Responsible Investing: OTPP on direct responsibility

As a pension fund seeking to both maximise and safeguard returns for its members, responsible investing comes high up the list of priorities for Ontario Teachers’ Pension Plan (OTPP).

“Our framework at Teachers’ is to look at financial and non-financial factors,” says Barbara Zvan, senior vice-president, strategy and risk, and chief investment risk officer at the pension plan. “We started talking about governance many years ago.”

The C$154.5 billion ($106.6 billion; €97.9 billion) pension plan, which has been investing in private equity since the early nineties, currently invests around C$21 billion in private equity globally, with a roughly even split between a funds programme and direct and co-investments.

Within its primary fund investing programme, OTPP has made commitments to funds such as local manager TorQuest’s C$535 million Fund III, the $4.7 billion Ares Corporate Opportunities Fund IV, the $2.68 billion MBK Partners Fund III and the northern Europe-focused €4.82 billion EQT VI, according to PEI Research & Analytics.

Within its well-established direct investment programme, one of OTPP’s highest-profile investments was Maple Leaf Sports and Entertainment (MLSE), the owner of the Toronto Maple Leafs ice hockey team and the NBA basketball team the Toronto Raptors, in which it first invested in 1994. In 2012 the pension plan sold what was then a 79.53 percent stake in the company to Bell and Rogers Communications for C$1.32 billion.

As well as investing in accordance with its board-approved Risk Appetite Statement, which sets out the OTPP board’s tolerance for various investment-related risks, the plan has also established five responsible investing principles that help to guide its investment team as they evaluate investment opportunities and the associated material risks.

The principles seek to balance risk, return and reputation, and include: integrating ESG factors into its investment processes; being engaged owners; evolving its responsible investment practices; seeking relevant information and disclosure; and collaborating with like-minded investors.

The motivations behind the focus on ESG are the same whether OTPP is investing in a fund or backing a portfolio company directly. However, in practice, the ESG due diligence takes very different forms.

“When you’re dealing with a fund, you’re trying to understand how the GP will look at different situations and understand how they manage their portfolio companies,” Zvan says. “You really want to get a grasp of what they’ve done in the past, what kind of policies are in place, what kind of practices they have in place.”

With a direct investment OTPP takes on the ESG assessment work that the GP would be doing on each individual portfolio company. It has the opportunity to do its own “deep-dive” and to ask detailed questions around any specific material risks.

“They’re difficult in different ways,” Zvan says of assessing investment funds and portfolio companies.

“In buying a direct company, there’s always time limitations, you’re confronted perhaps with a company you don’t know that well, you have to rely on different consultants’ views, you’re trying to ask the right questions and you’re trying to balance the things that you’re finding. Whereas with a fund you’re really trying to make sure that they have the right practices and procedures in place, and if you’re on the LP advisory committee you can ask questions. The approaches are quite different, but both are still very engaged.”

Of the three aspects of environmental, social and corporate governance, the governance part is the first priority.

“If you don’t have governance, then it’s hard to deal with the environmental and social, and even any other type of issues,” Zvan says. “We don’t see it as the most important, but it’s definitely an enabler. If you don’t have it right, it’s hard to deal with the other problems.”

For OTPP, which has a long-term investment horizon and in some cases, such as MLSE, holds its investments for as long as several decades, understanding material issues around ESG upfront is crucial, Zvan says.

“Value creation is really important, and during that period of time we’re looking to improve the business in many different ways. One of them is around ESG issues that we observed during due diligence or that we’ve learned while we’ve been holding the company.”

Instead of having specific responsible investment team members that work alongside the private equity investment team at OTPP, Zvan’s team prepares the investment professionals themselves to take on the responsibility for assessing material ESG issues.

“The way that accountability works here is that it lies with the investing team,” Zvan says. “We’ve tried to make sure that the portfolio teams are equipped. We have some speciality skills in my own department that assist them in making sure that they ask the right questions and understand the information they’re receiving back.”

When it comes to co-investment partners, Zvan sees a broad range of attitudes to and capabilities around ESG among the GP community.

“There are some GPs we looked to when we were putting our own practices in place, and others we were trying to move along,” she says.

However, Zvan is increasingly finding that fund managers are “aligning much more with us” on their approach to ESG.

For fund managers seeking a commitment from OTPP, when discussing ESG Zvan suggests listening closely to the pension fund’s own point of view on responsible investing and then presenting a clear picture of how their own policies have evolved and how they interact with their portfolio companies on material ESG issues.

“This is an area where people are progressing and gaining experience, and so [we’re interested in] how they’ve evolved [and] how they’ve learned to get a better understanding of how they’re equipped going forward,” Zvan says.

“We’re looking at [whether] they understand it from a return point of view, a risk point of view [and] a reputation point of view. How do they understand ESG? How important is it to them?”