Why ESG has fundamentally changed pension plan investing

How OPTrust uses a threefold strategy to implement ESG framework for investments

Why ESG has fundamentally changed pension plan investing

While most pension plan sponsors are aware of environmental, social, and governance (ESG) strategies, ESG represents yet another dimension to the business of pension plan investing that plan sponsors must address, if they haven’t already.

ESG is a framework used to assess an organization's business practices and performance on various sustainability and ethical issues. It provides a way to measure business risks and opportunities in those areas.

Alison Loat, senior managing director, sustainable investing and innovation at OPTrust, says the onset of ESG investing reminds her of the changes she saw when digitization and the internet started to become mainstream and the threat it posted to traditional news media businesses. They had to find a new way to do business.

Speaking at the ‘2023 ACPM National Conference’ at the workshop, ‘Sustainable Investing as a Core Aspect of Fiduciary Duty,’ she said pension plan sponsors now need to find a way to incorporate an ESG framework around investing and they must be very intentional in setting up a strategy.

“Our CIO set up a separate mandate and hired a team with the expertise to focus on ESG,” she said. “It’s hard for a team that already has a full workload to focus on this and learn something brand new.

“It is an organizational design and strategy decision to help set up the organization for what is coming – probably sooner than we want it to – but will come with financial risks related to climate change which will affect our portfolios.”

Threefold strategy to implement ESG framework

OPTrust’s mandate to implement a strategy was threefold.

“The first mandate is to be much more systematic about ESG integration,” she said. “OPTrust has a long history of commitment to responsible investing. How do we move the discussion from caring about ESG to really digging in and making ideal investments? We looked at the type of tools, processes, and training we would need to put in place to help teams accomplish that.”

The second mandate is to be more data driven. Loat said there is not a shortage of data but the quality of the data and turning it into useful insights and information is the challenge.

“Obviously, the big piece here is carbon emission data, that's really where a lot of the attention is. But across all ESG factors, we have put in place a framework and we are beginning to collect actual data against all of our portfolios in all asset classes.”

The third mandate is to be more intentional about the opportunity side of ESG. ESG is really a framework for assessing non-financial or pre-financial risks in any investment or any portfolio, said Loat. “There's clearly a huge opportunity in climate transition for which investors need to be prepared. Our team has a ‘sustainable incubation portfolio’ mandate where we invest intentionally with sustainability themes. It is intended to drive more insights, efforts, and knowledge of the organization for us to be prepared for as disruption of a sustainability theme becomes much more commonplace across all asset classes.”

Ultimately, firms need to ask the right questions of themselves and their investment partners and make sure the investment committees are well prepared for the course. “When we want to engage new potential money managers, we make sure they are with us on this journey. Do they have the right policies and buying processes? How do they make sure they are capturing this risk and the opportunities?

“It’s these simple approaches that will help an organization at least begin to get its head around [implementing an ESG framework for asset management],” said Loat. “As we ask the questions more and more, we’re going to get smarter and that's how we're all going to work together, frankly, as an industry.”