OMERS executives set for carbon cuts without too much portfolio ‘surgery’

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."

The plan is to pull two levers that OMERS executives have as investors: capital allocation and engagement.

They can make capital allocation decisions because they know the market is moving toward the low-carbon transition. And regarding engagement, executives will make sure they understand the carbon transition plans of the companies they already own.

But Ms. Preston does not anticipate it to be simple — the biggest challenge executives face in reducing the carbon footprint of the portfolio is in disclosure. "We need the information to actually do these assessments" of public and private companies, Ms. Preston said.

As such, the pension fund and seven other Canadian pension funds — the "Maple 8," Ms. Preston said — called on companies and investors to step up when it comes to the ESG information they disclose and use in investment decision-making. The call came in November and the pension funds involved represent about C$1.66 trillion in assets.

"We know this will help companies focus on what they need to focus on ... to get to the data we need," Ms. Preston said.

Setting a 2025 goal for cutting carbon emissions rather than committing to being net-zero by 2050 — as many European pension funds have pledged — "focuses people today, right now," Mr. Kelly said. "This is our first goal. I don't think it will be our last goal. Our view is the data, metrics and regulatory environment is evolving so much and so rapidly, we thought it best to start" with this goal. While some investors take a longer-term view and have goals stretching further out, "we see it as a pathway that we're on," Mr. Kelly added.

Executives are developing dashboard models to show progress between 1990 and 2025, tracking on an annual basis how the fund is doing against its target and where any pressure points may be. "It creates this feedback loop and dialogue with our internal people who are managing assets, and (they have) all been very supportive" with the ambitions, Mr. Kelly said.

The pension fund also has the benefit of being very close with its Canadian retirement plan peers. While they may have differing views on whether targets are the right way to manage carbon reductions, sharing experiences is helpful, Mr. Kelly said. OMERS is also a founding partner of the Investor Leadership Network — a collaborative platform where plans and money managers share ideas and best practices covering areas including diversity and inclusion.

And the sustainability group's work doesn't stop at carbon reductions. Executives are also in particular considering issues pertaining to the "S" — social — in ESG, such as health and safety in infrastructure, labor practices and social inequality.

On the governance side, cybersecurity is a big issue that executives think a lot about, such as how portfolio companies are protected against cyberattacks. That's a "huge risk for our companies," Mr. Kelly said.

But it's also important for executives to remember that E, S and G factors are intertwined. Climate change is thought of as an environmental or "E" issue, "but it impacts across all aspects of our economy — how people work, (what the transition means) for people working in the traditional energy space," Ms. Preston said.