Highlights:
- Exposure to green assets increased by $6.2 billion to $46.5 billion, driven, in part, by new climate-aligned investments
- Companies representing 42% of our portfolio carbon footprint now report GHG data, a 14% increase in data coverage relative to the last year
- Climate disclosures made based on the key recommendations of the Task Force on Climate-related Financial Disclosures
- Engaged with 811 listed companies on key ESG issues and voted at 5,837 shareholders’ meetings on 58,678 resolutions, with 21% of the votes being against managementmainly related to board composition issues
Montréal, Canada, November 10, 2022– The Public Sector Pension Investment Board (PSP Investments) today published its annual Responsible Investment Report, which outlines how the organization seeks to integrate material environmental, social and governance (ESG) factors in its investment practices. Accompanying reporting also includes PSP Investments’ climate-related financial disclosures based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
“Given our long-term horizon, sustainability factors are inextricably linked to our ability to achieve our investment objectives,” said Deborah Orida, President and Chief Executive Officer, PSP Investments. “I look forward to working with colleagues across our organization to deepen and leverage our sustainability expertise to make the most well-informed investment decisions for the contributors and beneficiaries of the pension plans we support.”
The 2022 Responsible Investment Report features updates on PSP Investments’ inaugural Climate Strategy Roadmap, including key achievements and upcoming priorities. PSP Investments’ climate change approach continues to strengthen and evolve, seeking to become increasingly data-driven, linked to asset-level value creation and technology-enabled in our due-diligence and engagement workflows.
“As the world grapples with the lingering pandemic, increasing pressure from climate change and other disruptive forces that are intersecting critically with geopolitics and affecting society and the economy – we believe that considering material ESG risk factors and opportunities in our decision-making is more important than ever,” said Eduard van Gelderen, Senior Vice President and Chief Investment Officer at PSP Investments.
Among the significant milestones reached during fiscal year 2022:
Climate strategy
- Launched a climate strategy which sets out emissions reduction targets across investment portfolios which we believe are ambitious but achievable. Through its investment and engagement efforts, PSP Investments aims to reduce portfolio GHG emissions intensity by 20-25% by 2026, relative to a 2021 baseline.
- Released a comprehensive Green Bond Framework and issued a C$1.0 billion green bond, PSP’s first-ever such issuance, to fund specific climate and environmental projects and to meet growing investor demand for sustainable products. The Framework was awarded an environmental rating of “medium green” and the highest possible governance score of “excellent” by CICERO Shades of Green.
- Developed a bespoke green asset taxonomy to better assess portfolio exposure to different types of climate-relevant investments, and to support the transition to global net-zero emissions by 2050. The taxonomy is a quantitative and qualitative framework that is based on investee companies’ carbon intensity and an assessment of the credibility of their transition plans.
- Enhanced disclosure of how PSP Investments manages climate change-related financial risks and responds to opportunities, based on the recommendations of the TCFD. For the first time, PSP Investments is disclosing a portfolio financed emissions metric, informed by guidance from the Partnership for Carbon Accounting Financials (PCAF), and drawing on emerging innovations and best practices.
A data-driven approach
- Developed the ESG composite score, a proprietary scoring system which is designed to enable the quantitative assessment and monitoring of a [portfolio] company’s performance on key ESG considerations.
- Significantly increased the self-reported GHG data available from PSP Investments’ portfolio companies, which was critical for developing the climate strategy and setting emissions-reduction targets.
- Introduced total-fund ESG key performance indicators for tracking progress in the areas of climate change, diversity and inclusion, business ethics, cybersecurity and data privacy, and human capital management.
Creating value through active ownership
- Engaged with 811 listed companies on key ESG issues, as a means of encouraging responsible business practices. Of the various engagements, 346 had climate-related objectives.
- Voted at 5,837 shareholders’ meetings on 58,678 resolutions. Approximately 21% of the votes were against management, mainly related to board diversity.
- Conducted 14 cybersecurity assessments of PSP Investments’ portfolio companies to help these firms protect themselves against cybersecurity risks.
“As a long-term investor, we believe that promoting sustainability adds value to our investments. We are working with our partners and portfolio companies to consider their environmental and social impacts in managing those investments,” said Herman Bril, Managing Director and Head of Responsible Investment at PSP Investments. “By actively embracing this opportunity, we believe we can support the achievement of our mandate.”
To read PSP Investments’ 2022 Responsible Investment and TCFD reports, visit our website here.
About PSP Investments
The Public Sector Pension Investment Board (PSP Investments) is one of Canada’s largest pension investment managers with $230.5 billion of net assets under management as of March 31, 2022. It manages a diversified global portfolio composed of investments in capital markets, private equity, real estate, infrastructure, natural resources and credit investments. Established in 1999, PSP Investments manages and invests amounts transferred to it by the Government of Canada for the pension plans of the federal Public Service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force. Headquartered in Ottawa, PSP Investments has its principal business office in Montréal and offices in New York, London and Hong Kong. For more information, visit investpsp.com or follow us on Twitter and LinkedIn.
Earlier this afternoon, I had a chance to talk with Herman Bril, Managing Director and Head of Responsible Investing at PSP Investments, to go over this responsible investment report and more.
I want to begin by thanking Herman for taking some time to talk with me and also thank Maria Constantinescu for setting up this Teams meeting and sending me material beforehand.
Before I get to my discussion with Herman, I'd like to go over PSP Investments’ 2022 Responsible Investment Report which is available on its website here.
First, a message from Eduard van Gelderen, PSP's CIO:
I note this part on linking ESG to value creation:
Sustainable investing is a focus of our strategic plan, PSP Forward, as we build on the strong foundation created over many years. We aim to elevate ESG factors, so they become key value drivers or considerations in our portfolio construction and investment decisions. In line with this shift, we’re starting to use the term sustainable investing – instead of responsible investing – to emphasize that our process is about more than just applying a risk lens to ESG; it’s also about creating value and enhancing returns.
Our fiscal 2023 priorities are as follows:
- Implement and enhance our climate strategy, making progress toward our targets using our Green Asset Taxonomy across the total fund.
- Improve access to ESG data across the total fund to help translate qualitative objectives into quantitative goals and expand the scope of our ESG analysis to better understand and address the correlation between sustainability and financial performance.
- Implement a hub-and-spoke operating model to further embed sustainable investment into our business model and decision-makings to achieve our mandate. The intent is to establish our RI group as a centre of expertise for sustainability, including climate risk leadership, while facilitating the deeper integration of ESG into our asset classes, in line with their specific strategies.
Our efforts will be led by Herman Bril, our newly appointed Managing Director and Head of Responsible Investment, who joined PSP Investments in July 2022. Herman has more than 25 years of experience in international financial institutions, and we welcome the new perspectives he brings.
Going forward, we will also benefit from the insights and experience of our President and CEO, Deborah Orida, a leader in sustainability, climate change and sustainable investing matters in Canada.
Indeed, Deb Orida and Herman Bril bring a lot of insights and experience to PSP.
Next, a message from Herman Bril, PSP's new Head of Responsible Investing:
On PSP's role in solving the world's biggest challenges, I note:
PSP Investments’ climate commitment is a prime example of how, within the context of our mandate, we are aligning with the global transition to a decarbonized economy. Similarly, our active ownership approach – which includes, where appropriate, the use of engagement and proxy voting to promote good corporate governance and sustainability practices that enhance long-term financial returns – aims to communicate to the board and management of companies in which PSP owns shares our views on important matters such as diversity, equity and inclusion, human rights and climate change.
And on where he sees responsible investing evolving over the coming years:
ESG is an evolving concept that aims to come to grips with the massive transformation that societies and markets are currently undergoing. Responsible investment will remain relevant so long as current price signals and regulation do not fully capture the true costs and benefits of these transformations.
However, at some point, maybe 10 years from now, we’ll no longer talk about responsible investment. That’s because sustainability will be pervasive, fully baked into mainstream investing, regulation and reporting as a third dimension, alongside traditionally defined risk and return parameters.
At PSP Investments, the implementation of a hub-and-spoke model will be an important step in this direction. However, this won’t happen overnight and a big part of our transition will involve giving our investment teams the technology-enabled tools, data and training that enable them to integrate ESG considerations into their processes in a more holistic manner.
At the same time, I’m mindful that the soft side of change management can be more challenging than the hard side, especially in financial institutions. I see myself as an ambassador of sustainable investment and aim to lead the transition at PSP Investments by building on the great work of my colleagues.
For those of you who don't know him well, before joining PSP in late July, Herman was formerly the CIO of the UN Joint Staff Pension Fund and CEO of Arabesque Asset Management:
Herman Bril, the former chief investment officer and head of the investment management division for the United Nations Joint Staff Pension Fund (UNJSPF), has a new role.
Bril, according to his LinkedIn profile, is now a managing director and head of responsible investment for the Public Sector Pension Investment Board,one of Canada’s largest pension funds.
Bril comes to PSP Investments after one year at Arabesque Asset Management, where he was CEO. Based in London, Arabesque is an independent, global asset management firm utilizing artificial intelligence and sustainability research. Bril joined Arabesque after leaving the UNJSPF in June 2021.
Bril spent five years as CIO at the UNJSPF. According to the most recently available annual report, UNJSPF at the end of 2020 had assets under management of $81.5 billion. The fund has more than 134,000 participants and more than 80,000 beneficiaries.
Prior to taking on the CIO role with UNJSPF, Bril was managing director and group CFO for Cardano, a London-based risk and investment specialist that provides fiduciary and investment advisory services to pension schemes.
Bril’s arrival at PSP comes on the heels of the pension fund’s naming Deborah K. Orida as its new president and CEO. She succeeds Neil Cunningham, who earlier this year announced his intent to retire in March 2023. When Orida starts her new role on Sept. 1, Cunningham will become vice chair and special advisor to the president and CEO. PSP has CA$230.5 billion ($178.5 billion) under management.
For the fiscal year ended March 31, PSP Investments posted a 10.9% return and grew assets under management by 12.7%. Based in Ottawa, PSP was established in 1999 and manages and invests capital transferred to it by the Government of Canada for the pension plans of the federal Public Service, the Canadian Forces, the Royal Canadian Mounted Police, and the Reserve Force. It has its principal business office in Montreal and offices in New York, London and Hong Kong.
And once again, some highlights from PSP's 2022 Responsible Investment Report:
Discussion With Herman Bril, Managing Director and Head of Responsible Investing at PSP
As I stated above, earlier this afternoon I had a discussion with Herman Bril to go over this report and more.
Herman began by telling me he's originally from Amsterdam and is now based here in Montreal. Prior to this role, he was CEO and partner at Arabesque Partners, a global group of financial technology companies offering sustainable investment, advisory, and data services through our advanced ESG and AI capabilities.Before that, he was the CIO of the UN Joint Staff Pension Fund for about 5 years.
He has a strong investment background working in multiple different countries for financial institutions over the last 30 years.
Herman told me he developed a passion for sustainability over the last 10-15 years and he was responsible for designing and implementing the sustainable investing strategy at the UN Joint Staff Pension Fund.
He's very pleased to be part of PSP Investments: "It's a great organization, I was always a big fan of the Canadian pension model and PSP is clearly a leader in that model." (he knows the model well because he was a member of ICPM for many years which has a lot of representation from Canadian pension funds)
Herman told me he's very impressed with what the responsible investing team at PSP and his predecessor built over the last five years: "I'm very impressed, the team and my predecessor built a solid foundation in ESG across the organization here and it's always a pleasure to find out the work has been done, there is a great team in place and PSP was already leading in responsible investing."
He told me flat out: "My job is to build on that work and help the organization move to the next level in sustainable investing. That is something I'm very keen to do."
He was also very pleased about the green asset taxonomy announced earlier this year."It feels to me that it is a leading initiative in the industry."
PSP published a white paper explaining their green asset taxonomy in more detail which is available here.
Herman added:
Now it's about implementation. We are making progress toward our targets.As you have seen in our report, 20% of our AUM ($47 billion) is labelled as green assets. It also shows you the underlying economy is really changing because 20% in green assets shows you how the economy is transforming toward green and I think that is very encouraging.
We also have in our taxonomy --and it's not only how you define green -- but we also look at transition assets. We clearly identified it as an important part of our strategy. Currently we have 2.8% ($6.6 billion) in transition assets. Our target is $7.5 billion in transition assets by 2026.
In terms of what is classified a transition asset, he said this:
We have our taxonomy but one is a function of carbon intensity and the other is if the organization has a transition plan in place and it it high level or science based initiative type of transition plan where management outlines the journey forward in wanting to decarbonize. Of course, it needs to be supported by climate disclosure because you can't have a transition plan without disclosure and we want to measure progress towards the target. We clearly encourage portfolio companies to move forward toward science based transition plans and also to support climate disclosure and reporting of emission data to us. We made good progress in our climate footprint in our reporting. I think 42% of our portfolio is covered by some GHG data. That's 14% more than last year. I'm encouraged by that progress because as you know emission disclosure in most jurisdictions is still voluntary. We send out a questionnaire to our portfolio companies and we also use our influence particularly in private markets where we have direct investments, with the support of our senior management of specific asset classes, to encourage companies to start reporting.I asked Herman is getting data from funds remains a bit challenging:
With funds, you have two layers, you have to work with the GPs to get to the portfolio companies whereas with direct investments, we are siting on the board and have a clear communication line with management, so we can engage with management directly compared to GPs. It's also a function of jurisdiction and in some areas GPs are slower with climate disclosure. We are a global investor and are dealing with GPs who are all in different journeys and it's our job to encourage them to improve their climate disclosure.
We are also one of the founding signatories of the ESG data convergence project. I think that's a really important initiative in the industry in raising the awareness, particularly in the United States. You see an improvement in GPs who understand this is the direction of the future. Most institutional investors want data and GPs are starting to report more and more. Having said that, we still have a long way to go. Ideally, it would be supported by regulatory initiatives. this would help the industry have much better visibility because you can see the ESG space is moving from qualitative story telling to much more data driven and quantitative as as we learned from the great Peter Berger, what gets measured get managed so we have to measure where companies are to influence and engage them towards decarbonization.
Herman confirmed my thinking that Europe is ahead of most other jurisdictions in terms of regulations forcing companies of a certain size to disclose carbon emissions but he told me over time, other jurisdictions will follow (still, North America lags Europe on this front).
I then asked Herman to pretend we live in an ideal world where he and his team have all the emissions data from public and private companies, then how do they go about implementing this data to add value in terms of the investment process given that his team is part of the CIO's group and he reports to the CIO.
Herman replied:
Assuming the perfect world you're describing and we see the exact trajectory of a company over time, to see their journey of decarbonization. I would argue if we don't see progress, our level of active engagement will increase, because we will start a conversation and ask why they're not progressing. If organizations are progressing well, we will be pleased and less engaged because things are progressing nicely.So our engagement will be a function of how well a company is progressing and will be reflected in our reporting as well.
I then asked him about his short-term, medium-term and long-term goals for the team:
That's a great question. We are in the process of implementing (inaudible) in the organization which basically means two things. We are transferring the ownership of ESG data analysis into the investible decision making process. We are trying to embed it as deeply within the asset classes as possible so that it's an extension of their investment function so they are looking toembed non financial factors like ESG into their investment process. So we are hoping with the tools, the technology the data and whatever they need to embed it more deeply in the organization which will give my team the role of evolving into a center of excellence where we can really focus on more value added around sustainability, research, innovation, the next thing.
So we are now very busy working with asset classes as part of the due diligence and as part of the analysis. My team is doing a lot of the work together with the asset classes so going forward, this is part of what will be the "standard underwriting" of investments in terms of ESG analysis.
Over time, teams will more and more do this by themselves. Some teams are more advanced than other teams, of course, and that is fine, so the implementation will be very bespoke depending on where the team is and what their needs are. This is a project that will take some time because it will have an impact on the organization.
At the same time, we are building the Responsible Investing team to be the center of excellence in terms of pushing to be best in class in ESG practices, leadership, innovation, and all the things that we should do to move toward ESG 2.0.
I told Herman I was glad to hear this because there are so many misconceptions going on right now concerning ESG and adding value in terms investments.
He replied:
ESG is clearly one of the pillars of our investment beliefs and we have stated this in previous RI reports. We are active investors and I would argue that every single material non financial factor which can be of relevance to your investment should be taken into account as an active investor. And that's what we do because these factors might have a huge financial implication going forward and that's why you apply an ESG lens both from a risk perspective but also from an opportunity perspective. I call this smart investing.
Herman confirmed that PSP has not divested from oil & gas and they prefer engagement:
I think it's clear there is a long way to go in the economy to decarbonize and transition assets are part of it. The current energy system needs to rewired to a new energy system. Divesting by itself doesn't cut it. Everyone needs to make their own decision but we believe that being an active investor means being engaged with these organizations and nurse them to come up with transition plans which we discussed earlier. Having said this, it doesn't mean we will be invested in every single company in the world. Brown companies without a transition plan, without making any progress, a smart investor will not stay invested because the probability of this company will survive is getting lower.I told Herman that PSP is an anchor investor in Brookfield's Global Transition Fund and has other strategic relationships and he confirmed the purpose is twofold, to earn returns and to benefit from knowledge transfer and learn from these relationships.
He added:
Transition investing will ultimately help to drive decarbonization because you put your money and influence to work to transform the real economy in primary markets instead of buying and selling stocks in the secondary market where your influence is less.
We are in the perfect position in the Canadian model as private market investors to use our capital and influence to drive this transformation.from a perspective of an investor. Our job is to generate returns for our beneficiaries and we seek the best opportunity set.
Great insights from Herman Bril, I thank him again for taking the time to talk to me and differentiating between the challenges and opportunities of sustainable investments.
Once again, take the time to go over PSP Investments’ 2022 Responsible Investment Report which is available on its website here. It is excellent and packed with great insights.