Chad Park, VP of sustainability at Co-operators, discusses the Canadian insurers' target to have 60% of its investment portfolio in impact and transition investments by 2030.
How do you define 'impact investing'?
We define impact investments as those that create compelling financial returns alongside positive social and environmental impact that can be measured, tracked and reported.
Our impact investments cover different impact themes and sub themes. Climate change, for example, is a theme that makes up close to 75% of our impact investments, and within climate change, we further distill down into climate solutions such as renewable energy.
All of Co-operators investments are undertaken through the lens of our sustainable investing policy. And then roughly a quarter of those are impact investments that meet the specific criteria for impact investing. But all of them are scrutinized with the sustainability lens. And, beyond our own investments, we also see our role as one of a catalyst, in terms of how we engage with the market and policymakers. This extends directly from our vision of being a catalyst for a sustainable, resilient society.
Your mentioned 'a financial return plus an impact' and often when we talk about impact, there is this idea that you may compromise on the returns for the benefits of the impact – so still generating some returns, but maybe not as high – is that how you approach it?
No, although that does exist in the market. But at Co-operators, we aim to deliver market or above-market returns and on the whole, our impact investment portfolio has done so thus far. We believe these investments will generate better returns over the long-term as we transition markets toward sustainability and resilience. By de-risking our portfolios and focusing increasingly on investments that drive positive environmental and social externalities, we are making our economy more resilient today and for future generations.
There is a certain aspect of judgment, it's not quantitative, a lot of it is a qualitative judgment of whether there is an additionality in terms of impact?
Even though there's some nuance involved for us to consider something as an impact investment, it definitely needs to be measurable. There has to be something that's quantitative, and we would have to agree that that meets the threshold that we've set for what should be considered impact in our chosen theme areas. For example, we know the total impact achieved by renewable energy projects and initiatives in which Co-operators had invested by the end of 2021 had generated approximately 86.5 million MWh of renewable electricity, enough to provide electricity to 7.5 million homes for one year.
We publicly report as well on all of this. We publish an Integrated Annual Report and a TCFD report, which provides more details on the climate-related issues.
We are also part of the NZAOA so we report as part of the Alliance on these metrics.
There is a tilt, towards climate, it's the main chunk of your impact investments at close to 75%. Is that because that's an area that is more mature and easier to measure with established metrics, and data, compared to social or nature themes?
That is true, but I would add that from our standpoint, this is also tied into our whole purpose as an organization, the reason we exist -- which is to provide financial security for Canadians and our communities. Climate change is a direct threat to that financial security. We've identified our investments as one of the primary and most significant levers that we have to help catalyze action on climate change. So part of it is about the market, but part of it is about our own strategy too, and our sense that climate change is a very high strategic priority for our organization. By investing in ways that will have a positive impact on the climate crisis, we are helping to protect the long-term financial security of our clients and communities, and in turn, will be better able to fulfill our purpose long into the future.
What do you invest in? And is there a challenge to achieve that target with the necessity to maintain a diversified portfolio that matches your liabilities?
In one way it's challenging for the obvious reasons, but in another way, we're also pretty clear. We've set clear targets, and as a regulated insurer we are mindful of the appropriate balance we need to keep in our portfolio.
So within each asset category we need to find the opportunities to pursue more sustainable outcomes.
In 2016 we set a goal of getting 20% of our portfolio into impact investments, which we now exceeded at just over 24%. We'll keep trying to grow that, but it's not going to grow enormously past that percentage for the reason that you laid out. The vast majority of these impact investments are fixed income investments, and we need to have a balanced portfolio, with different asset categories and so on. So, we've now introduced more emphasis on what's been called 'transition investing' and set a new target of getting to 60% of our portfolio that will be in either impact investments or climate transition.
For us, transition has so far largely been about equities, picking up stocks equities that are in organizations that are committed to the transition to net-zero and that are actively managing the process of getting there.
That's very different from all the impact investments that we've been talking about. But it's an example of how we're pursuing a similar sustainability-oriented strategy or outcome, but in a different way for a different asset class.
And as part of the NZAOA we look at different asset classes, one at a time, but this will broaden over time. So it is unlikely we will ever get to 100% of our fixed income portfolio in impact investing, but we believe we will get to 60% and hopefully beyond, in impact or climate transition investments.
Would I be simplifying if I said that impact is easier done on the fixed income side and transition is easier to achieve on the equity side?
It is a simplification, but roughly reflective of our experience.
On setting targets, how much of it is actually planned? Are you looking at the portfolio and seeing what will mature and need to be reinvested in that timeframe? Or are you actually setting targets that are challenging to achieve?
It is definitely a challenge to get to those targets. It isn't just about picking this investment instead of that investment, it's also about trying to catalyze others in the market and economy.
We're not likely to achieve our net-zero target and thrive as an investor if the Canadian economy is not also moving to net-zero. Our role as an advocate, a convener, and a catalyst is fundamental to our work in impact investing and absolutely critical to achieve our vision as a financial services co-operative.
So, part of it is investment selection and scrutiny, but we also need to work on things like policy recommendations and engaging with the policy makers and others to try to move the whole system forward. Above all, we need to demonstrate that this is possible, to mobilize investors at a critical mass that will shift the markets in the right direction to ensure a sustainable and resilient society.
But even if you say, 'it's not about picking this one, instead of this one', at the end of the day, that's how you hit your sustainability targets right?
It's not just about that, because the full range of opportunities we need in order to be net-zero and thrive as an organization are not currently available, which is why it's the long-term target. So, yes, we are making those kinds of choices that you're talking about on an ongoing basis. But we also need to work on catalyzing the market so that there are more such opportunities in the future. If you build it, they will come, so to speak.