51±¾É«

Meeting monthly, and sometimes more frequently, the Responsible Investment Working Group (RIWG) followed an education, research and consultation process, which included:

• Receiving presentations on the university’s investment funds and managers;
• Reviewing existing university policies and practices related to ESG;
• Hearing from legal counsel on the responsibilities of the Board of Governors with respect to investments;
• Reviewing reports and articles on responsible investment;
• Studying the policies, practices and responses to divestment campaigns at other universities and large pension funds in Canada;
• Commissioning research from the university’s investment advisors on responsible investment products that might fit the university’s portfolio requirements;
• Requesting and reviewing research on portfolio impacts of divestment and investing in responsible investment products;
• Soliciting feedback through written submissions and oral presentations by community members; and
• Discussing the implications and options for 51±¾É«’s pension and endowment funds.

See key definitions and concepts related to responsible investment, reference material consulted, and a description of the consultation process.

Other Canadian Universities’ Approaches

The RIWG reviewed reports from other Canadian universities that responded to requests for divestment.

The universities reviewed concluded that the primary responsibility of their Boards is to abide by their fiduciary duty to maximize returns within an acceptable level of risk. There was consensus that divestment is not an effective approach to responding to the issue of climate change, and that ESG policies would naturally deselect the companies for which the injurious impacts of their activities outweigh the societal benefits.

Several of the universities committed to engagement strategies that will enable their institution to work with fund managers and other investors. They further proposed to interact with industries and sectors through direct and indirect channels to encourage positive ESG policies, procedures and practices. Some universities have proposed to research or implement endowment funds that are sustainable or fossil-free endowment investment funds. This includes a commitment of seed money to initiate the fund. In most cases, the universities discussed or implemented mechanisms or processes by which universities will receive or consider future petitions or expressions of concern.

The University of British Columbia, University of Toronto and the University of Guelph also emphasized the bigger picture of sustainability and ways in which universities can address climate change through research, education and energy conservation. This emphasis is linked back to their vision, mission and strategic priorities.

Legal Responsibilities Related to Investments

The RIWG met with the university’s legal counsel on two separate occasions and also received a written report. Consistent with the advice provided to other Canadian universities, the Board of Governors has the legal obligation to maximize financial returns to the investment funds over the long term within a reasonable risk profile. The Board may consider ESG factors in investment decisions, but not to the detriment of the long-term investment returns to the funds. The Board may also choose to hold securities directly rather than through pooled funds; however, the additional administrative costs and management fees must be weighed against the long-term returns to determine where there will be a negative impact on overall returns. Beyond statutory and common law duties, the Board must also take into account contractual obligations related to the endowments, for example, if there are agreed upon investment targets or asset mixes for those funds. These legal obligations and the potential for legal liability place constraints on options available to the Board to respond to requests for divestment or related alternatives.

Financial Considerations and the University’s Fiduciary Duty

As noted in the summary above, the university invests the pension and endowment funds with third-party managers rather than directly, which is the most economical strategy for an investor of 51±¾É«’s size. In order for the Board to consider divestment of fossil fuels, it would have to identify pooled fund investments that do not and will not invest in fossil fuels. In order to meet its fiduciary obligations, the Board would need to assure itself that these funds could be expected to achieve the same or better long-term returns as the existing portfolio with a similar risk profile.

Several community members pointed to research that fossil-free funds are producing similar returns to non-fossil-free funds and therefore the university could shift its investments to these fossil-free funds and continue to meet the university’s fiduciary obligations. Upon researching fossil-free funds, RIWG found it difficult to conclude that financial performance would not suffer from divestment of fossil fuels. There is a lack of robust, long-term data on fossil-free funds, because many are relatively new. Most of the studies referenced by consultation participants involved companies with strong ESG practices and sustainable investment practises. ESG practices and sustainable investment practises are often correlated with positive returns because they signal well-run companies; however, strong ESG practices and sustainable investment do not always mean divestment has occurred.

51±¾É«’s investment consultant performed a search of the fund universe to identify non-CU200 funds that could possibly replace 51±¾É«’s existing pooled funds. Out of a fund universe of 727 funds, the investment consultant was able to identify 15 that fit into 51±¾É«’s investment asset classes and were also non-CU200. The investment consultant analyzed these funds based on 51±¾É«’s standard risk/return guidelines. These non-CU200 Funds underperformed as compared to 51±¾É«’s current funds on a risk and a return perspective. Therefore, RIWG expressed concerns that 51±¾É« would compromise its fiduciary obligations if it replaced 51±¾É«’s existing funds with non-CU200 funds. Another and perhaps more significant concern arising from this analysis was the limited number of funds that would meet this criterion (15 of 727). This would raise 51±¾É«’s diversification risk level for achieving fund balance.

The RIWG also consulted with many on-campus and industry experts about the financial impacts of divestment¹. A number of challenges were raised with the concept, including:

• The difficulty of determining where to draw the line, i.e., should the university divest of companies extracting fossil fuels or should this extend to their suppliers, financiers and customers;
• The downstream impacts of divestment on companies not intended to be targeted;
• The low likelihood that the company from which an investor has divested will be negatively impacted by the divestment;
• The difficulty of assessing stranded asset risk on a portfolio taking into account the potential downstream impacts on many different holdings and the uncertainty around timing;
• The importance of portfolio diversification and the impact of divestment from an entire sector or choosing funds from a very narrow investment universe (see above); and
• Managing responsible investment concerns for a portfolio comprised mainly of pooled funds.

Community Submissions

The RIWG interviewed the authors of the petition and other experts from within and outside the 51±¾É« community; received 47 written submissions; and hosted public consultations at each of 51±¾É«’s Waterloo and Brantford campuses with members of the working group in attendance. RIWG heard from faculty, staff, students, alumni and broader community members. The submissions and public consultations were very helpful to the working group and emphasized the importance of this issue to the 51±¾É« community. The RIWG sincerely appreciates the time, effort and passion brought forth by 51±¾É«’s community members.

The majority of 51±¾É« community members recognize global warming and the associated effects on climate change as one of the biggest issues facing society today. The information presented in the submissions provides compelling evidence of the effects of burning fossil fuels on our environment, the impact of resource extraction on surrounding lands and inhabitants, the particular harm to Indigenous communities, and the need for society to act to ensure we mitigate these potential effects into the future. Other members of the community suggested other industries that the university’s responsible investment policies should contemplate, including the weapons industry, fast fashion and industries known for human rights and other abuses.

Although there was general consensus on issues of importance to community members, there was a diversity of opinion on whether and how to reflect these issues in the investment policies for the pension and endowment fund. There were also many questions and misunderstandings about these funds, pointing to the benefit of providing more transparency and education.

Note

¹ The RIWG would like to acknowledge particularly the contributions of Professor William McNally (a member of the Board’s Pension Committee), who with the assistance of Professor Brian Smith (a member of the Board’s Investment Oversight Sub-Committee) and Associate Professor Fabricio Perez, prepared a .