Shifting Values Drive RI Growth

Group retirement savings leader sheds light on the shifting sands of ESG demand, fund selection, and risk oversight

“Driving the growth in responsible investing (RI) is a shift in society’s values”, says George Turpie, Senior Vice-President, Group Retirement Savings and Investments, at Canada Life.

In an Up Close interview with Benefits and Pensions Monitor, he said investors are showing more interest in investing in a way that helps support positive environmental and social change. They want greater transparency in how and where their money is invested. In fact, he says, “if there’s anything good that we can take away from the COVID-19 pandemic, it’s that we have an        increased desire that the products we buy, the companies we do business with and the places where we work show a commitment to the greater good.”

Another element is performance. Evidence suggests that considering environmental, social and governance (ESG) factors in investment decisions can contribute to improved risk adjusted returns, said Turpie.

And then there’s growing regulatory pressure. Governments and regulatory agencies around the world realize the financial sector can play an important role in meeting global challenges such as climate change. With that comes the need for improved reporting and higher disclosure expectations.

How important is sustainability?

Sustainability is important to all of us. Our planet is something we need to protect, whether it’s for us or our kids. Nothing’s going to matter if we can’t survive on the only planet we have to live on. When we think about responsible investing, sustainability, DEI (diversity, equity, and inclusion) and corporate purpose, we need to look more broadly than we have in the past and see opportunities where we can incorporate DEI and ESG considerations into the decisions we make. For example, consider our due diligence and investment manager oversight process. We assess how ESG is considered by all our investment managers ‒ this is an important part of our investment manager review.

What should plan administrators of DC plans look at when considering responsible investing funds for their plan members’ investment menus?

They need to make investment decisions that are expected to lead to the best investment outcome for the members. In broad terms, plan administrators should not make investment decisions where the ESG goals take precedence over financial return goals. The responsibility of the plan administrator is to have funds that will not sacrifice the financial objectives for the member’s retirement outcome.

To do so in the context of responsible investing, there are different elements to consider with respect to the funds offered. Investment managers that don’t factor ESG risks into their investment decisions are probably missing out on what could be an important performance-affecting consideration, so some degree of ESG consideration is expected. That’s because, we believe, ESG risks can be a material financial risk and considering them should be an important part of an investment manager’s approach to achieving strong investment returns.

It’s also important to understand who your plan members are and the fund choices they want. There may be cases where you have a core fund that’s not specifically ESG-focused and you also have a set of sustainable or ESG-focused funds as an option for plan members who want to add them to their savings portfolio. Whether it’s a sustainable fund or not, it’s important to still do your due diligence on whatever fund you add to your plan.

Do DC plan administrators have a fiduciary responsibility to include funds which consider ESG factors?

Under Canada’s existing legal framework, incorporating ESG considerations in investment decisions isn’t prohibited or required, nor is there an accepted definition of what constitutes ESG factors or considerations. However, plan administrators have a legal obligation to the financial interests of members, even in cases where a high-performing investment doesn’t meet ESG thresholds.

CAPSA (Canadian Association of Pension Supervisory Authorities) has issued draft guidance on using ESG factors to decide between two otherwise equivalent investment opportunities that could be compliant with a plan administrator’s fiduciary duties. The guidance cautions plan sponsors that “ignoring or failing to consider ESG factors that may be potentially material to a fund’s financial performance could be a breach of fiduciary duty” and that those factors shouldn’t be seen differently from other types of risks. However, this is still in draft and once finalized, is guidance and not a law.

How do you ensure that the funds you offer are meeting the expectations of sponsors and members?

We have an investment managers review team accountable for investment manager research and due diligence oversight. They meet with all our investment managers twice a year. It’s something we’ve been doing for 30 years, but we continue to enhance and modernize the process to ensure it is thorough and rigorous. For us, that’s an important tool. More recently, we’ve deepened the process through a thorough assessment of their ESG practices. Our review team assesses and verifies their investment decision making processes, ensuring the investment man- agers are doing what they say. We will also look at analytics on the funds to confirm the fund performance is behaving in a way that aligns with the investment manager’s objectives.

But we also have to be careful about that. Analytics are a tool, but they’re not the only tool and you really need to have that strong investment manager review and due diligence process to get a full assessment of the investment managers. Factoring in ESG doesn’t necessarily mean you’re making decisions based only on an ESG lens. It does mean you’re factoring it into your investment decisions.

Why is it important for investment managers to consider ESG risks?

A company that ignores or has poor oversight of ESG risks can see it affect their bottom line through a wide range of risks, including financial legal penalties. For example, rising temperatures are causing prolonged drought and increasing the risk of forest fires, putting a greater burden on companies to ensure they’re operating safely. A company that prioritizes profits over maintenance can see that approach end badly. That was the case for a California utility company that was found responsible for numerous wildfires in the state, including a fire which started when a live wire past its replacement age fell from a tower. The company ended up facing a multi- billion dollar settlement and pled guilty to involuntary manslaughter in the deaths of many people. This is just one example where a stock price suffered and we can make a direct tie to this company not taking into account the ESG risks that were present.

So, when you’re talking about investment managers not considering ESG risks, they could be ignoring material financial risks that   will affect the financial performance of the funds. So, we see ESG consideration being important in that regard.

How do you see the market evolving?

I expect we’ll see a clearer regulatory environment going forward. Right now, we get a lot of questions from regulators asking what we are doing about incorporating ESG into investment decisions because clarity on regulation is still lacking. As well, we have fiduciary responsibilities that might limit if and how plan administrators incorporate ESG into their investments. Improved transparency is also needed to help members understand their choices. I was at a meeting where someone asked if all funds would incorporate ESG considerations into their investment decision within the next five years. We might think everything is urgent and it’s going to happen tomorrow, but it’s going to take a while for things to change. Five to 10 years from now I’m not sure all funds will have an ESG focused investment objective.

However, I expect they’ll consider ESG factors. There will also be new products. As an example, Canada Life introduced Sustainable Target Date Funds ‒ a portfolio of funds that makes it easy for plan members to invest in a way that influences positive change for a more sustainable world while helping to grow their savings. All members have to do is choose the fund closest to the year they want to retire. Strong returns are prioritized alongside sustainable investing approaches, making Canada Life Sustainable Target Date Funds all-in-one investment solutions that give members access to an entire portfolio diversified across asset classes, regions and responsible investing strategies. Members can invest for returns while reshaping the future by putting their money where their values are. Think of it as balancing purpose with performance – with ease.

I also think there’s going to be greater opportunities for companies like Canada Life to partner with sponsors on products and services that align with their corporate sustainability commitments and the sustainability expectations of plan members.