W hen will McGill decide to fully divest from the fossil fuel industry instead of focusing on decarbonizing the entire investment pool?
The University has taken an innovative approach by which we are not only looking at the energy sector, but also at influencing companies in other sectors to become more efficient. We believe that focussing on reducing the overall carbon footprint will yield greater benefits than eliminating a couple of holdings in the Top 200 Carbon Underground reserve holders’ list, which represent currently less than 1% of the McGill Investment Pool. Engaging with companies is another selected strategy where we can leverage our position as shareholder to influence corporate decision-making in favor of better environmental practices. It is really the combination of a range of approaches that we believe will have the best outcome to fight climate change.
Did the decarbonization process lead to a dramatic reduction in the number of companies McGill invests in?
At this stage, we have already reached a 20% reduction of our portfolio’s carbon footprint, from our objective set at 33%. We had discussions with fund managers who had the highest carbon footprint in the McGill Investment Pool and had them commit to reducing the carbon footprint. One of the strategies involves a hedge fund managing about $1 billion of assets for McGill and for other investors. The manager has committed to a 50% reduction and has already met the objective by selling most carbon intense holdings, reducing the carbon footprint of the MIP but also of other investors’ portfolios. The reduction of 20% is also a result of the termination of a $75 million carbon-intensive mandate, with the most holdings (57) in the top 200 Carbon Underground list.
What funds or pools should be prioritized to help reduce our carbon footprint?
In the listed equity, we will reduce the carbon footprint by establishing targets with fund managers. In other asset classes, such as in the alternative assets, we intend to invest in renewable energy funds or funds that will contribute to decarbonisation. In the fixed Income asset class, we intend to invest in green bonds. At the moment, we are working on all fronts and in all asset classes. The reduction of carbon footprint in the listed equity portfolios and the impact investments allocation are on track. In addition, we have already more than tripled our investments in green bonds in the fixed income portfolio.
What is the impact of this strategy on the returns over time?
We believe that in a 20- to 30-year window, the impact will be negligible in terms of our investment in listed equities. However, reducing investment in the most intensive sectors, like energy, materials and utilities, will certainly have impacts over a short period of time. The impact on return can be either negative or positive depending on the phase of the business cycle. We might see an impact on returns in our investment in impact funds and in green bonds. The pricing for green bonds might be a little bit higher because there is less supply; same for projects in the renewable energy sector. There is a great demand by investors for renewable energy investments and this has contributed to reducing the potential for higher returns. However, the Investment Committee is comfortable that we will find strategies and opportunities that will permit the MIP to continue to meet the long-term investment objective. We are maintaining the same objective of returns and we believe it will not have too much impact in the long run.
How can your team access the best possible strategies for responsible investments?
Our team works very closely with the vast majority of investment managers we have in the MIP. We are also in contact with others external investment managers specialized in impact funds. We also work with asset management consulting firms which are helping us identify impact investment funds, and we collaborate with other universities and large pension plans looking to achieve this common goal. We also have access to a database of investment managers with specific research reports on their ESG practices.
Why are the fossil-fuel-free fund investments coming from donors only and not McGill?
The fossil-fuel-free fund was put in place in 2017 following McGill’s commitment to commit an initial $5 million contribution from the McGill Investment Pool. There are strong efforts from University Advancement to promote that new fund with donors. We believe the interest from donors will increase over time.
Why does McGill continue to invest in companies that are involved in carbon intensive tar sands?
Fund managers hold investments and stocks in wide and very diversified sectors of the economy. As they abide by our objective to reduce our overall portfolio carbon footprint, they may buy or sell investments in portfolios that will help attain that objective, but they have liberty in achieving this in the most efficient way they deem possible, while adding value to their benchmark. We are accountable for the total carbon reduction across the listed equity assets, but we don’t want to arbitrarily constrain the managers on day-to-day management of their portfolios. In addition, with over 5,000 equity holdings in the MIP, including investment in global market indices and in pooled funds, it would be very expensive to entirely eliminate current and future investments in a selected list of holdings. It would mean terminating mandates with half of the public equity managers.
How will we ensure that fund managers respect ESG commitments and how is this going to change how the MIP is managed?
Every quarter, for each fund manager, we measure the carbon footprint of our investments. We track this in a very diligent fashion in order to deliver on our commitment to achieve our reduction target within two years. In addition, we requested a copy of the ESG policy the managers have put in place to ensure that these considerations are taken into account in their investment processes.
Will McGill's endowment fund seek to become a UNPRI signatory?
Following several discussions with other universities, we continue to believe it is more important to have fund managers become UNPRI certified because they are the ones to select investments in their portfolio. In addition, our managers are responsible for the oversight and implementation of the proxy voting in their ongoing review of company’s corporate governance and performance.
Why does divestment seem more difficult for McGill compared to what other institutions have announced?
Investors have different approaches. When the CAMSR committee met on this issue and conducted a thorough analysis, they came to the conclusion that a combination of actions was better than a single approach. These actions include increasing our impact investments, in renewable energy for instance. We believe the reduction of our portfolio carbon footprint will be beneficial in the long run and will influence the efficiency of many companies in many sectors for the benefit of McGill assets, but also to the benefit of other investors investing in funds along McGill. Since our plan is to immediately implement the recommendations, the community will understand that McGill is not only making announcements but taking concrete actions with an ambitious but achievable action plan.
(Town Hall on McGill's Responsible Investment Strategy, held November 27, 2020)
