Stewardship: BCI plays the long game

Stewardship at British Columbia Investment Management Corporation (BCI), the C$250.4 billion ($179 billion) investment manager is wide ranging. From voting at shareholder meetings at every public company in the portfolio, to applying pressure on North American banks to finance more clean energy; advocating on tying executive compensation to sustainability targets; and cajoling oil and gas companies to incorporate climate risk assessments into their audited financial statements, stewardship is multi-faceted and progress hard-won.

“There is no magic bullet for engagement,” says Jennifer Coulson, senior managing director and global head of ESG, at BCI which has just published its first Stewardship Report detailing its methods and progress on how it uses its ownership rights and influence to drive sustainability.

Engagement with policy makers is a key element of strategy and although Coulson describes coordination and consultation with governments as “time consuming and requiring significant effort” – BCI contributed to 26 ESG-related policy consultations, roundtables and joint statements last year – she says the rewards are impactful, long-term, and far-reaching. They also have the potential to drive progress not only in BCI’s current portfolio companies but in future investments too.

“Investors can play an impactful role as the connective tissue between companies and policymakers. Now more than ever, we need coordination on policy, regulations, and mechanisms that incentivise changes in behaviour and investments in solutions,” Coulson says.

Most recently, BCI’s engagement with the Canadian government together with peers in the Sustainable Finance Action Council contributed to policy makers announcing next steps for Canada’s long-awaited green taxonomy at PRI in Person in Toronto.

“Seeing the federal government officially back this taxonomy is a promising step forward on climate and a positive development for attracting green and transition capital to Canada,” Coulson says.

Elsewhere, BCI has actively engaged with the regulator and global capital markets to help shape the creation of the IFRS sustainability disclosure standards. The stewardship team communicate disclosure expectations with public and private companies, and she notices an increase in companies voluntarily reporting against the SASB Standards.

Coulson says she also notices positive momentum at the policy level on issues like gender diversity on boards.

“When BCI began engaging on the topic of women on boards average representation for TSX Composite Index companies was 9 per cent, last year it was more than 36 per cent,” she says.

“This was achieved by working with the securities regulators on disclosure requirements and engaging directly with companies at the same time.”

Direct engagement with companies can often feel more immediate and productive than engaging with policy makers. But she warns this “does not necessarily translate into easier” given the effort and resources required to research, coordinate, and engage in constructive conversations. Engagement is a complex, non-linear process that varies from company-to-company in the depth and breadth of topics as well as the type of outreach.

BCI’s stewardship report reflects just how tough it is, stating that 40 per cent of engagement outcomes are “neutral” indicating that a company hasn’t taken steps towards the “desired action” and there is more work to do.

Coulson counters that in instances with a single request, like asking companies to respond to CDP, the engagement could remain neutral while BCI waits for the disclosure results before moving from neutral to objectives-achieved. Some of the investor’s more complex, long-term engagements that have multiple topics and milestones can be assessed differently year-on-year depending on the overall progress.

More encouragingly, direct and collaborative engagement with companies can be highly effective for targeting niche issues or in instances of  gaps in regulation, where BCI can drive standards.

For example, Canadian investors have been engaging securities regulators for more than a decade on say-on-pay. Despite most Canadian issuers taking this on voluntarily, a mandatory requirement does not exist other than for companies incorporated under the Canada Business Corporations Act.

“Because of the policy gap, it was easier to achieve the desired outcomes by engaging directly with the corporates and filing shareholder proposals,” Coulson says.

One area BCI is engaging with corporates is around bond issuance, helping shape the sustainable bond market and trying to increase the product offering available to fixed income investors. While public equities come with explicit and well-defined shareholder rights like voting, she insists investors in fixed income have equally powerful levers through their financial commitments and support for new issuances.

“The bond market is evolving and strong ESG practices are now a basic requirement for conventional and sustainable issuers alike, Coulson says.

“By meeting with companies to express our expectations and share our expertise, we can actively shape bond programs and instruments that align to globally recognized best practices, while setting a high bar for future issuances.”

She is outspoken on the shortcomings of sustainably linked bonds.

“Unlike labelled bonds, sustainability-linked bonds (SLBs) often lack ambitious targets and have minimal penalties for missing the targets they do have, limiting the incentive for an issuer to actually pursue sustainable solutions. We have seen less enthusiasm from the market for these instruments.”

BCI is a member of the ICMA Sustainability-Linked Bond Working Group and the Sustainability-Linked Loans Refinancing Instruments Taskforce to try and help improve the overall product offering for SLBs.

Coulson also shares her concerns about the lack of progress at the PRI, reflecting that although the right conversations have happened, notably on climate, they remain insular.

“Conversations are generally taking place between those who are already bought-in,” she says.

“To see real, meaningful progress, we need to expand our reach and engage in broader dialogue, particularly with groups that have differing views. We must keep top-of-mind that these challenges affect everyone and demand collective action from all players, not just the most passionate.”

One area she’d have liked to have seen more progress was around “getting back to basics” on corporate governance. She believes a lack of effective governance fundamentals related to board independence, management compensation, and diversity, even in developed markets, continues to impact long term sustainable returns.

“We can’t overlook the power of good governance practices in providing a solid foundation for progress on material environmental and social issues,” she says.