Canada's Experts on Sustainable Finance?

Benefits Canada reports, Pension plans just one component in transition to lower carbon economy, says PIAC:

While Canada’s public and private pension plans are a vital player in the transition to a lower carbon economy, they’re only one component, with other financial market participants, such as banks, insurers and asset managers, must also play a role, according to the Pension Investment Association of Canada.

In a letter commenting on a report by an expert panel on sustainable finance, the association agreed financial market participants should pay attention to the potential impact of government policy. As far as carbon emissions, the PIAC also noted it generally agrees with the measures put in place by governments to mitigate and reduce the negative impacts of climate change, which includes efforts to reduce greenhouse gas emissions. These actions can include regulatory action, as well as more general guidance and incentives to influence capital allocation that would bolster innovation around climate change.

In terms of fiduciary duty, the PIAC noted its members are required to act in good faith on behalf of their plan members. It also highlighted that evaluating the potential impact of environmental, social and governance issues on investments falls within the scope of responsibility.

There’s a growing consensus around the inclusion of these factors, noted the letter, which included examples such as the United Nation’s Principles for Responsible Investment’s 2015 report on fiduciary duty and the significant support for the task force on climate-related disclosures.

In building markets that are friendly to sustainable financing, of particular importance is improving reporting and disclosure on climate change-related risks and opportunities, according to the letter. “We have previously stressed, as long-term investors, our members require reliable, consistent and comparable information in climate risks to make informed investment decisions,” it said. “In Canada, disclosure on climate risks and opportunities is often insufficient or completely absent with even basic information around GHG emissions not disclosed.”

The PIAC’s letter encouraged the expert panel to continue discussions of the role it has to play in encouraging and regulating these types of disclosures.

You can read the PIAC letter here and the interim report from the expert panel on sustainable finance here. There's also an executive summary of the report available here.

The expert panel on sustainable finance is made up of four people:

1. Tiff Macklem, the former senior deputy governor of the Bank of Canada and current Dean of the University of Toronto’s Rotman School of Management and Chair of the Board of the Global Risk Institute. 
2. Andy Chisholm, a member of the board of directors of the Royal Bank of Canada who spent most of his career at Goldman Sachs & Co serving as head and co-head of the Global Financial Institutions Group, in London and New York, and globally as senior strategy officer of the firm. 
3. Kim Thomassin, the Executive Vice-President of Legal Affairs and Secretariat, with the Caisse de dépôt et placement du Québec where she manages the Legal Affairs, Corporate Secretariat and Compliance, and Responsible Investment teams. She is also a member of the executive committee, in addition to being a member of the board of Ivanhoé Cambridge, the institution’s global real-estate subsidiary. 
4. Barbara Zvan, the Chief Risk & Strategy Officer for the Ontario Teachers’ Pension Plan where she leads the Strategy & Risk team in supporting the plan sponsors, in plan-design decisions, and the board, in determining the appropriate benchmarks and risk appetite. She drives the responsible investing and climate change risk management and strategy for the fund and directs the enterprise and operational risk-management approach for the organization. 

You can read the full biographies here but suffice it to say, these are all very accomplished individuals who truly are experts in finance broadly and sustainable finance specifically.

In my opinion, Barb Zvan and Kim Thomassin are the two most powerful women in Canada's large elite pension club dominated by men. Barb is next in line to head up OTPP where she leads the risk and strategy team and Kim is doing an outstanding job at the Caisse where she manages the Responsible Investment teams (I wouldn't be surprised if she is considered to take over the top job at the Caisse when Michael steps down).

Tiff Macklem and Andy Chisholm are two leading experts in finance, they're both extremely accomplished and together with Barb and Kim, they have produced a comprehensive report which is well worth reading.

Canadians can be proud to have such experts writing a report on sustainable finance. The expert panel was launched last April:

The global demand for cleaner economic growth is opening up tens of trillions of dollars of opportunity around the world—giving Canadian developers of clean solutions access to new markets and creating good jobs for Canada’s middle class. The federal government is investing in climate action and clean competitiveness to ensure Canadians can participate in and prosper from these opportunities, today and in the decades ahead.

Canada’s financial sector has an important role to play in unlocking the potential of clean growth in Canada. That was the focus of a round table discussion, today, on sustainable finance, with the Governor of the Bank of England, Mark Carney, and Canadian business leaders. The round table was hosted by the Minister of Environment and Climate Change, Catherine McKenna, and the Minister of Finance, Bill Morneau. Accelerating action to support sustainable finance is an important part of Canada’s G7 presidency.

At the round table, representatives of Canada’s business and financial sectors—including banks, pension funds, insurers, and the energy sector—discussed what Canada needs to do to avoid missing out on the opportunities associated with clean growth as well as the climate-related risks—such as more intense forest fires, storms, and floods—that could affect their operations and financial outlook.

The Ministers announced the creation of the Expert Panel on Sustainable Finance, to be chaired by Tiff Macklem, Dean of the University of Toronto’s Rotman School of Management and former Senior Deputy Governor of the Bank of Canada. The Expert Panel will consult members of the business community about the opportunities associated with sustainable finance. The Expert Panel will also explore the opportunities and challenges for companies facing voluntary standards for corporate disclosure of the financial risks associated with climate change.

The Expert Panel builds on the work of the Task Force on Climate-related Financial Disclosures (TCDF), led by Michael Bloomberg, established by the Financial Stability Board, and chaired by Governor Carney. The Task Force is recognized worldwide for its ground-breaking work to develop voluntary recommendations on climate-related information that companies can disclose to help investors, lenders, and others make sound financial decisions.

Other members of the Expert Panel are

• Andy Chisholm, member of the Board of Directors of the Royal Bank of Canada
• Kim Thomassin, Executive Vice-President, Legal Affairs and Secretariat, Caisse de dépôt et placement du Québec
• Barbara Zvan, Chief Risk and Strategy Officer, Ontario Teachers’ Pension Plan

The four-panel members will complete their work and provide recommendations to the federal government by the fall of 2018.

In terms of PIAC's letter on the expert panel's report, I think it recognizes that climate change poses a systemic risk but it also explicitly states that PIAC members have a fiduciary duty to act in the best interests of plan members.

Still, Canada's large pensions are increasingly incorporating ESG factors in their decisions and focusing on climate change.

For example, today, OPTrust released the results of its climate-savvy asset liability management/strategic asset allocation (ALM/SAA) project in partnership with Ortec Finance:

The project marks another important step for OPTrust’s Climate Change Action Plan to ensure the portfolio remains resilient and agile in meeting the challenges of climate change.

The ALM/SAA project is one of the first efforts of its kind to integrate quantified physical and transition risks and opportunities associated with climate change into traditional multi-horizon, real-world scenario sets that drive strategic investment decision-making.

James C. Davis, Chief Investment Officer of OPTrust said, “Taking action on climate change and considering the financial implications is in the best interests of our members at OPTrust. In integrating climate risk into our portfolio construction framework, we continue to explore and develop various climate change scenarios and analyze the impact on the entire portfolio. We are pleased with the results of the pilot project as it helps provide a current state assessment of climate risks to our fund.”

Key Findings from the Report

1. Top-down, macro-economic and systemic climate risk perspective delivers new insights. The pilot has established that it is crucial for investors to consider the macro-economic and systemic implications of different global warming pathways (top-down approach).
2. For a globally diversified investor, a transition to stay under 1.5°C warming, even a severely disorderly one, is preferable over a 4+°C scenario. However, there are material differences across regions; largely determined by the relative energy efficiency of the economy and dependence on carbon intensive production and exports.
3. At a global level, a steep economic transition to limit warming to 1.5°C may entail significant opportunities for economic growth, perhaps even above current market expectations– the infrastructure investments required, research & development and employment generated are strong drivers of growth and competitiveness. The more orderly the transition, the more pronounced these economic and investment opportunities become.
4. The time to act is now – even if physical climate-related risks may only become financially material on a longer time horizon. The expectation that physical climate-related financial risks are likely to only materially manifest as of mid-century is no reason to be complacent as an investor today.
5. If action fails today and the transition to a low-carbon, climate-resilient economy is not completed by mid-century, our economies will be locked into a higher global warming pathway where the global economy is likely to increasingly and structurally slow down. The negative impacts of a 4+°C pathway take over the impacts of a disorderly transition to 1.5°C around 2030-2080, depending on the country.
6. The climate-savvy ALM analysis permits investors to fulfill increasingly stringent disclosure requirements and upcoming regulatory compliance.
7. The project supports strong climate action through informed strategic choices: Gaining insights to enable portfolio optimization for a chosen global warming pathway (that matches investment beliefs/goals/targets), while at the same time ensuring the portfolio is robust for other global warming pathways.
8. There is no silver bullet when managing climate-related financial risks. Each step in the investment process requires a different forward-looking scenario-based approach.

For more details, download the full report.

This isn't hokey pokey analysis, OPTrust takes its fiduciary duty to its plan members very seriously which is why it embarked on this pilot project and they will share their findings and methods with other pensions who are equally interested in an approach that fulfills their mandate and reduces their carbon footprint.

As you can see, Canada has really smart people tackling sustainable finance in many ways. I've just scratched the surface in this comment but it's no wonder impact investing has taken off in such a huge way here.

Below, an older (2016) clip where Barbara Zvan, OTPP's Senior Vice-President, Strategy & Risk and Chief Investment Officer, discussed the evolution of responsible investing and the role it plays in helping them meet their fiduciary duty to members.

And members of OTPP's Strategy and Risk team discuss how managing risks uncovers investment opportunities and contributes to members' pension security.