The University of Toronto Asset Management Corporation (UTAM), the non-profit corporation responsible for handling the University of Toronto’s investments, has released its first Responsible Investing Report, outlining its plans to pursue responsible investment strategies.
A shift to responsible investing
UTAM’s primary effort to encourage responsible investing has been through the analyses of environmental, social, and governance (ESG) factors when making direct and indirect investment decisions. Environmental factors refer to a company’s direct impact on the physical environment; social factors refer to practices that affect society, such as a company’s working conditions; and governance factors refer to the administration of a company.
UTAM hires financial managers to buy and sell individual bonds and stocks on its behalf. Managers are expected to consider ESG factors when evaluating investments.
“In the approach that we’re taking, which is ESG integration approach, we’re talking to our managers, we’re getting to know them better,” Daren Smith, the President and Chief Investment Officer of UTAM, told The Varsity. “This is another lens through which we can evaluate them, and ultimately, we think that it’s going to make us better at selecting and monitoring managers.”
UTAM focuses on instructing its managers to consider ESG factors in their analyses when the finances in question may be impacted by ESG factor, and then understanding how the managers achieve this. Some managers have dedicated ESG groups, while others may delegate this responsibility to portfolio managers.
“We’re not being overly prescriptive, and saying to the managers, ‘you have to do x, y, and z,’” Smith said. “We need to understand where ESG responsibility lies at the manager, who’s doing what, and ultimately, whether we think it’s appropriate. We don’t think there’s a one size fits all that works for all managers.”
All existing and future managers have been put through the new evaluation process. There are some “private market investments” made over 10 years ago that have not been through the new investment analysis method that make up “less than 10 or 15 per cent of the overall portfolio.”
“We’re still engaging with those managers, but there’s less that we can do with those type of investments,” said Smith.
In December 2016, UTAM became a signatory to the United Nations-backed Principles for Responsible Investment (PRI), which are six principles to guide investors in evaluating ESG factors and successfully implementing them. In addition, PRI will help UTAM use ESG factors to monitor and select its managers.
On March 6, 2014, Toronto’s chapter of 350.org, a “global grassroots climate movement” focused on dismantling the fossil fuel industry and developing “solutions to the climate crisis,” called on the University of Toronto to cease direct investments in fossil fuel companies within five years.
As a result, U of T President Meric Gertler created the President’s Advisory Committee on Divestment from Fossil Fuels to consider the suggestions.
In March 2016, Gertler released a report entitled “Beyond Divestment: Taking Decisive Action on Climate Change” on the advisory committee’s recommendations to “helping to meet the challenges posed by climate change.”
In “Beyond Divestment,” Gertler called on UTAM to apply ESG factors into their investment decisions and increase transparency.
UTAM was not instructed to divest from fossil fuel-producing companies, and instead focused on incorporating ESG issues into their investment decisions, which Smith believes is “a more thoughtful approach to the issue” that is “consistent with what the president has asked us to do.”
“Considering ESG-based factors… offers the best chance of success in addressing climate change from the perspective of our investments, while simultaneously allowing us to fulfill our fiduciary duties to the University’s Pension and Endowment Fund beneficiaries,” Gertler said in UTAM’s Responsible Investing Report.
UTAM also plans on signing the PRI-supported Montréal Carbon Pledge in 2017. The Pledge, formed in September 2014, requires investors to annually show the carbon footprints of their investment portfolios to the public.
While other institutions send their portfolios to external providers to figure out their carbon footprints, UTAM plans to calculate their own carbon footprint “so we have a more informed understanding of what’s driving the carbon print.”
Recently, UTAM was one of 217 other global investors who signed a letter that urged G7 and G20 leaders to continue their commitments associated with the Paris Agreement, a climate accord addressing greenhouse gas reduction, adaptation, and finance.
Taking part in advocacy like this, said Smith, has helped UTAM become more visible and interact with like-minded investors, groups, and initiatives.
“We do feel it’s very important that UTAM is visible in terms of its activities, that people in the investment industry and the wider global community understand that this is very important to UTAM and also to the university,” Smith explained. “And we think one way of doing that is through appropriate engagements and advocacy and collaboration.”
“We have a lot to learn here, and I’m not going to pretend like we’ve figured it all out,” said Smith. “There may be some bumps in the road, and there may be some on the advocacy side that we need to learn from, but so far I think we’ve been quite successful and we haven’t had any hiccups.”