity initiatives and carbon footprint disclosures, have become crucial investment criteria for institutional money managers in recent years, but the way in which companies report these risks and commitments is akin to the Wild West.
To streamline decision-making, Canadian pension fund chief executive officers have worked for the past six months to mutually agree on the best frameworks for companies to use – those from the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures.
The leaders backing the initiative include the CEOs of Canada Pension Plan Investment Board, the Caisse de dépôt et placement du Québec, Ontario Teachers’ Pension Plan and PSP Investments, which manages the pensions of federal government employees and the Royal Canadian Mounted Police.
Many of the funds have already been vocal about improving ESG disclosure, but the joint request marks the first time all eight have come together. “We’re going to have a lot more impact on changing behaviours if we speak as eight organizations representing $1.6-trillion,” PSP Investments CEO Neil Cunningham said in an interview.
The initial spark for the idea came in May when the pension fund heads got together for their biannual meeting with the Governor of the Bank of Canada. In a discussion among themselves afterward, Mr. Cunningham expressed frustration with the “alphabet soup” of organizations that have made disclosure recommendations. What the funds wanted, he said, was “a consistent, transparent means of measuring ESG impacts and risks.”
Canadian corporations not only lag their U.S. counterparts by a wide margin in disclosing climate risks, according to Montreal-based ESG consultancy Millani, but of those that published a sustainability report in 2019, the disclosures varied widely.
Roughly two-thirds of companies used what is called the Global Reporting Initiative, or GRI, to guide their reporting, according to Millani, while about one-third used an ESG framework from the Sustainability Accounting Standards Board, or SASB.
The SASB standards, which the pension funds back, were published in late 2018 after six years of research, and they include 77 industry-specific frameworks. They also include climate-related financial disclosure recommendations released in 2017 by the Task Force on Climate-related Financial Disclosures, or TCFD.
The TCFD was created by former Bank of England governor Mark Carney in 2015, and the organization’s goal is to help investors, lenders and insurers understand which companies will endure or even flourish as the environment changes and new technologies emerge, according to its mission statement.
PSP’s Mr. Cunningham stressed that tracking such details is crucial for making investment decisions. “Companies that are more involved and understand ESG risks better, and disclose risks completely … tend to outperform those that don’t,” he said. “The ability to identify those outperformers will increase our returns, and then benefit our beneficiaries. This is just smart investing.”
The full list of Canadian pension funds backing the disclosure request is: Alberta Investment Management Co., British Columbia Investment Management Co., the Caisse, CPPIB, Healthcare of Ontario Pension Plan, Ontario Municipal Employees Retirement System, OTPP and PSP.
Bank of Canada Governor Tiff Macklem is also endorsing the push. “A strong commitment to environmental sustainability, diversity and inclusion and good governance principles will not only make our economy and financial system more resilient, it’s also the right thing to do,” he said in a statement. “Leadership from Canada’s financial sector is essential as we focus on building an enduring and more equal economic recovery from the pandemic.”
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Tim Kiladze