Why internal management at Canada’s BCI includes ESG

Like many large pension funds, British Columbia Investment Management Corporation, BCI, the $211.1 billion asset manager for around 30 Canadian pension funds and insurers, has steadily internalised asset management over the years.

Now BCI’s reduced reliance on external managers requires a similar in-house approach to ESG and sustainability that is also bespoke, expert, consistent and controlled. Enter Jennifer Coulson, BCI’s first global head of ESG, recently promoted to the new position.

Coulson joined BCI eleven years ago as part of the public equity team, back when ESG strategy was primarily focused on voting, engagement and public policy, and BCI had little in-house management.

Today a total portfolio programme built on four pillars (invest, integrate, insight and influence) seeks to capture ESG opportunities and manage risks in a nuanced and fast-changing environment where the benefits of internal management are manifold. “As our assets have been internalised, our focus has shifted to ESG integration through a comprehensive corporate-wide programme,” she says.

For example, managing assets internally has allowed BCI to integrate ESG at the ground level across all asset classes, bringing complete control of the process.

“We really love the flexibility of being able to design something that is a fit for us,” says Coulson. “It is about the flexibility of doing it internally and doing it how we want. We don’t have to continually go back to an external manager, who will have several clients that they need to accommodate, with our expectations.”

Working with global frameworks like SASB and ISSB provides essential tools for the team. But BCI also takes pride in pursuing and developing its own, bespoke processes. For example, it has created an ESG risk and opportunity framework that involves comprehensive scenario planning for systemic issues like climate change across different sectors, revealing how an asset will behave based on BCI’s own underlying assumptions.

These internal models provide full granularity, she continues. “It helps us at a total portfolio level to see if we are getting too much exposure in one area and not enough in another.”

Elsewhere, BCI has partnered with Dutch investors PGGM and APG, as well as AustralianSuper, to develop the AI-powered Sustainable Development Investments Asset Owner Platform, SDI AOP.

total portfolio approach

As BCI grows its internal ESG expertise, how to structure integration has been front of mind. In a total portfolio approach, ESG professionals are embedded into each asset class across the fund, fully aligned with asset class teams and investment committee members making decisions.

This approach replaces a previous system she describes as “de-centralised” whereby members of the different asset class teams would call on the ESG team for expertise.

“Now the ESG perspective is within the asset class,” she says, describing one of her roles as providing an overarching consistency, bringing the 16-person team of which she has 5 direct reports together to function as a cohesive unit.

Another part of the role involves ensuring that ESG is treated differently in different asset classes. ESG due diligence on an infrastructure asset, that the fund might own for 30 years and is vulnerable to physical climate change, will differ from analysis of a liquid asset that is easy to sell.

“ESG integration looks different in fixed income than infrastructure or equities given the varying investment horizons and the physical nature of the asset,” she explains. “We are trying to create something that provides consistency, but which is also sensitive to the realities of the asset class.”

Private market nuance

ESG also looks different in private markets. And because most of her expertise lies in public markets, managing ESG integration in BCI’s private markets, where the investor still uses external partners, has been a new experience.

She is particularly focused on working with GPs and portfolio companies to ensure they understand BCI’s expectations in a joint effort between her team and people in those asset classes looking after the relationships.

She is also focused on bringing real consistency to manager selection in private markets. Strategies include careful assessment prior to onboarding and regular monitoring as well as tracking managers committed to the Principles of Responsible Investment – around 80 per cent of BCI’s managers in private markets have signed the PRI.

She notes that in many cases, engagement in private markets is quicker.

“As an owner in private markets, you can get into a room together and present a case; show how it would add value, and implement it, pretty much right away.”

That compared to public markets where it takes time for investors to build relationships with the company, ensure they understand the business and where (because these companies are accountable to more shareholders and stakeholders) discussions never comprise just one conversation.

BCI’s engagement program is run around KPIs where it uses specific indicators to measure corporate performance around, say, climate or diversity and can chart the change in the numbers over time. “We are aware that engagement takes time. It is not a silver bullet; it takes time and persistence to do it well and it means we have to put actions behind our words and really invest in engagement.”

Increasingly her focus is turning to policy engagement too.

“When you advocate at the policy level you are lifting all boats. If you go straight to the regulator, you can achieve widespread change and we are spending more time on this,” she says. “We will continue to push on the regulatory front to try to ensure governments hit the appropriate targets and push companies to innovate and invest in research and development. The transition involves everyone, but governments must set the tone.”

In one high profile example, BCI is currently engaging with Ontario Securities Commission (OSC) and other regulators to improve corporate disclosure, requesting companies on the exchange publish diversity statistics of their board members beyond just gender.

The investor can’t implement its proxy guidelines and enforce expectations if it doesn’t have this disclosure from companies, explains Coulson. “We can’t judge if a director is from a minority or not; it needs to come from the company.”

BCI has contributed to an ongoing consultation process around better disclosure at an Ontario, BC, and federal level. Progress to date includes new regulations like the Canada Business Corporations Act now demanding better corporate disclosure, although only for a subset of companies.

Will that be extended? “I am hopeful we will get greater disclosure,” she says. “It is hard for them not to do something in this space. It is just a question of how specific it will be, but we are going to push for specificity.”

Hard won, slow victories amount to big rewards in the role, but she reflects that although some elements of ESG have got easier over the years (like the availability of data for larger and private companies) it is still fraught with complexity. Like the constant evolution of tools and methodologies that don’t always make ESG easier. “Keeping up with the pace [of change] is very challenging,” she says.

“For me, ESG is just part of the investment process,” she concludes. “We are not here trying to take on a specific issue; we are doing everything in the best interest of our clients from a financial standpoint. In terms of managing risk and capturing opportunities, ESG is still financially material and not looking in this area would be imprudent.”