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“We think the work that has happened to date has been useful and helpful, but let’s recognize that we are at the beginning of this conversation and we want to push the companies we invest in to give us more disclosure, and we also want to engage in a conversation with our peer plans about the best way to do this.” – Hugh O’Reilly

 


 

When it comes to mitigating the damage caused by climate change to the environment and investments, dialogue is better than silence, engagement preferable to divestment, says Hugh O’Reilly of OPTrust.
That path, however, requires data, disclosure, to map out investment strategies that work for the fund’s key stakeholders: its members. Trouble is, that information can be hard to obtain.
“For us responsible investing isn’t about securities screening or divesting, it’s about engagement … it’s about putting our views forward to the companies we invest in so that we can make sure that we are investing in the long-term interests of our members,” O’Reilly, the fund’s President and CEO, told ARIA in a recent conversation.
“The difficulty we have when it comes to climate change is that the disclosure is inadequate.”
To that end, the fund produced the report, Climate Change: Delivering on Disclosure, a position paper that reviews the fund’s approach to dealing with climate change from an institutional investor’s point of view, and includes a call for investors to collaborate towards the development of standardized measures for carbon disclosure.

“What we need to do is work together. We are just at the beginning of this conversation, and we have to avoid simple answers such as saying we aren’t going to invest in fossil fuels. It’s way more complicated that that.”

It is accompanied by a report from the consulting firm Mercer, OPTrust: Portfolio Climate Risk Assessment, which analyses and assesses the risks presented by climate change to the fund’s investments.
The Mercer analysis considers investment return estimates over a 35-year timeframe on four sectors – industry, asset class, total portfolio, total portfolio by scenario – and four climate risk factors. The report finds that climate change will impact returns across all of scenarios reviewed, with returns from the industry sector particularly vulnerable to climate change.
The warming models range from an increase in temperature of two degrees to four degrees, per-industrial times to the end of this century. With the former scenario, returns in some sectors – timber, agriculture, real estate and emerging markets – could improve, while natural disasters such as severe weather and floods from rising sea levels will imperil returns under the latter scenario.
While the Mercer report produced results, the models are only as good as the data in them, says O’Reilly, who adds “we just don’t have enough data points, and this creates real issues for us.”
Issues related to carbon disclosure have been identified, he continues, pointing to initiatives like the Carbon Disclosure Project, but the conversation remains limited, with institutional investors like OPTrust not getting sufficient carbon disclosure from companies in which they invest or own.
“We think the work that has happened to date has been useful and helpful, but let’s recognize that we are at the beginning of this conversation and we want to push the companies we invest in to give us more disclosure, and we also want to engage in a conversation with our peer plans about the best way to do this.”
And now “global policy imperatives” like the Paris Agreement are driving the imperative to “try and get on top of climate change,” says O’Reilly.
“When you have policy initiatives at a governmental level, regulatory initiatives, investors have to respond. We just have to see how they play out in the marketplace, and we have to make sure the companies we are investing in are disclosing to us how they will see climate change impacting their operations and what steps they are taking to mitigate their risks and contribute solutions to climate change.”
Fossil fuels are not going to disappear anytime soon, either as an energy source or an investment option, he says. Recognizing that, OPTrust’s approach is to engage in an active dialogue to ensure the companies it invests in are actively developing renewable energy, and engaging in “environmentally prudent practices.”
“We also want the companies we invest in to look at scenarios so we can understand the climate risk that our portfolio contains, so we can take actions to try and limit those risks.”
OPTrust operates from a member-driven strategy, meaning its investments and practices are aligned with the best interests of its members. Establishing reporting and disclosure standards and assessing climate risks are essential to that strategy, says O’Reilly.
“If we don’t fully understand the risks associated with the investments we are making, then we may face losses that we could otherwise have avoided. That is the fundamental concern.
“The second concern is that from the point of view of members, what happens from a climate change perspective will affect their lives, of course, but it’s going to affect our overall investment portfolio performance, so we have to understand that.”

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