BCI’s Global Partnership Fund (GPF) has a distinct and flexible mandate that allows the team to pursue opportunistic investments including those driven by or linked to systemic ESG trends like climate change. We launched the GPF as an actively managed investment fund in 2019 to generate returns in excess of the MSCI World ex-Canada Index through the employment of both traditional long-only equity security selection and absolute return strategies. Absolute return strategies give our clients access to investments that are expected to deliver positive returns irrespective of broader market performance and have low correlation to equity markets, with strong downside protection.

Rod Prat, Managing Director, Partnership Portfolio, shares how the GPF considers sustainability themes in its strategies and his perspective on future ESG trends and opportunities.

Why is the GPF uniquely positioned to invest in sustainability-related themes?
RP: Across BCI, we strive to understand and manage ESG-related risks while identifying underlying ESG factors that could inform future investment opportunities by collaborating closely with our dedicated ESG team and colleagues throughout the organization. The GPF is differentiated by a distinct mandate to invest in absolute return strategy investments that does not constrain us to a specific asset class. We have the flexibility to be highly opportunistic and explore a diverse range of asset types and structures. A key advantage of this is our ability to invest in unique deals that may not have a natural home within BCI’s other funds and strategies, including those that not only aim to deliver on the fund’s investment objectives, but also seek to deliver positive sustainability outcomes. For example, the GPF can allocate capital to environmental commodity markets and niche sectors that are important to advancing global ESG and climate-related ambitions.

With such a wide mandate, can you elaborate on the types of deals you look for and provide some examples of the GPF’s recent sustainability-themed investments?
RP: Investments that fall into our absolute return strategies’ investable universe seek to achieve positive returns in rising, falling, or flat market conditions. This can include fund investments, co-investments, and direct investments that capture pricing discrepancies, market inefficiencies, and other opportunities not directly tied to the performance of market indices.

The GPF has invested in a range of opportunities that align with sustainability themes. We tend to focus on market inefficiencies and situations that require nimble, opportunistic capital versus large-scale projects and investments that are more suited to BCI’s other assets classes like infrastructure & renewable resources. For example, AB CarVal’s Clean Energy Fund II, which invests in lending opportunities in clean energy generation and storage assets. Our relationship with AB Carval also led to two sustainability themed co-investments last year.

Another recent investment that shows the flexibility and uniqueness of the GPF’s mandate is Three Hills Capital Partners, a European-based manager with a diverse portfolio of assets across Europe and North America. The GPF recently committed to its Impact Fund I S.C.Sp., which aims to make a positive difference by investing in innovative and impactful mid-cap businesses that address environmental or social challenges. The fund invests in secured debt and preferred equity instruments, seeking out business models that promote solutions to these challenges.

The ESG landscape is evolving quickly. Where are you seeing the most interesting opportunities and trends?
RP: We are excited about new and emerging opportunities resulting from the global push towards a low-carbon economy. As the world transitions to renewable power sources, there is an increasing need for advancements in storage solutions, large-scale low-cost batteries, and sustainable supply chains for critical minerals. Innovations in clean carbon technologies and carbon capture have also proven essential for reducing global greenhouse gas emissions and achieving broader sustainability goals. These trends are creating opportunities from exploration and extraction to processing and production of finished products.

The GPF’s structure and investment objectives enable us to participate in these themes across the entire supply chain by way of optimal, downside-protected structures and asset class types. For example, we are invested in asset-based credit and private credit investments for renewable energy projects, green buildings, commercial and industrial solar and wind-powered assets, storage solutions, and carbon capture and storage. We are also invested in opportunities that benefit from the need for battery metals, and environmental commodity markets that provide financial incentives for emissions reduction and promote renewable energy generation.

Our team is always looking for unique deals that meet the risk-return characteristics of our investment mandate and we anticipate that ESG trends and global action on climate change will continue to present attractive opportunities for our clients.

Learn more about the GPF in BCI’s 2023-2024 Corporate Annual Report.

Victoria, B.C. – British Columbia Investment Management Corporation (BCI) has received a score of 100 per cent from Global SWF in its latest Governance, Sustainability and Resilience (GSR) Scoreboard, a testament to our industry-leading practices and commitment to accountability and transparency.

“Amid an increasingly complex global investment landscape, strong governance and responsible investing practices have become imperative to deliver long-term, sustainable returns for our clients and their beneficiaries,” says Gordon J. Fyfe, BCI’s Chief Executive Officer and Chief Investment Officer.

“This recognition reflects more than two decades of dedication to excellence in achieving our mandate, and the commitment of our world-class team. We are proud to be among leading global investors and look forward to continuing to support best practices across the industry.”

The annual benchmark evaluates the public disclosures of the world’s 200 largest sovereign wealth and public pension funds, which manage approximately US$27.5 trillion on behalf of 80 countries. BCI was one of only five funds to achieve a perfect score, sharing the top spot with CDPQ (Canada) , ISIF (Ireland), NZ Super (New Zealand), and Temasek (Singapore). Last year, we achieved the second highest score with 96 per cent.

In September 2023, Global SWF highlighted BCI as its Fund of the Month with a focus on investment performance, global expansion, and leadership on environmental, social, and governance (ESG) matters.

Learn how BCI unlocks opportunities in volatile markets in our 2023-2024 Corporate Annual Report.

ABOUT BCI
British Columbia Investment Management Corporation (BCI) is amongst the largest institutional investors in Canada, with C$250.4 billion in gross assets under management as of March 31, 2024. Based in Victoria, British Columbia, with offices in Vancouver, New York, and London, U.K., BCI manages a portfolio of diversified public and private market investments on behalf of its 29 British Columbia public sector clients.

With a global outlook, BCI integrates ESG factors into investment decisions and activities that convert savings into productive capital to meet clients’ risk and return requirements over time. Founded in 1999, BCI is a statutory corporation created by the Public Sector Pension Plans Act. For more information, visit BCI.ca or LinkedIn.

CONTACT
Olga Petrycki
media@bci.ca

Last updated October 22, 2024

As a long-term investor, BCI believes in engagement and advocacy over divestment in high-emitting sectors such as oil and gas. We prefer to address long-term and persistent ESG risks like climate change through constructive dialogue with company management and boards, as well as regulators and standard setters. This includes encouraging companies to adopt targets aligned to the Paris Agreement and improve climate-related disclosure and performance.

Aligned to our Climate Action Plan, BCI has increased our focus on methane emissions and use of strategic escalation where we see limited progress following engagement.

Increasing our Focus on Methane Disclosure
Methane has a far greater warming potential than carbon dioxide, contributing 28 times more on a 100-year timescale and 84 times more on a 20-year timescale, and the portion of emissions attributable to human activities is responsible for at least a quarter of today’s global warming. According to the International Energy Agency, addressing methane is one of the fastest, most cost-effective means of limiting global warming in the near term. This means companies are also facing heightened regulatory risk and pressure from consumers to act.

While natural gas is positioned to play a role in the energy transition over the short to medium term in certain jurisdictions, the accuracy of methane reporting remains a source of uncertainty and potential risk. Despite voluntary disclosures, methane is recognized to be significantly underreported because of insufficient detection and overly simplistic accounting assumptions. To make informed investment decisions and manage risk within the portfolio, long-term investors need companies to align to leading methodologies for methane disclosure and seek third-party verification through reasonable assurance.

Calling for Alignment with the Oil & Gas Methane Partnership 2.0
We encourage companies to align with the Oil & Gas Methane Partnership 2.0 (OGMP) – the flagship oil and gas reporting and mitigation program of the United Nations Environment Programme and the highest standard in methane measurement, reporting, and target setting. Its comprehensive framework allows investors to track and compare progress and performance across companies, and strengthens the effectiveness of abatement activities. This is particularly important as scrutiny on methane will increase as new technologies evolve such as satellites capable of detecting methane. Furthermore, enhanced measurement and management aids operational safety and efficiency such as monetizing a waste product that could otherwise add value to the oil and gas value chain.

The OGMP’s membership includes 130 companies with assets in more than 70 countries, representing nearly 40 per cent of the world’s oil and gas production, over 80 per cent of liquified natural gas flows, and nearly 25 per cent of global natural gas transmission and distribution pipelines. While the initiative has grown significantly in recent years to include many major U.S. oil and gas companies and global national oil companies, there is currently only one Canadian member company, emphasizing the need for further engagement.

“Commitment to and implementation of OGMP provides investors with assurance that portfolio companies are responsibly managing and urgently mitigating their methane emissions towards near-zero levels.”
– Anne-Marie Gagnon, Director, ESG at BCI.

To enhance our efforts, BCI joined a collaborative engagement led by Nordea Asset Management to urge more oil and gas and utilities companies to join the OGMP and reduce methane emissions to near-zero levels. In 2023, nine of its focus companies joined the OGMP and the initiative received the Environmental Finance Award for Pollution Reduction Initiative of The Year (Global). The collaborative engagement also recently received the 2024 Recognition for Action – Climate Award from the Principles for Responsible Investment for its leadership on methane reduction and disclosure.

Case Study: TC Energy
BCI has been engaging individually with TC Energy, a Canadian energy infrastructure and pipeline company, on strengthening its methane disclosure.

After almost two years, we escalated our engagement by filing a shareholder proposal seeking reasonable assurance on TC Energy’s climate-related emissions metrics, including methane in its natural gas business unit, ahead of the company’s 2024 annual shareholder meeting. We also requested that TC Energy adopt the OGMP’s methodology for measurement and reporting as a basis for reasonable assurance on the methane metrics.

In response to our engagement and filing, TC Energy committed to publish a roadmap to reasonable assurance and reassess its membership in the OGMP by July 2025. Based on this progress, we agreed to withdraw the proposal prior to the annual meeting. BCI will continue our engagement with the company as it delivers on these commitments.

Contributing to a Stronger Regulatory and Policy Environment
As a global investor, BCI actively responds to public policy consultations and advocates for ambitious action to address oil and gas methane emissions at the regulatory level. For example:

• In 2021, BCI joined major global investors in signing an investor statement calling for stronger regulations and enforcement for methane emissions in the U.S.
• In 2023 and 2024 respectively, we responded to regulatory consultations on methane held by the U.S. Environmental Protection Agency and Environment and Climate Change Canada (ECCC).

Overall, BCI supports the proposed regulations and ECCC’s efforts to adopt cost-effective rules for its methane reduction target of at least 75 per cent by 2030. We also support extending the regulations for the exploration and production sub-industry to storage, processing, transportation and transmission facilities in Canada’s onshore oil and gas sector.

Learn more about our approach to climate action.

Examining investments at the total portfolio and client portfolio levels allows us to identify broad ESG trends that could have financial or reputational impacts.

We use our proprietary ESG Risk and Opportunity Framework to analyze, measure, and report on ESG opportunities and risks across portfolios, including climate change scenarios. This work helps us make more informed decisions and supports resilient portfolios focused on the long term. It also increases the likelihood of achieving our clients’ financial objectives.

We developed the framework over a number of years, and continuously improve it by updating financial models, estimation methods, and methodologies.

The Framework
BCI’s ESG Risk and Opportunity Framework is designed to support analysis at a total fund, client, asset class, portfolio, sub-industry, and individual asset levels. It consists of five modules:

• Materiality: identifying relevant material systemic risks for the total portfolio.
• Scenarios: developing and updating scenarios for each material systemic risk.
• Sensitivity tool: quantifying the financial impact of systemic risks on every sub-industry.
• Risk quantification: quantifying the potential financial risk impacts to the portfolio over time.
• Dashboards: reporting and distributing data and results for each investment decision.

By testing the sensitivity of industries and portfolio holdings, BCI can identify, evaluate, and target areas of opportunity and risk.

Climate Scenarios
The framework’s climate scenario analysis and modelling capabilities allow BCI to evaluate multiple possible future outcomes using standard financial and risk modelling techniques and approaches. The scenarios are updated and refined as new data and estimation methodologies from reputable sources become available, such as the International Energy Agency (IEA) and the Network for Greening the Financial System (NGFS).

We analyze historic and current asset exposures using long-term expected climate change impacts under different climate scenarios, including 1.5°C, 2°C, and 3°C. The framework is used to stress test total portfolio and asset-specific impacts under these scenarios.

Using the Results
We use the framework for client asset-liability reviews and to analyze material transition and physical climate risk during deal due diligence reviews. For clients, the framework shows the vulnerabilities of different strategic asset allocations. For due diligence on potential new investments, where material, BCI evaluates transition and physical climate risks and opportunities. This allows BCI to identify risks, potential risk mitigation strategies, or identify new opportunities at the investment, asset class, and total portfolio levels. For asset classes and portfolio managers, this analysis provides a better understanding of the resiliency of certain types of investments to climate change and other uncertainties.

Between 2018 and 2020, asset allocation decisions, informed by climate change scenario analysis, decreased the climate risk level for the portfolio and increased the potential for transition opportunities. Climate risk in the portfolio has remained relatively stable since 2020, and we expect the actions in our Climate Action Plan will continue to reduce this risk level going forward.

Our ESG team continues to monitor emerging trends like societal and labour risks, biodiversity risks, and increasing cyber security risks that have potential implications for our global portfolio.

^{1The results represent the measurement of the portfolio climate risk that could materialize by 2050 under a 2°C scenario relative to a 3°C scenario. The 2023 results are not directly comparable to prior years due to incorporation of new datasets from the NGFS and extending the analysis date from 2040 to 2050. Using the prior year reported data and approach, portfolio climate risk levels in 2023 were roughly unchanged relative to 2022 risk levels.}

BCI’s private equity program manages a diverse portfolio comprising $30.7 billion in directs, co-investments, and funds. By actively engaging with our portfolio companies to identify material ESG risks and opportunities that drive economic value, we can achieve tangible outcomes that have the potential to result in higher risk-adjusted returns for our clients as our portfolio companies become more resilient, sustainable, and better positioned in their respective markets.

Evan Greenfield, Managing Director, ESG, shares how BCI’s private equity team actively creates value for our clients through ESG performance improvements.

BCI leverages ESG as a source of value creation across our portfolio. How is this accomplished in the private equity program?
EG: Our embedded ESG experts work closely with the private equity investment teams to integrate ESG considerations across the investment timeline, from due diligence to exit. We tailor our approach for each portfolio company and aim to identify and address material risks, unlock new growth opportunities, and improve operational efficiency.

We have developed an engagement-based ESG framework unique to private equity that helps us to create clear links between initiatives and quantify financial outcomes. It is designed to understand company-specific risk factors and opportunities, inform strategy, and create economic value during three main phases:

1. Investment Due Diligence: At the outset, BCI evaluates material ESG risks based on the company’s industry and identifies mitigation pathways such as purchase price adjustments or post-investment reduction strategies. Value creation opportunities are also identified at this stage but the primary focus is on understanding ESG risk.
2. Post-Investment Close: While always working to identify and mitigate ESG risks, early in the investment period BCI looks to leverage ESG as a core part of company strategy. In some cases, this includes engaging with management to create products and solutions related to sustainability and the energy transition.
3. Investment Exit: Over the life of the investment, BCI supports our portfolio companies in demonstrating and sharing the tangible outcomes and value created by their ESG initiatives and tying this to financial outcomes. By leveraging ESG as a differentiation factor and competitive advantage, BCI aims to achieve higher exit valuations for portfolio companies.

Can you share a recent example of BCI’s work with portfolio companies?
EG: We engaged extensively with five portfolio companies, representing $1.6 billion in net asset value, over the past year 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 our engagement with PS Logistics, a leading flatbed truck transportation and logistics provider in the U.S. Collaborating with management, we quantified the financial benefit attributable to their ’driver-first’ culture. Management’s focus on prioritizing 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 optimization, and greater market share from clients who are focused on sustainability in their supply chain.

Does the private equity team’s ESG approach extend to our general partners?
EG: Over the past year, we engaged more than 50 per cent of our fund portfolio general partners, based on assets under management, on ESG and climate-related opportunities to align expectations, exchange expertise, and enhance performance. This included conducting deep-dive educational sessions to showcase leading practices in ESG integration.

We also encourage our general partners to participate in the ESG Data Convergence Initiative (EDCI) – a global initiative that compiles private company ESG data using a standard set of metrics established by investors.

BCI selectively engages external partners and managers, where appropriate, to create value for our clients by increasing access to opportunities. We evaluate every external firm’s ESG practices before allocating or increasing capital to its funds.

Our in-house, proprietary ESG External Manager Framework was established in 2020 to provide consistency and coordination for how we assess external firms across all asset classes. We updated the framework in 2023 to ensure it stays relevant to our investment strategies and reflects how ESG integration and stewardship practices are evolving.

The framework provides clear definitions and guidelines, covers holistic ESG matters such as equity, diversity, and inclusion (EDI) at the management firm, and collects information that improves reporting and practices at BCI.

The Framework
Our framework has multiple dimensions. We assess the extent of ESG integration into the firm’s investment processes, the resources and tools provided to staff, and whether the firm’s ESG stewardship practices are aligned with BCI’s corporate engagement priorities. This can include the firm’s formal ESG policies, who is accountable and who oversees ESG matters, and concrete examples of how ESG risks and opportunities are evaluated and considered. We also pay attention to the firm’s internal EDI policies and commitments.

We conclude by categorizing our external manager and partners’ ESG practices into one of the following groups:

• Immaterial: ESG may not be applicable to some managers due to very short holding periods, the type of asset they hold, or strategy they pursue.
• Developing: managers that recently launched an ESG program, and are building resources and processes.
• Committing: managers with established policies and procedures, dedicated ESG resources, and internal training.
• Advancing: managers or strategies seeking positive outcomes in pre-identified ESG themes, such as clean energy.
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Using the Results
In fiscal 2024, we conducted 23 reviews using the updated framework, reflecting all new external partners and managers, to ensure our standards extend beyond our in-house activities. Following the assessment, we selectively engage with our external partners and managers to promote continued improvement over time and may make specific requests for improvements.

For example, BCI’s Managing Director, ESG dedicated to private equity engaged with more than 50 per cent of our private equity fund portfolio general partners, based on assets under management, in fiscal 2024 on ESG and climate-related opportunities to align expectations, exchange expertise, and enhance performance. Key highlights include organizing educational sessions and assisting our general partners in adopting our industry-leading ESG frameworks and engagement practices, with an emphasis on financial linkages.

BCI has been an active participant in Climate Action 100+ (CA100+), the largest investor-led engagement initiative on climate change, since it was formed in 2017. We continue to support this global group and engage with its target companies based on the progress to date.

CA100+ brings together 700 investor signatories from 33 countries, representing more than US$68 trillion in assets under management. It works to ensure that 170 of the world’s largest corporate greenhouse gas emitters take necessary action on climate change.

The fundamental principle of CA100+ is that climate risk is financial risk. Its three main goals are to:

• Improve board oversight of material climate-related issues.
• Reduce greenhouse gas emissions in the real economy.
• Improve corporate climate-related disclosures.

BCI stands out as one of the few large Canadian investors taking a lead role with high emitters through the initiative. During the first phase of CA100+, our public markets team led or co-led engagement with four companies and actively supported engagements with six other companies in the mining, oil and gas, and utility industries in North America. Over that time, we saw many companies make improvements to their climate strategies, governance, and disclosure.

Progress To Date
Through CA100+, global investors have communicated to high-emitting companies the urgency and practicality of making emissions-reduction commitments, as well as the importance of board-level involvement and better disclosure.

The initiative’s 2023 Net Zero Company Benchmark assessment results showed that, while more companies on the focus list have pledged to achieve net-zero emissions by 2050 or earlier, they are not moving fast enough to align corporate actions with the goals of the Paris Agreement.

For example, 77 per cent of focus companies had pledged to achieve net-zero emissions by 2050 or earlier (up from 75 per cent in 2022) and 93 per cent implemented board committee oversight of climate change risks and opportunities (up from 91 per cent in 2022). Still, only 59 per cent disclosed decarbonization actions to meet their greenhouse gas reduction goals. Overall, incremental progress on company ambition and long-term targets was not matched by progress on short-term targets, decarbonization strategy and capital allocation.

Phase 2
Noting that the period leading up to 2030 is critical, CA100+ launched the second phase of its work in June 2023 with a focus on moving from words to action. The three main goals were renewed and evolved, with the third goal updated to include a focus on implementing net-zero transition plans.

BCI remains committed to taking a leadership role and leveraging our influence to support its increased expectations, which align with our Climate Action Plan. BCI currently leads the engagements with Suncor Energy Inc., Canadian Natural Resources Limited and Teck Resources Limited, and contributes to those with Exxon Mobil Corporation, Duke Energy Corporation, The Southern Company, Chevron Corporation, POSCO Holdings Inc., Samsung Electronics Company, Ltd. and UltraTech Cement Ltd. These 10 companies reflect an expansion of our participation to include new sectors and regions.

“We share the heightened sense of urgency with CA100+ and can attest that collaborative engagement is effective. We’re pleased to continue as a lead and contributing investor because we recognize the risk that climate change presents in our portfolio.”
– Jennifer Coulson, Senior Managing Director & Global Head, ESG at BCI

Our work with CA100+ aligns with our commitment to use our influence to support the global goal of net zero by 2050. Read our Climate Action Plan.