BCI’s Coulson: “private markets are well-suited to engagement”

Part 3 of NZI’s Stewardship Series looks at why the Canadian pension giant has become increasingly focused on private market stewardship

One of Canada’s largest institutional investors, British Columbia Investment Management Corporation (BCI) has been engaging companies on their climate impacts for over two decades.

BCI manages a portfolio of public and private market investments on behalf of 29 British Columbia public sector clients, including 10 public sector pension funds, three insurance funds, and various special purpose funds.

With approximately half of its $250bn AUM invested private markets, BCI is increasingly focused on stewardship in private markets. Net Zero Investor sat down with Jennifer Coulson, senior managing director & global head, ESG, to find out more.

Of the top 100 carbon emitters, only 30 are listed on a stock exchange. Is engaging with private markets an important  part of your efforts to reach net zero by 2050?
One of our climate ambitions is to ensure at least 80 per cent of BCI’s carbon-intensive investments across asset classes have set mature net-zero aligned commitments by 2030. With about half of our $250bn in gross AUM invested in private markets, engagement with our private portfolio companies and partners is critical to achieving this goal, as well as managing climate risk and finding new ways to create value for our clients through the energy transition.

To support our increasing focus on engagement in private markets, we have grown the ESG teams embedded in our private equity and infrastructure and renewable resources programs, and recently developed a data platform that automates and provides on-demand access to climate information to empower portfolio managers and our investment teams.

While ESG stewardship in private markets is still developing, these asset classes are well suited for engagement, particularly to capture long-term sustainability trends. Investors are uniquely positioned and incentivised to support ESG performance and initiatives where it will increase risk-adjusted returns for clients. Through engagement, our partners and portfolio companies can tap into our team of experts and build value over a longer time horizon that can be realised at exit, which we see as a competitive advantage.

Can you provide some examples of specific engagements?
Over the past year, we have engaged extensively with five portfolio companies in our private equity programme, representing $1.6bn in net asset value, to establish and quantify ESG-related initiatives. Through this work, we have identified numerous opportunities for value creation and are working to execute on ESG-related initiatives that we believe can unlock hundreds of millions in value for our portfolio.

One example is PS Logistics, a leading flatbed truck transportation and logistics provider in the US. Collaborating with management, we quantified the financial benefit attributable to their “driver-first” culture. Management’s focus on prioritising drivers has led to distinct financial benefits such as reduced insurance premium costs, avoidance of costs in recruiting and training new drivers, lower energy costs through route optimisation, and greater market share from clients who are focused on sustainability in their supply chain.

Then, in our infrastructure & renewable resources program, we provided active oversight and strategic direction as a board member and owner of Mosaic Forest Management (Mosaic), a timberland management company located in Canada, on the development of its Big Coast Forest Climate Initiative. The overall direction of the company involves selling certified carbon credits generated from conservation of old forest habitats. BCI participated on a carbon credits committee to oversee the evaluation and execution of the initiative.

Is there a big difference between stewardship practices in private and public markets?
Stewardship across public and private markets have a shared overarching goal: leverage your rights as an owner to manage risk and create long-term value for clients and beneficiaries. In all cases, we prioritize material issues and opportunities, and focus our time and effort where we can have the highest impact.

The differences are often driven by the nature of the relationship between the investor and the investment. Private and public company owners have distinct levers of engagement available to them.

For example, investors in public markets typically benefit from consistent and predictable regulatory and listing requirements, all of which provide an annual opportunity to engage through proxy voting. As a large institutional investor, we often have access to company boards and management.

However, shareholder bases aren’t always aligned on climate issues. Our direct engagement efforts, therefore, require patience and persistence. Being effective means taking the time to build credibility with management teams as they begin to see us as a source of trusted advice. Where escalation is required, we can engage collaboratively or use tools like shareholder proposals as well as advocating for broader public policy changes (examples: methane, diversity, CA100+).

As you can imagine, our public markets portfolio is rather large so we also need to be selective and prioritise the most material issues and opportunities to engage on.

For private markets, there is less standardisation among companies, particularly around disclosures. This can make benchmarking and industry-level analysis, which is often needed for engagement, more challenging. However, concentrated ownership, the governance rights we hold with our portfolio companies, and regular access to management are clear advantages.

Where we play a governance role, there is oversight of management strategy, and we can set expectations for performance, including on climate change. Based on the holding periods for many private investments, our engagement priorities are typically focused on longer-term outcomes where we can work alongside the company to deliver value from sustainability initiatives over time.

Where we aren’t a direct owner, we engage our general partners to align expectations, exchange expertise, and collaborate on longer term opportunities. Last year, we engaged with more than 50 per cent of our private equity fund portfolio general partners, based on assets under management, on ESG and climate-related opportunities. This included conducting deep-dive educational sessions to showcase leading practices in ESG integration.

It sounds like, in certain cases, institutional investors can exert a fair amount of influence over companies in their private equity portfolios.
In public markets, change does happen, but it can be slower as companies have a broad and diverse shareholder base.

In private markets, investors with larger direct ownership stakes, which are often accompanied by governance rights like board representation, can have more influence on corporate strategy and management decisions, including climate action.

While there is more potential influence, engagement on ESG and climate change are often not standalone initiatives and tend to be integrated into broader discussions between the investor and company. Because of this structure, engagement in private markets functions more like a partnership – between the GP, LPs, and the portfolio company.

Engagement in Private Markets Q&A with Net Zero Investor: Jennifer Coulson

BCI’s Coulson: “private markets are well-suited to engagement”