We prefer to integrate material ESG factors into all of our investment processes, rather than exclude or divest from certain assets based on ESG factors alone. This is done through the identification, assessment, and management of ESG risks and opportunities in a manner that best suits the characteristics of each investment. We monitor best practices in the industry to stay up-to-date on new investment tools and activities to support integration.
Each asset class has diverse characteristics, opportunities and risks, which are managed in a variety of ways by OPTrust. When we do not have sufficient security level transparency or when the investment vehicle structure does not allow us to direct investment decisions (for example, in pooled funds), the approach to RI and adherence with the SRIP is more challenging.
OPTrust may own interests in public equities directly through portfolios managed by internal or external managers, through managed, pooled funds, through exchange-traded funds, and listed and privately-structured derivatives, including options on individual stocks and portfolios of stocks such as indices.
The investment team includes ESG factors in external manager search, selection and monitoring processes. The external managers are expected to demonstrate an understanding of ESG issues and explain how these issues are integrated into their decision-making process. We monitor the managers’ portfolios to identify companies that may have exposure to financial, reputational or other risks arising from ESG issues. The results of these reviews are used to engage the investment managers and to evaluate the effectiveness of each manager in integrating ESG factors.
Our external managers are required to adhere to the SRIP, which is mandated in their investment contracts.
Within our segregated accounts, we do not invest in public companies that conduct business in breach of certain international treaties and maintain a security exclusion list for companies that are involved in the manufacturing of anti-personnel landmines or cluster munitions. These companies are engaged in business activities that violate the Ottawa Convention and the Convention on Cluster Munitions.
Private Equity and Infrastructure
The investment team works to identify, exploit, manage, and/or mitigate ESG risks and opportunities. A standard SRIP clause is included in each investment proposal to confirm that the team has examined and dealt with material ESG risks. When working with external partners (e.g. General Partners), we discuss OPTrust’s approach to RI and reporting expectations. Activities can also include background checks, legal and environmental due diligence, labour and human rights research, and site visits.
Given the nature of this asset class, the key characteristics, when compared to public markets, include a higher degree of control (and thus potentially, responsibility), far less public transparency, usually less regulatory oversight, generally smaller and less resourced external partners and, within portfolio companies, corporate structures, and targeted investment periods, which are longer than those seen in public markets, but far shorter than the obligations of the Trust.
The investment team has integrated ESG matters in its investment underwriting, portfolio management and reporting processes. The team’s comprehensive due diligence questionnaire incorporates ESG issues. For every new investment, we formally advise our partners and managers on our approach to RI and the importance of labour rights to OPTrust. A SRIP clause is included in all investment summaries for new investments confirming that the team has examined and identified any ESG risks.
We also conduct extensive environmental and legal due diligence. For our direct real estate portfolio, we provide OPTrust’s SRIP to our managers and require full adherence to the principles. On an ongoing basis, the team assesses all investments with an Investment Monitoring Scorecard which includes ESG issues.
OPTrust has implemented portfolio-wide programs to improve the environmental performance of our Real Estate portfolio. These programs include energy efficiency, water and waste management, and renewable energy (rooftop solar panels). Where possible, we have achieved independent third party certification for environmental and energy efficiency.
A newer area of exploration for OPTrust is ESG integration with risk functions. This requires ensuring RI issues are considered in the evaluation of both reputational and investment risk to OPTrust. Focus has traditionally been on ESG risks of a specific investment, however, there are cross sector and cross geography ESG risks (e.g. climate change) that could be examined at a Total Fund level to determine the impact.