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The Ontario Teachers’ Pension Plan logo is seen in this file photo.

There was a lot more than profit at stake for Ontario Teachers' Pension Plan when it struck a deal to invest in mining giant Glencore PLC.

In a sign of a shift in the way big institutional investors think about the way they deploy capital, the pension fund's investment committee's many discussions about the royalty and streaming arrangement, announced in early December, were loaded with questions about health, safety and environmental issues.

"There are many mines in that deal, by different operators. We wanted to have an understanding of who are those operators?" said Barbara Zvan, chief investment risk officer at Teachers.

"When we looked at their practices, were they leading, were they lagging, were they about average? And how do we make sure, in this ongoing relationship, that Glencore understands our expectations as a partner."

Teachers isn't alone in such concerns. While the sustainability of investments has long been top of mind for the country's largest pension funds, which typically keep their holdings for longer than private equity and other fund counterparts, there was a surge in the promotion of responsible investment issues in 2017.

These considerations, often referred to as environmental, social and governance (ESG) factors, can have an impact on the returns an asset can offer, and protect – or harm – the credibility and reputation of the investors that back them. And as ESG becomes an increasingly important term to investors, it's changing the expectations of public and private businesses in search of capital.

Over the course of the past year, top brass at pension funds spoke out against the trouble with short-termism in the investment world and set bold targets for trimming their portfolio exposure to fossil fuels.

The most public effort to curb exposure to carbon-heavy industries came from Caisse de dépôt et placement du Québec, as it pledged to reduce the impact of climate change on its overall portfolio in a measurable way this fall, promising to cut its carbon footprint by 25 per cent by the year 2025. It also plans to increase investments in renewable energy and other low-carbon assets by 50 per cent, or $8-billion, by 2020. And in 2018, the Caisse also plans to boost its shareholder engagement efforts.

"We vote on over 40,000 resolutions a year for publicly listed companies. More and more people are submitting resolutions on climate change and we will be playing a really active role there, similar to the way we have on board composition or board compensation," said Kim Thomassin, executive vice-president of legal affairs and secretariat at the Caisse.

Climate-related exposure is set to be a major topic of consideration for investors and their public and private market investments in the coming year. The Canadian Securities Administrators (CSA), an umbrella group representing the country's provincial and territorial regulators, is expected to release the findings from their review of disclosure of risks and financial effects associated with climate change in the coming year. And last year, a task force founded by the G20's Financial Stability Board, which is chaired by Bank of England Governor Mark Carney, set out its recommendations for better climate-related financial disclosure. In the spring, a new knowledge hub will launch to provide guidance and tools to help businesses implement these frameworks, and investors say they will be looking for more standardized disclosure.

Mark Machin, chief executive officer of the Canada Pension Plan Investment Board, says more investors around the world are focused on risks associated with environmental, social and governance factors, adding that climate risk has been a sustainable investment priority for CPPIB for about a decade. "We've been working on this and working on making sure we have the tools available to assess climate risk."

The fund's other sustainable investment priorities include water, human rights and executive compensation, and aligning its investments toward longer-term holding periods. The fund also aims to be an influencer when it invests in a company, and it voted on nearly 52,000 resolutions in 59 countries around the world in 2017.

For Canadian funds, however, there is some sensitivity required when analyzing a business's exposure to fossil fuels.

Canada's natural-resource sectors make up about 16 per cent of nominal GDP, according to government data, with energy accounting for the bulk of that. But when it comes to capital investment, energy, mining and forestry have an even larger footprint, with 38 per cent of non-residential capital investment, or $90-billion, in 2016. Many of the country's largest companies do business in extractive industries and their operations are in more than 120 countries around the world.

That's a major local market for pension plans to consider, especially for the funds that have many contributing members working in these industries. Navigating the so-called energy transition toward renewable power sources is putting pressure on funds such as AIMCo, which represents the investments of 32 pension, endowment and government funds in Alberta.

"We know the direction we need to head," said Kevin Uebelein, CEO of AIMCo. "What that means in terms of the timeline for AIMCo, who does rely on carbon-based cash flows to pay for pensions for hundreds of thousands of Albertans, it's going to be a different definition than perhaps someone else."

Mr. Uebelein says that when it comes to making progress on issues associated with environmental, social and governance factors, his more immediate concern for the coming year is to improve gender diversity among the ranks of company directors. Three years ago, securities regulators set requirements that companies annually disclose the number of women in executive positions and on their boards. Since then, the number of women in board seats inched up from 11 per cent to just 14 per cent at Toronto Stock Exchange-listed companies. But Alberta lags even these tallies, Mr. Uebelein said.

"This is less of an area, in my opinion, that there should be exceptions because of your locale. Alberta has some catching up to do," he said. "We're becoming incrementally more vocal and more engaged with our investment company around this notion of gender balance in the boardroom."

Making the right calls on potential effects can improve investment portfolio returns, but there's also the less measurable aim of securing the pension plan's reputation and brand.

In November, OPTrust said it would divest from the tobacco industry by the start of 2018. "There is no such thing as a safe level of consumption of tobacco products," Hugh O'Reilly, CEO of OPTrust, said in a statement. "They cause only harm. As a result, investments in tobacco do not align with our responsible investing principles."

Ms. Zvan at Teachers echoes the importance of being known as a reliable investor with consistent standards. The plan not only does due diligence on investments before taking a new stake, but also takes the sales process of an asset seriously.

"One thing we really are proud of is our reputation," she said. "We don't want to make an exit [with the wrong partner] – it's not worth the reputation damage."

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