For asset owners wanting to know how to set interim targets for your net zero portfolios, here’s how to do it. Amanda White speaks with Deborah Ng from Ontario Teachers’ on their world-class approach.
Back in January, the C$227.7 billion Ontario Teachers’ Pension Plan made a commitment to a net zero portfolio by 2050. At the time it said it was aiming to set interim targets by the end of Q1 but the fund’s journey is a demonstrable reminder of the difficulty in setting targets for large complex global portfolios. Come September it has now released its interim targets.
Deborah Ng, head of responsible investing at Ontario Teachers’ says the delay reflects the fund’s complexity. OTPP took a collaborative approach with representatives at the most senior levels of the organisation having key buy-in, and it had to incorporate the intricacies of setting net zero targets in a large and growing allocation to private markets.
A net zero commitment was a corporate strategy initiative at Ontario Teachers’. The fund’s net zero taskforce was led by members of the investment executive team, as well as representatives from total fund management and global strategic relationships.
The idea was to get a broad group to work through the interim target setting and get buy-in from the entire organisation. There was a lot of interaction and meetings with the investment teams which Ng says was integral as “they are the most impacted”. It also worked with external consultants to help facilitate some of the work which included extensive interviews with peers.
“It was a collaborative approach that we took across the plan internally and externally. We did a landscape assessment of our peers to find best practice and mostly focused on asset owner peers who had set net zero targets as well as asset managers like Blackrock and Wellington,” Ng told Top1000funds.com in an interview.
“It varied quite a lot with where they were at with their plans, some were at very advanced stages and had targets. A lot of them were top down and we also took a tone from the top approach which unlocked resources and efforts to work towards it on a bottom up basis.”
Setting interim targets
The starting point for OTPP was the International Panel on Climate Change’s recommendation of reducing 2019 levels by 50 per cent by 2030.
The fund landed on interim targets that were a lot more ambitious than that, with a plan to reduce portfolio carbon emissions intensity by 45 per cent by 2025 and two-thirds by 2030, compared to its 2019 baseline.
“We did a lot of scenario analysis, we knew there would be emissions reduction because of the decarbonising world, and we wanted to capture that and add to it,” she says. “All of our businesses are buying electricity from somewhere and with this macro decarbonisation we looked at how much reduction was expected in each jurisdiction and applied that to our portfolio.”
The second step was to spend time with the investment teams and examine where the fund was already looking at opportunities, and what plans there where with the transition of assets.
“There was lots of discussion to understand from an investment strategy viewpoint how investments would evolve from now to 2030,” she says.
One of the nuances here was that the broad indices in public equities were very emissions intensive and driving a lot of the fund’s intensity exposure.
OTPP’s strategy overall is to invest more in private markets and high conviction positions in public companies so the portion of the portfolio that was high intensity, broad-based market investments, would be declining over time. In addition, Ng says, the sectors that were of interest to the deal teams were not the high emissions sectors.
“Understanding the investment strategy helped us to understand the targets,” she says.
More in private markets
Ontario Teachers’ currently has 50 per cent of the portfolio in private markets, and that is expected to grow by as much as $70 billion over the next five years as they lower their allocation to fixed income.
“From an investment standpoint we will be increasing private assets over time and our private equity portfolio is very low intensive compared to public equity,” Ng says. “Part of [net zero] strategy is as we pivot more to PE will be able to achieve some of those reductions.”
As a direct investor, the fund will also use its role as an owner of businesses to set portfolio companies on a clear path to implement Paris-aligned net-zero plans and meaningfully reduce emissions.
“We invest a lot directly, and sit on boards, so we can use that influence to help facilitate improved practices and decarbonisation,” she says.
Part of the net zero plan is to significantly grow investments in companies that generate clean energy, reduce demand for fossil fuels and build a sustainable economy.
Sections of the private equity team have been pivoting towards sustainable energy such as sustainable fuels, bio energy and battery storage.
The fund has also set up a team called VERT – the virtual, energy and renewables team – which is a cross-collaborative team made up of representatives from every asset class.
“This group is working to develop an over-arching total fund strategy for how we find investment in clean energy technology, so they are on the cutting edge,” Ng says. “We are trying to understand the areas of interest, our capabilities and what is most investable. We didn’t want to create a new standalone team, we already have the talent, this is a forum to accelerate that and look at opportunities.”
Green bonds and transition assets
OTPP has a debt issuance program as part of its total fund management program and has signalled its intention to grow its green asset base. It will issue green bonds and invest the proceeds in climate solutions and sustainable companies.
In addition it intends to address transition assets, recognising their importance in the net zero pathway.
“We can buy higher emissions investments and through our efforts help them to decarbonise faster than they planned or could before and that’s an important area for net zero. There is so much focus on emission reduction what we see happening is the easiest way to meet a target is to sell an asset. There will be times when our footprint doesn’t go down as much because we are taking on a high emissions investment, but we will be taking it down in future years. Most importantly, these efforts lead to real-world emissions reductions,” Ng says, adding it is developing a taxonomy to help define that.
OTPP is an anchor investor alongside Temasek in Brookfield’s global transition fund, co-led by Mark Carney, which will scale clean energy as well as invest capital to transform carbon-intensive businesses. PSP and IMCO are also investors.
Ng says a lot of the net zero steps are operational items. Things like how to allocate the targets across the organisation and asset classes, how to define transition assets and measure them in a meaningful way.
“Measuring our green investments is another definitional challenge. We are leveraging our green bond framework, but we also need to understand and measure our entire exposure to green assets and how much that is changing over time,” she says. “We also have to get the deal teams focused and working on private companies to help them moving. We have already done work with portfolio companies to measure their carbon footprint. The work ahead is now we’ve measured it what are the opportunities for reducing those emissions?”
While the fund has been working on the net zero interim targets for the past six months, Ng says the work has just began.
“2025 is not very far away and it will take support from the investment teams to reach these targets. They are aware of targets and are on side but sometimes they need help on getting started so we are working with them on things like how to have the conversation with your portfolio companies. We are looking at what we need to equip the team with to execute this.”
The last piece of the roadmap is on the policy advocacy level to work at the industry and regulatory level to promote policies that are conducive to a transition to net zero.
“As much as we are an influential investor there are much bigger pools of capital out there so standards and regulation also important lever that can create positive change across the entire market .”