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Michael Kelly – OMERS

How Canada’s pension plan is tapping into sustainable investing

It may have been tough to contribute to an employer-mandated retirement plan during those working years as a firefighter or police officer, but Ontario retirees who’ve put in these hours and dollars can look forward to a monthly pension check throughout their retirement years.

Being able to drive a new car, travel, take the family to a Toronto Blue Jays ball game, or simply make needed home improvements in retirement might be expenses within reach, thanks in part to some mindful, responsible investing for pensioners navigated by OMERS and its Chief Legal Officer Michael Kelly.

Michael Kelly – OMERS

Michael Kelly | Chief Legal & Corporate Affairs Officer | OMERS

It’s Kelly’s belief that moving beyond traditional investment models to incorporate more progressive themes such as environmental, social and governance factors—known as ESG—will help deliver sustainable returns to OMERS pensioners.

To that end, from his office in Toronto, Kelly is leading the team globally to carefully build an ESG framework to help invest the plan’s more than $100 billion global portfolio—which benefits more than 500,000 members.

“As the world changes, it’s important to look at the long-term financial impact of issues like climate change and evolve our investing frameworks to integrate these 21st century business risks and opportunities,” he says. “OMERS has a financial obligation to prepare for a future where corporate success will be connected to factors such as inclusive and diverse leadership, sustainability and social license to operate.”

Transitioning to a new model

Since 1962, OMERS has safeguarded a defined benefit pension plan which supports Ontario’s firefighters, police and other municipal sector employees. Its mandate is to provide people with a pension during their golden years based on their earnings and the number of years they contributed to the plan.

But while the purpose and mission has been constant, the method of achieving it must reflect the times, Kelly says. In a constantly changing investment landscape, OMERS’ investment teams must consider a broad array of factors before laying money down in both public and private enterprises, he notes.

“ESG integration has become an increasingly important tool, but it does require more effort in the decision-making process,” Kelly explains.

Michael Kelly – OMERS

He notes it wouldn’t make sense to invest in a company with a track record of poor labor practices or human rights transgressions. Nor would it be wise to invest in fossil fuel assets without understanding whether risks associated with climate change, such as stranded assets, consumer demand patterns or government policy, pose material risks to its business strategy.

“For pension plans such as OMERS’ … ESG investing doesn’t mean advancing a social cause, per se, but it does mean taking a more holistic assessment of factors that affect value and risk,” Kelly says. “Our mandate is to provide a financial return to our pensioners, but we believe that companies with strong ESG practices will perform better, particularly over the long term.”

Getting buy-in

Michael Kelly – OMERS

When OMERS decided to evolve its ESG practices, Kelly created a framework through a board-approved policy, guidelines and specific ESG assessment processes for each asset class.

With a decentralized investment structure comprised of business units focused on real estate, infrastructure, private equity and public markets, the goal, he notes, was to provide a unifying strategy reflecting the unique investing styles and circumstances of each asset class.

For example, the infrastructure team typically spends months assessing a direct investment in an asset and can make direct inquiries and “touch and feel” the asset before deciding, he explains.

“We had to be flexible, yet have overarching strategic investment principles,” Kelly says. “Investing styles across our asset classes are unique and we had to respect that, otherwise there would be no buy-in. One-size-fits-all was not going to be a successful approach.”

Creating the framework took six months and was completed in March 2019. To get perspective outside of OMERS, Kelly reached out to his Canadian pension peers and other global institutional investors and retained an OMERS portfolio company, ERM, that is active in this space.

He also gained insights from investor organizations supported by OMERS, such as the Investor Leadership Network and the Canadian Coalition for Good Governance and continues to collaborate with these and other groups, such as the World Economic Forum.

The roadmap

Learning from those experiences, Kelly developed the OMERS Sustainable Investing Framework, a roadmap for the organization.

Embedded in that document, OMERS established a vision and mission statement to be a leader in sustainable investing and to include areas of concern such as climate change, indigenous rights, labor practices, inclusion and diversity, anti-corruption and cybersecurity in its investment decision-making.

Michael Kelly – OMERS

“I expect there will be more regulation in the ESG space in the future. Right now, it’s more best practices and voluntary disclosure requirements, but we are starting to see regulatory initiatives, particularly in Europe,” he notes.

Most recently, the group completed work on a carbon footprint project within its portfolio, that allowed it to analyze the portfolio through a “carbon lens.” Investment teams have also been working on ESG scorecards for their current portfolios, identifying areas where engagement can help to improve the scores. These initiatives have had positive engagement with investment teams, particularly younger employees, Kelly notes.

Integration of education

Kelly came to OMERS in 2006 after 12 years as a corporate and M&A lawyer in Toronto, London and Ottawa, joining its Borealis Infrastructure division. He used his skills in negotiating acquisitions of infrastructure assets and related partnering and financing agreements—while developing his knowledge in the areas of energy and transportation.

Equipped with a business degree from Wilfrid Laurier University in 1989, an LLB from the University of Toronto in 1992 and a master’s degree in international relations in 2004, Kelly says he was well-suited for work needing a global perspective. After eight years as executive vice president and general counsel at Borealis, as the infrastructure arm of OMERS was then known, he was promoted to general counsel in 2014 and is now chief legal and corporate affairs officer and serves as the chair of the Sustainable Investment Committee.

Michael Kelly – OMERS

“It’s a dynamic and challenging time in the investment business. The issues are complex, the reach is global, the world is changing, and many different perspectives must be brought to the table to make good, forward-looking investment decisions,” Kelly says. “The combination of these factors presents a lot of unique and interesting issues … no two days are ever the same.”

Published on: November 3, 2020

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