Thursday, October 15, 2009

Canada: Moving forward with responsible investment

Although Canadians can be proud of the many individuals and organizations that are leaders in the field of responsible investment, it would be harder to assert that Canadian institutional investors, as a class, are also leading their world counterparts. There are, however, encouraging signs that this is about to change.

One reliable indicator of active participation in responsible investment is the level of support for the UN Principles for Responsible Investment (UN PRI). The UN PRI is an international initiative launched with UN support – and assistance from Mercer – in 2004 to promote the integration of environmental, social, and corporate governance (ESG) factors into the investment management process. Today, the UN PRI can boast of over 550 signatories – asset owners, investment managers, and service providers – with over USD$18 Trillion in total assets.

Canada, which boasts many of the leading organizations and advisors active in the field of responsible investment (RI), has seven asset owners and 11 investment managers listed as signatories to the UN PRI. Australia, by contrast, with a smaller stock market and population and similar level of aggregate retirement savings, has 28asset owners and 43 investment manager signatories.

Part of this difference may be due to strong regulatory support “down-under” which arguably reflects and helps reinforce a broader interest in RI strategies. For example, the Australian Government has recently provided funding for the creation of the world’s first academic institution focused on encouraging the mainstream adoption of RI tools and strategies. More importantly, and in line with similar provisions in the United Kingdom and other European nations, Australia requires pension plans and investment managers to disclose if and how they assess, monitor, and mitigate ESG risks.

The call for ESG disclosure has been one near and dear to the RI community for many years. Here in Canada, there has been much discussion but little progress to date. Only the province of Manitoba explicitly allows trustees to consider so-called “non-financial” criteria in the investment decision-making process. Other Canadian jurisdictions are silent on the matter. The pressure may be mounting, however.

This year, for example, the Ontario Legislature unanimously approved a private member’s motion calling on securities regulators to study and make recommendations for meaningful disclosure of ESG-related risks. Shortly thereafter, the Ontario Securities Commission announced a review of corporate disclosure requirements.

This month, a private member’s motion was introduced in the House of Commons calling on public and private pension plans to disclose how they track and manage ESG-related risks. These actions mirror similar recommendations for pension plans in 2007, by the National Roundtable on the Environment and the Economy, and in 2008, by Ontario’s Expert Commission on the Future of Defined Benefit Pension Plans.

We may be reaching a tipping point in Canada as electoral speculation dovetails with widespread public concern about financial stability and retirement security. Canada’s largest pension plans are certainly not waiting for a regulatory push. Many of our globally-recognized funds are already considered global leaders in responsible investment and will be discussing the state of research and best practices with their counterparts this fall as the UN PRI holds an academic conference in Ottawa and a board meeting in MontrĂ©al.

The broader pension plan community, however, may require greater clarity from regulators to encourage widespread adoption of RI. If disclosure requirements are strengthened next year, 2010 may well be the year that RI practices truly enter the Canadian mainstream.

Jordan Berger is a principal at Mercer Investment Management in Toronto. This article was reprinted with Mercer's permission.

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