(reprinted courtesy of www.advisor.ca)

by Kate McCaffrey

Integrating environmental, social and corporate governance considerations into investment decision making is no easy task and, although some appreciate this fact, large pension funds have drawn a fair share of criticism for failing to provide leadership in this area.

A panel of pension managers and SRI experts convened by Mercer Investment Consulting and the University of Toronto took the opportunity to discuss the issue on Thursday (Jan. 19) and give their thoughts on what it would take to bring responsible, or sustainable, investing into the Canadian mainstream.

They agree that a "tipping point" is coming, likely within the next three years or so, but there are several areas that the industry needs to work on to create conditions for wider acceptance.

Language is one of the main barriers. pension managers say lingo developed by the industry to identify the different shades of gray between strategic proxy voting, active company engagement and outright company screening, have all made it very difficult to educate pension plan decision makers about their options.

The industry's love for acronyms has already spawned a number of catch phrases, including socially responsible investing (SRI), environmental, social and governance (ESG) considerations, not to mention corporate social responsibility (CSR), that are sometimes used interchangeably even though they can mean radically different things from an investment point of view.

The language issue, raised by Morgan Eastman, chief investment officer at OPSEU Pension Trust and backed up by other panelists, is one that the industry needs to clarify, the audience heard, because it's automatically assume managers are talking about ethical activism, lower returns and limited portfolio investment choices.

Once that obstacle has been overcome, better information and collaboration on the part of pension plan managers will be needed to understand and better state the business case for adopting SRI and ESG investment mandates.

European pension plans are several years ahead of Canada in this respect, and that interest has spawned several collaborative efforts like the Global Reporting Initiative, the Extractive Industries Transparency Initiative, the Carbon Disclosure Project, and the United Nations Institutional Investor Summit on Climate Risk.

Still, there are signs that Canadian institutional money managers will soon be following suit. In October the Canada Pension Plan Investment Board (CPPIB) introduced the a new Policy on Responsible Investing , building on the CPP's Proxy Voting Principles and Guidelines. The CPP says the policy is based on the principle that responsible corporate behaviour can generally have a positive influence on long-term corporate performance. The board has committed to building an engagement capability and plans to use its influence as a shareholder in over 1,800 companies in order to encourage improved performance on, and disclosure of, ESG factors.

Ian Dale, the CPPIB's vice president of communications and stakeholders relations, says as the board moves from its traditional role as a passive investor it will use this new research on the long term materiality of ESG factors to integrate those considerations into the pension's investment plans.

"We tend to be long term buy and hold investors," he said. "We think engagement works because engagement can take some time to work. As we become more active investors we can integrate those factors."

Jacqui Parchment, a principal with Mercer Investment Consulting, also believes SRI will become more accepted within a few years, but says in order for that to happen, large pension plans need to show more leadership and visibility.

Outlining situations where ESG considerations can be useful in managing volatility and other strategic investment concerns and assist managers successfully negotiate the tricky legal and fiduciary landscape, will also help the situation, she said.

Eastman held up a recently released discussion brief from the Canadian Institute of Chartered Accountants, entitled MD&A Disclosure about the Financial Impact of Climate Change and Other Environmental Issues to show that better information is already on the way. He says if accountants are starting to look at the effects of social and environmental responsibility, investors can probably count on the subject becoming a mainstream issue.

He says policy pension policy guidelines to address the matter will likely be universal within a year. But it could take as long as five years to integrate those guidelines.

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