with UPP's CEO Barbara Zvan to discuss how to build a sustainable pension plan from scratch :
In 2020, Barbara Zvan took on a
unique challenge, becoming the first CEO and President of the University
Pension Plan Ontario (UPP). While most pension plan CEOs have faced the
challenge of integrating ESG factors into their investment plans and
business models, Zvan had the opportunity to build them into the
foundations.
But her approach was also informed
from the lessons learned of a long career at the interface of
investment, business and government. Before joining UPP, Zvan had spent
25 years at the Ontario Teachers’ Pension Plan (OTPP), rising to the
post of Chief Risk and Strategy Officer.
She also sat on the Canadian federal
government’s Expert Panel on Sustainable Finance, its Sustainable
Finance Action Council (SFAC) – an advisory body consisting of Canada’s
25 largest financial institutions – and now plays a leading role at
Climate Engagement Canada (CEC).
Direct value creation
A defining characteristic of larger
Canadian pension schemes such as OTPP is their willingness and ability
(often enshrined in founding mandates) to make direct investments in
partnership with asset managers. Co-investments appeal to pension funds,
explains Zvan, by helping to improve the risk and return profile of
large-scale, long-term investments.
“We were able to get exposure to
inflation protection, for example, through the infrastructure and real
estate portfolio. It gave us the ability to be on boards to influence
value creation and risk management. That’s important because these
pension plans have to take risk to meet their liabilities and to keep it
affordable,” she says.
Now Zvan is looking to leverage the
experience of OTPP and other larger Canadian pension plans at UPP, which
has a much smaller pool of assets (C$13 billion; US$9.5 billion). UPP
initially provided pension plans to three universities, adding new
clients at a rate of one a year since.
To explore the case, Zvan co-authored
a paper that analysed how Canada’s C$200 billion-plus AUM pension
schemes used their resources and expertise to capture value through
co-investments while addressing four groups of risk: concentration and
reputation risk; operation and development risk; government
interference; and weak governance structure.
One example cited is Caisse des
Dépots et Placements du Quebec’s investment in Montreal’s new metro
system, during which the pension fund leveraged relationships with
government, contractors and the public to help ensure stakeholder buy-in
at the land expropriation stage, minimising costs and delays that could
have compromised long-term returns.
Along with schemes of a similar size
to UPP, Zvan is exploring how co-investing can still offer advantages –
but with a twist to the existing model. Sector expertise is important,
partly to be able to make the right choices, she says, but also to
demonstrate the credibility in the market to ensure plans are offered
the deals that offer the best fit.
“One of the key risk management
attributes of doing private markets deals that you are tied into for a
long time is having that deep sector expertise upfront in your risk
management and your assessment,” she says.
UPP has focused on mid-market
transactions, partly to avoid competition with large rivals, in sectors
such as infrastructure – focused on climate-aligned solutions, including
both green and transition assets – residential and industrial real
estate in developed markets, as well as buy-out opportunities.
The key, says Zvan, is investing in “institutional knowledge” over the long term.
“To keep that partnership with the
general partner (GP) going, you need a really strong pit crew. These
deals don’t happen just by the investor teams alone. You need a strong
legal group, tax group, operational due diligence group, and responsible
investment group,” she adds.
Access to derivatives and synthetic
securities was also a key prerequisite, the report observed, to enable
smaller funds to supply liquidity at short notice.
ESG as talent attractor
Operational from July 2021, ESG
factors were built into UPP’s approach “from the get-go”, rather than
integrated into existing processes. Although UPP did inherit managers
and portfolios from their founding three clients, there were no common
technologies or policies, giving Zvan and team carte blanche to build from the ground up.
Internally, this meant hiring the
people with the right skills and capabilities, as well as implementing
thorough due diligence upfront.
“Everyone we hired is very aligned to
what we’re trying to do around the integration of material ESG factors
into the investments. We would say it’s a talent attractor,” says Zvan.
Externally, it meant working with
managers that bought into UPP’s climate investment transition framework,
and were willing to go on a journey of ongoing improvement.
Not only should managers regard
climate as a systemic and financially material risk, and make some kind
of measurable net zero commitment; UPP also asks them to identify areas
of improvement on an annual basis, by leveraging an industry benchmark,
for example, or addressing an aspect of their governance structure.
“It’s continual and it’s to ensure progress,” says Zvan.
Inevitably, UPP’s priorities have
evolved as its assets have grown – focusing initially on balancing asset
mix and securing inflation protection – with its panel of managers
shifting accordingly. In parallel, the plan has moved away from pooled
to segregated vehicles, in order to exercise greater control and
influence, particularly from a sustainability perspective.
“This is something we’ve been doing
quietly in the background, so we can vote the way that we want, exclude
the way we want and engage directly with companies,” Zvan says.
UPP’s approach has been commended in the latest Canadian Pension Climate Report Card, published annually
by Shift, a charity. The plan was awarded a B+ ranking, based partly on
meeting its 2025 emissions intensity reduction target a year early, but
also the robustness of its climate stewardship and climate transition
investment frameworks.
Shift nevertheless encouraged UPP to
include time-bound criteria and reinforce escalation as part of its
Paris-aligned, outcomes-based climate engagement activities, as well as
setting tougher expectations, backed up by climate-related resolutions
or votes against directors. It also called on the plan to strengthen its
fossil fuel exclusions, including a commitment to a “time-bound and
managed phase-out of existing fossil fuel assets”.
Climate collaboration
To meet its target of reaching net
zero financed emissions by 2040, UPP has been engaging with portfolio
companies on climate and other sustainability issues directly and via a
number of collaborative fora, both domestic and internally focused.
For a relatively small scheme to
manage the impact of its investments on the climate, partnership with
other investors is essential, asserts Zvan. As well as CEC, UPP has
worked with the Institutional Investors Group on Climate Change and
Climate Action 100+. The common thread of the initiatives in which they
participate is a clear and well-understood area of focus, she says.
Another critical success factor for
collaborative initiatives is flexibility, says Zvan. “One size does not
fit all; maintaining flexibility in how they participate and how they
contribute is key,” she observes.
The three initiatives cited all
include asset managers in their membership, who are both competitors and
subject to obligations to shareholders and a network of regulators.
Asset owners may not be competitors, but are subject to similar
considerations, also differing according to factors such as culture and
investment horizon. In the case of CEC, the initiative has expanded to
include international investors alongside domestic ones, the better to
present a range of perspectives to high-emitting corporates.
Zvan says collaborative investor
initiatives must regularly review the effectiveness of their support for
the engagement teams of participating institutions, including by
monitoring impact. This involves close coordination but also “deep dive
research” into targeted areas such as capex alignment.
“You have to measure progress. The benchmark assessment element of these initiatives is so important,” she says.
UPP has also stepped up its bilateral
engagement and stewardship capabilities, as part of its efforts to
encourage portfolio firms to maintain momentum across climate-related
governance, strategy, targets and disclosures.
A significant step this year was the filing of
a shareholder resolution at Alimentation Couche-Tard, asking the
Quebec-based retailer to disclose an emissions reduction strategy. The
resolution, which follows an extensive engagement process, asked the
firm to set medium-term targets for material Scope 1 and 2 emissions
reductions, in line with its peers, as well as setting out its approach
to tackling Scope 3 emissions.
In early September, more than a fifth
of independent shareholders in Couche-Tard supported UPP’s resolution,
making it the most supported climate-related proposal at the firm in
seven years.
“Couche-Tard has already acknowledged
that its fuel and energy business faces material risks from the ongoing
transition — including regulatory changes, shifting market demand,
evolving technologies and changing consumption patterns — but management
isn’t telling shareholders how it intends to manage these risks,” said
Sarah Couturier-Tanoh, Director of Shareholder Advocacy at the
Shareholder Association for Research and Education, which co-filed the
resolution.
UPP is also increasing its scrutiny
of directors, monitoring their effectiveness at overseeing climate risk,
and reserving the right to vote against them at future AGMs if they
fall short. “That’s a very powerful tool,” says Zvan.
Systemic engagement
The importance UPP places on stewardship stems from its investment beliefs,
which include the principle that UPP’s ability to deliver returns to
beneficiaries depends on healthy and functioning financial, social and
environmental systems.
This implies a system-based approach
to stewardship which emphasises the role of government in creating an
enabling policy environment that encourages the private sector to
address systemic risks, such as climate change.
Zvan believes governments are moving
too slowly, to the detriment of carbon-intensive sectors and firms that
struggle to profitably transition to net zero. But her work on Canada’s
SFAC has deepened her understanding of the “different worlds” inhabited
by the public and private sectors, as well as the size, complexity, and
fragmented nature of government.
Effective engagement with government
requires “an appreciation of what they’re up against,” says Zvan.
“Continuous sharing back and forth is important,” she adds, allowing
that this need is more evident in Canada, where the federal system
requires as many as 30 separate rule changes in order to implement, for
example, a country-wide approach to sustainability disclosures.
“Local investors can provide insight,
but it’s really important for the government to hear from the foreign
investors too,” Zvan adds.
It’s not just dealing with regulators
in 13 provinces that makes it hard to align Canada’s economy with net
zero and planetary boundaries. The country has long relied on its extractive and often carbon-intensive industries for growth and jobs, contributing more than 8% to GDP in 2024.
This means policy action and clear
guidance to major industries are particularly important. Canada’s
scorecard is mixed in terms of providing the signposts to a more
sustainable economy, such as a taxonomy that helps investors to support
firms in transition.
Last December, the Canadian
Sustainability Standards Board (CSSB) adopted the International
Sustainability Standards Board’s climate and general sustainability
disclosure standards late last year. The Office of the Superintendent
of Financial Services’ B-15 regulation, updated in February
to conform with CSSB standards, lays out clear expectations for
federally-regulated financial institutions. SFAC’s recommendations,
including on a transition-focused taxonomy, have been adopted. Prime
Minister Mark Carney expects the taxonomy to be effective for Canada’s
most carbon-intensive sectors next year.
Governance and oversight of
transition guidance remains an issue, suggests Zvan, seeing a need for a
permanent body, independent from government, to engage with the private
sector on transition planning.
Less positively, the Canadian
Securities Administrators, which is the coordinating body for the
country’s securities regulators, has put on hold
disclosure requirements for public companies, favouring voluntary
adoption instead. Geopolitical headwinds have not helped, acknowledges
Zvan.
“The trade issues are real. Canada
exports a significant amount, much more than the UK and Europe, to the
US. And so that is taking up a lot of time and attention for
corporations, for financial institutions, as well as our federal
government. The reality is, we have to keep this progress going,” she
says.
This discussion was released last week but I only had a chance to listen to it today and it's excellent.
Now, I would separate the discussion in two parts, how was UPP created, what is unique to this plan, where is their focus and how did they ramp up in the middle of Covid?
The second part is on sustainability and its importance at UPP and how they are tackling this issue inside their organization and influencing peers to vote on certain proposals like asking Couche-Tard to set medium-term
targets for material Scope 1 and 2 emissions reductions, in line with
its peers, as well as setting out its approach to tackling Scope 3
emissions.
Admittedly, Couche-Tard is the last company I think of when it comes to climate change is climate disclosure but if UPP proposed this proposal, they did their homework and feel strongly about it.
Also, I am a big believer in science-based climate proposals and more importantly, on striking the right balance between climate initiatives and future economic prosperity.
So, when Shift goes after UPP or other pension plans for investing in oil and gas or pipeline firms, it doesn't just rub me the wrong way, it makes my blood boil because in my humble opinion, we have dithered far too long listening to climate activists and need to reintroduce logic and sensible policies that will create jobs and create economic prosperity.
"Keep it in the ground is just idiotic," it's a slogan which needs to be laid to rest once and for all.
Again, these are my opinions, I don't agree with every pension fund manager on all climate issues but I definitely listen to their views and Barb is an expert worth listening to.
So, without rambling on here, please take the time to listen to her discussion with Chris Hall.
Below, in this video, CEO Barbara Zvan explains how the University Pension Plan Ontario was
designed to be green “from the get-go”, while maintaining a laser focus on value creation.
Most pension plan CEOs have faced the challenge of integrating ESG factors into their
investment plans and business models, but Zvan highlights how UPP leveraged its
opportunity to build them into the foundations.
Earlier today, Ontario Teachers’ announced the
appointment of Christopher Metrakos as Executive Managing Director,
Infrastructure & Natural Resources:
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