Putting in place a decarbonization policy for a large, diversified portfolio that balances ambition with fiduciary duty can be hard work, executives at the Ontario Municipal Employees' Retirement System, Toronto, have found.
The goal is to reach a 20% reduction in carbon emissions in the entire portfolio by 2025. "We want to be ambitious about this, but also disciplined about how we can do this and what we can do to get started on it without necessarily having (to do) some major surgery to the portfolio in terms of the investment program," said Michael Kelly, chairman of OMERS' sustainable investing committee, in an interview.
That required a significant amount of work. First, a "carbon accounting exercise" — something executives had never done before, was needed, Katharine Preston, vice president, sustainable investing, said in the same interview. OMERS worked with a data partner to look at its almost 2,000 assets.
"One area we wanted to focus on (was the) carbon footprint of the entire portfolio," Mr. Kelly said. "It's not a simple thing to do, is a large undertaking" and required analysis of the public and private parts of the portfolio.
The pension fund, which had C$105 billion ($82.1 billion) in assets as of Dec. 31, has a 45% allocation to equities, 23% allocation to fixed income, a 20% investment in infrastructure and a 14% allocation to real estate, as well as a -2% allocation to short-term instruments.
But what does a long-term investor do with the carbon footprint figure? "It's a backward-looking number. ... Our view on climate change generally is that it does present risks and it does present opportunities to our portfolio. The question is, 'How do we ... put some direction on that transition at OMERS?'" Mr. Kelly said. "It's not necessarily natural for pension funds to want to set targets — we're a fiduciary so invest every asset with a risk/return lens ... but given that we believe the world is in transition, this kind of puts some guideposts in for us."
The bulk of the work to be done is in the infrastructure and public equities portfolios, Mr. Kelly. "We know that the emissions tend to be concentrated (in those portfolios), so naturally the focus will be there. Our private equity, just given the nature of some of the assets that it owns, does not have a high carbon emissions profile. And the real estate book (under Oxford Properties Group) is separate but doing quite a bit."