Ontario Teachers’ investment chief: long-term capital powers net zero transition

What role do pension funds play in the transition to net zero? And what are the opportunities for investors as businesses, governments and regulators shift towards a greener economy? 

Ziad Hindo, since 2018 the chief investment officer of one of the world's largest pension funds, the Ontario Teachers' Pension Plan, which has net assets of more than $247 billion, gives his take on the energy transition and what net zero means for the investee companies of long-term investors such as 'his' OTPP.

As major investors, what are pension plans like yours doing to address some of the net zero challenges?

Over the last two decades, there has been a growing conviction that material environmental, social and corporate governance factors are important business drivers for investors and businesses. Today, in many ways, these efforts are looked upon as table stakes. We’re moving into an era of impact investing, where investors and businesses deploy capital and play an active role in finding solutions to the world's challenges in a way that generates good risk-adjusted, sustainable returns.

So if we zoom in on your climate approach. 

Our strategy is multi-faceted, it's long-term in nature and it will require capital. It’s at the heart of our impact investing strategy. In 2021, we made a public commitment to achieve a net zero investment portfolio by 2050. In doing so, we set interim targets to reduce portfolio carbon emissions intensity by 45% by 2025 and 67% by 2030. To achieve these targets, we are taking a multi-pronged approach. This includes increasing our exposure to green investments. 

We created a multi-asset class group called VERT [Virtual Energy and Renewables Team], devoted to understanding the energy transition and how we can best invest in it. We also have a plan to allocate around $5 billion to so-called high carbon transition assets, with a goal of using our capital and expertise to help select high emitting companies decarbonize faster.

Can you give us an example of that.

Sure, one example would be a utility that uses coal plants to generate energy. As an investor with long-term capital, we can help the company decommission the coal plants over time while changing energy generation to more sustainable sources. 

In addition to this, we’re also issuing green bonds through our subsidiary Ontario Teachers’ Finance Trust and engaging with our portfolio companies to help them adopt paths to decarbonization in alignment with the principles of the Paris Agreement.

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Sure, and what other methods do you use to push your portfolio companies towards net zero, over time?

One of our most important actions we can take as investors is exercising our voting rights to influence positive change. This is particularly true for topics related to effective boards and governance, which have a huge impact on the long-term performance and sustainability of businesses.

For our investments in public companies, we vote based on what we believe is in the best long-term interest of the company and its shareholders, and in accordance with our proxy voting guidelines. 

On the private side, we control approximately 400 board seats. Not all of these companies have the same access to resources that we have, so we try to help them through educational sessions that enhance knowledge on key topics like decarbonization.

Speaking of decarbonisation and the wider energy transition, you are increasingly faced with more rules and regulation.

Yes, one trend we’re seeing is an increased intervention among countries to support the energy transition. Europe has been setting the standard with its approach to sustainability. More recently, the U.S. has come forward with the introduction of the Inflation Reduction Act (IRA), which we believe is a game changer that will result in a lot of capital being invested in the energy transition.

More broadly, the IRA has forced other governments to think about how to compete in a world that is focused on green industrial policy. Governments are now competing among themselves to attract capital and back the next wave of industries that will support the green economy. 

Canada is promoting some good initiatives, and we think North America as a whole will play a big part in the energy transition. There will be tremendous opportunities for long-term investors!

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