BPM 33.03

ANNUAL REPORT ON ETFs Page 34

Benefits and Pensions

MONITOR

The Canadian Magazine Of Employee Pension Fund Investment And Benefits Plan Management

THE BPM ANNUAL REPORT & DIRECTORY

PM #40008000

MANAGERS OF ALTERNATIVE INVESTMENTS

ISSUE 33.03

ESG Integration

Prior Authorization

Page 22

Page 28

BPM E X C L U S I V E S

There’s more to the story, online.

The thought leadership content of Benefits and Pensions Monitor goes beyond the pages of its eight issues. Between publications, www.bpmmagazine.com showcases more great reads.

Visit the website today to see articles on:

Institutional Investors Need Great Investment Partners

The Parlous State of ESG

With the heightened market volatility and complexity, institutional investment portfolios need the right investment partner.

Companies who market their products with ESG/ sustainable labels, without adequate justification, also need to be held to account and, if necessary, fined.

Health Benefits Trends of 2023

Seven Preventive Care Strategies To Explore This Year

If there’s any silver lining to the pandemic, it has to be the modernization of benefit plans that occurred over the past three years.

A more manageable, long-term approach could help foster healthy habits that can last a lifetime. And it’s these habits that can help prevent illness.

Our website is also the home for research from some of Canada’s leading experts.

For more information, contact Joe Hornyak at joe.hornyak@keymedia.com

CONTENTS

www.bpmmagazine.com

Features

Benefits and Pensions

MONITOR

UP CLOSE: CHRISTINA IACOUCCI

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22

Global Footprint Generates Better Real Estate Outcomes BENTALLGREENOAK (BGO)

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CLIMATE CHANGE

The Impacts of Climate Change on Worker Health and Safety – What Should Employers Be Thinking About?

BRYAN J. BUTTIGIEG

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12

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26

INVESTMENT

Opportunities Emerge for Long-Term Investing Amidst a Volatile and Unpredictable Market NICK CHAMIE

28

BENEFITS AND PENSIONS MONITOR ROUNDTABLE ON CLIMATE CHANGE

ADELINA ROMANELLI, SUN LIFE GLOBAL INVESTMENTS GRAHAM TAKATA, BMO GAM

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ESG

Navigating the Complexities of ESG Integration in Pension Governance SEAN LISS

DB PENSION PLANS

The New Funding Regime for Defined Benefit Pension Plans CHUN-MING (GEORGE) MA

DRUG PLANS

Why It’s Time To Change The Prior Authorization Process DENISE BALCH & RADIYYAH KARODIA

ESOPs

The Need for Employee Owned Share Plans in Canada PERRY PHILLIPS

THE BPM ANNUAL REPORT & DIRECTORY 32

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ALTERNATIVES REPORT Infrastructure and the Impact of Disruptive Technologies RBC GLOBAL INFRASTRUCTURE TEAM

18 21

ALTERNATIVES REPORT

WORKPLACE TRENDS

Tips for Embracing the Future of Flexible Work MIKE SHEKHTMAN

34

ANNUAL REPORT ON ETFS

36

ETF SHOWCASE

A Closer Look at the Evolution of the Canadian ETF Landscape ERIKA TOTH

Directory Listings

ALTERNATIVES REPORT

Asset Listings

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EDITOR’S VIEW

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Are We Really Serious about Climate Change?

BY Joe Hornyak, ASSOCIATE PUBLISHER & EXECUTIVE EDITOR joe.hornyak@keymedia.com

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n the Benefits and Pensions Monitor Round Table on Climate Change on page 24, Adelina Romanelli, director of responsible investing at Sun Life Global Investment, reported Canada was heating up at twice the rate of other countries.

Isn’t the reason why obvious? People using the drive-through to get their morning coffee. Granted, in some ways their behaviour is easy to understand. It takes as long to park, walk into the coffee outlet, and wait to be served by one harried employee while a battalion of staff serves the drive-through customers.

Cars Idling But, if we are serious about climate change and global warming, why do we even permit drive-through restaurants? We see signs in plaza parking lots telling us not to let our cars idle. Turn them off. Yet we see long lines of cars idling each morning as they wait to inch forward one car length at a time to get their coffee.

Okay, maybe not the best example of the lack of intention toward global warming.

How about during the early days of the pandemic when everyone was at home? The air quality over major cities improved and a hole in the atmosphere over Antarctica started to close. That happened in just a few weeks.

So if we are serious about global warming, shouldn’t we be requiring anyone who can work from home to do so? It shouldn’t

be an employer’s choice – it’s about the survival of the planet and the human race.

How about Europe, often cited as the global leader when it comes to considering environmental, social, and governance (ESG) factors regarding investment decisions? It has seen raging debates over burning wood to generate electricity. They decided to only burn wood that was damaged, diseased, or substandard, not wood collected from forests.

And we understand France took it a step farther by deciding that wood pellets from countries like Canada, if burned to produce electricity, would not count as carbon emissions. Seriously – wood is wood, wherever it is from, and if you burn it to produce electricity, you are producing carbon dioxide, which is a serious contributor to global warming.

Circular Economy Let’s consider electric vehicles. These are only relevant if we can commit to a circular economy in whch nothing goes to waste so that we can build them out of recycled material. We cannot produce electric cars if we have to use only natural resources. We recall one speaker at an event saying that to produce the number of these vehicles required in future, we’d have to turn Africa and South America into moonscapes.

Clearly, current efforts to address global warming are insufficient. This was the message of a report from the United Nations Intergovernmental Panel on Climate Change. It says keeping temperatures to 1.5°C above pre-industrial levels will take “deep, rapid, and sustained” greenhouse gas emissions reductions in all sectors this decade.

Clearly, everyone needs to get serious, and soon. Time is running out, and investors like pension funds have a role to play by allocating funds to fast food restaurants that shutter their drive-throughs, encouraging companies to have workforces that no longer need to commute, and realizing that wood is wood. If you burn it, you will threaten the global climate.

Benefits and Pensions

MONITOR A KM Business Information Canada publication

Issue 33.03 Global Managing Editor, James Burton Associate Publisher, Joseph Hornyak Editor, Nienke Hinton Business Development Director, Abhiram Prabhu Account Manager, Michael Hughes Business Development Manager, Doris Holinaty Webinar Producer, Kristyn Dougal Content Editor, Kel Pero Production Manager, Monica Lalisan Production Coordinator, Kat Guzman Designers, Brian Thibodeau & Marla Morelos

EDITORIAL ADVISORY BOARD

Randy Bauslaugh, Bauslaugh Pensions & Benefits Law Celine Chiovitti, OMERS Joe Connelly, Morneau Shepell Doug Crowe, RBC Tim Clarke, tc Health Consulting John Dynes, Cascadia Greg Hurst, Greg Hurst & Associates Neeraj Jain, Mawer Alain Malaket, InBenefits Mark Newton, Newton HR Law Robert Weston, Pharos Platforms

Editorial advisory board members meet informally and are consulted when appropriate to their areas of expertise, interest or jurisdiction. The members bear no responsibility for the contents of the magazine.

ADVERTISING SALES Michael Hughes michael.hughes@keymedia.com Doris Holinaty doris.holinaty@keymedia.com (416) 644-8740

KM Business Information Canada Ltd. 317 Adelaide Street West, Suite 910 Toronto, ON M5V 1P9 tel: +1 416 644 8740 www.keymedia.com Canada • USA • UK • Australia • NZ • Philippines Benefits & Pensions Monitor is part of an international family of B2B publications, websites and events for the finance and insurance industries

WEALTH PROFESSIONAL

james.burton@keymedia.com T +1 416 644 874O

www.bpmmagazine.com

PEOPLE

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Khasgiwale

Hum

Frazer

Nickerson

Dedels

MacMillan

Heldman

Douglas

Kitchen

Mahmood

Trans-Canada Capital Rahul Khasgiwale is head of Canadian sales at Trans-Canada Capital. He joined the organization in 2021 from Aviva Investors where he was head of Americas investment specialists/senior multi-asset investment director.

Neuberger Berman Joyce Hum is senior vice-president at Neuberger Berman, leading coverage efforts for institutional consultants across Canada.

She joins the organization from Fiera Capital and was previously at BMO. Mintz Mitch Frazer is a managing partner at Mintz LLP. He joins the firm from Torys LLP where he was a partner.

McCarthy Tétrault Susan Nickerson is a partner and head of the pensions, benefits, and executive compensation group at McCarthy Tétrault. A senior member of the pensions and benefits bar, she is a past chair of the board of the Association of Canadian Pension Management (ACPM) and has spoken at industry conferences and participated in the drafting of many industry policy white papers, covering, among other areas, target benefit plan design and implementation, funding reform, and enhancements to the Canada Pension Plan.

Paramount Scott Dedels is president of Paramount Employee Benefits & Pension Consulting.

Previously, he was with Bitcoin Well, CAPRICMW, and Great-West Life.

WTW Maaz Mahmood (FSA, ACIA) is a senior associate, health and benefits, at WTW. He joined the firm in 2021 from Aon where he was a consultant.

Selectpath Abbie MacMillan is president of Selectpath Benefits & Financial Inc. She has over 30 years of experience in the financial services industry in senior leadership roles in sales and distribution organizations within Canada Life. Gordon Hart, who served as its president and CEO for over 25 years, will be transitioning into the role of executive chairman and CEO, refocusing on strategic projects.

SHEPP Colette Wagner is a senior investment analyst at SHEPP (Saskatchewan Healthcare Employees’ Pension Plan). Previously, she was a senior investment analyst at Möbius Benefit Administrators.

Wise Trust Theo Heldman (CPA, CA, CFA) is chief financial officer and vice-president, risk, at WISE Trust. He joins the organization from Invesco Canada where he was vicepresident, strategy and compliance. Tracey Douglas is vice-president of pension services. She joined the organization from WSIB in May 2021 and brings over 25 years of combined pension consulting and administration outsourcing experience.

Mercer Andrew Kitchen is partner and investment solutions leader, Canada, at Mercer Canada.

Previously, he was managing director, institutional Canada, at Russell Investments.

Gallagher Jason Bell is executive area president, western region, at Gallagher Benefit Services Canada. He has been with the firm since 2016, most recently as national growth leader.

RBC Insurance Allison Cairns is senior sales consultant, group benefits, at RBC Insurance. She joins the organization from the Leslie Group where she was, most recently, director, group benefits, western Canada.

Canada Life Tara (Besant) Liu is assistant vice-president, drug claims strategy, at Canada Life.

She joined the organization in 2011 from Safeway Canada where she started as a pharmacist.

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BPM

UP CLOSE INDUSTRY LEADERSHIP IN FOCUS

CHRISTINA IACOUCCI

Managing Partner, Canadian Chief Investment Officer, and Head of Investment Management BGO in Canada

How BGO’s CIO is Leveraging Local and Global Advantages to Lead the Way Christina Iacoucci, Managing Partner, Canadian Chief Investment Officer, and Head of Investment Management at BGO in Canada, is embracing all the evolutions of her role as one of the firm’s leaders in Canada. In an “Up Close” interview with Benefits and Pensions Monitor, Iacoucci is mixing the joy of new learning with the intensity of ever-changing market dynamics to ignite her leadership drive and draw from a global platform of expertise to deliver strong outcomes in challenging times.

SPONSORED FEATURE

BGO in Canada is a diverse business ‒ from investment management to development, leasing, and property management. How do these verticals of the business contribute to your insights as a fiduciary?

Our fully integrated platform in Canada is actually unique. It is rare to have an investment manager who has expertise in all areas of real estate, from portfolio strategy construction to fully integrated property management, leasing, and development. Because of the size and scale of our Canadian and global businesses, we have expertise across a wide range of functions, including research, data science, and ESG, just to name a few, that provide critical inputs to the mandates we manage.

This, plus information from our local markets where our expansive, on-the-ground presence provides us with a daily source of intelligence on what’s happening in each market, enables us to stay ahead of the curve in terms of the market dynamics as they change. At the end of the day, it just helps us make better decisions. It enables us to actually pivot quickly to create new strategies where we see unmet needs in the marketplace.

The CIO’s role is maybe more people-centric than it has ever been. How has this evolution impacted your leadership style?

People are big consumers of real estate and are central to the success of the buildings we invest in, develop, and manage. Understanding what drives people and the choices they make is critical to making the kinds of decisions that bode well for our investors and the tenants we want to attract and retain.

When you consider the number of factors that go into choosing how people work, shop, how businesses manage their supply chain, and how people at all stages of life choose their home, if my view is too narrow or poorly informed, the success of investments suffers.

As an example, we use innovation to create high-quality environments within buildings that align with what tenants are looking for.

They want to be in buildings that are providing top-tier environmental performance with a pathway to net zero – a now critical consideration in determining the future value of an asset.

We also created an innovation lab several years ago where we developed and tested our thesis on climate resiliency and the efficacy of highly detailed adaptation plans at the property level. In this example alone, we have invested in innovations in both processes and building performance with the intention of mitigating risk and safeguarding value.

But the thinking, for me, goes beyond climate change. Real estate and its place within the ecosystem of its social surroundings needs to be understood and responsibly managed as well. Environmental and social performance are top of mind when we consider the long-term prospects for growth and value.

Our experience from the pandemic certainly reinforced the importance of our assets demonstrating their potential as nurturing environments where mental health and overall wellness positively influence the decisions that tenants and residents make.

As regulatory regimes in Canada focus more intensively on ESG (environmental, social, and governance) standards, how is this impacting how you lead the firm?

The way we manage the shifting demands from regulatory regimes is to set the bar really high. Then, you have to spend every day trying to exceed that bar because playing catch-up is a losing strategy. You also can’t rest on your laurels; you need to continue to push the boundaries.

Within BGO, my role as CIO is to develop a diverse, empowered, and engaged team that encourages expression of ideas and makes those views integral to the decision-making process. It’s being able to build and maintain a culture that allows people to bring their true selves to work every day and that nurtures intellectual exchange and divergent thinking.

BGO itself has to be a testing ground for innovation to ensure that our workplace and the environment we create for our teams are built for excellence. I’ve enjoyed my immersion in this world of innovation very much, but I also approach it all with urgency and treat it personally as a leadership imperative.

This facet of leadership that puts people first and creates space for people’s voices to be heard and elevated is something I challenge myself to be accountable to and I truly believe that it makes us collectively stronger.

On the subject of the environment, how profound are the present and potential future impacts of climate change on your real estate investment management decision-making?

In your first years on the job as CIO, you’ve spoken about the importance of innovation as an area of focus for you. Why has this developed into such a priority?

Real estate is a long-term asset class. You cannot just buy an asset that works today without understanding if it is going to stand the test of time. We have carried out risk assessments on all our properties across North America to determine the outcomes under 10 different climate events that could potentially happen ‒ things like risk of flooding and other volatile weather events ‒ to assess future investment potential and risk.

Making the right carbon-reducing energy

The simple way to think about it is you can’t use yesterday’s solutions to solve tomorrow’s problems. That is a recipe for failure. Being able to use innovation to increase productivity and efficiency helps to deliver better performance for our investors, which is an extension of my fiduciary role.

efficiency investments as part of our asset management strategy has profound impacts on the savings that flow through to investors today and the desirability of that property to future investors in the years ahead.

The way we manage the shifting demands from regulatory regimes is to set the bar really high. Then, you have to spend every day trying to exceed that bar because playing catch up is a losing strategy. You also can’t rest on your laurels; you need to continue to push the boundaries.

For example, right now we’re constructing the first net zero and net zero-ready industrial developments in our portfolio. One building will be positioned to achieve full net zero performance and the net zero-ready developments are being designed so that as the right macro and space market conditions arise, the building is able to transition into a net-zero building. It’s really thinking about building today and futureproofing for tomorrow’s regulatory and marketplace demands.

As BGO’s Canadian CIO, how are you drawing on the firm’s global footprint to deliver stronger performance?

Market trends from other parts of the world often materialize before they make their presence felt in Canada. The growth of niche real estate plays like data centres, cold storage, and life sciences, and the overall growth story of the logistics sector, are examples where international markets were the frontrunners. Through our access to BGO’s global debt and equity platform, we’re able to gain insights into these trends earlier than most and as they occur, and then translate that for a Canadian context. Through these seamless relationships across the platform, we are delivering dynamic solutions with our local depth and our global breadth too.

It’s also encouraging to be able to draw on our community of leaders to address common issues related to climate change, geopolitical and global economic volatility, and to draw on best practices related to emerging areas like proptech, data sciences, and AI (artificial intelligence) to create crossplatform advantages. The world feels a lot smaller and more accessible when we work together.

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CLIMATE CHANGE

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www.bpmmagazine.com

The Impacts of Climate Change on Worker Health and Safety – What Should Employers Be Thinking About?

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BY: BRYAN J. BUTTIGIEG

ast year’s heavy storm in southern Ontario (labelled a “derecho” by our meteorologists) caused extensive property damage over a wide swath of some of the most densely populated areas of the country. It served as yet another reminder of climate change predictions that extreme weather events are likely to increase in severity and frequency in the coming years. This, in turn, could well require a reassessment of employers’ due diligence systems to ensure that there is adequate assessment of and protection from foreseeable risks.

In Ontario, the Occupational Health and Safety Act imposes a duty on every

employer to “take every precaution reasonable in the circumstances for the protection of a worker.” Similar obligations are imposed by legislation across the country. In practice, this means that liability can be minimized or avoided entirely if it can be shown that “all reasonable care” was exercised to prevent the particular event from occurring. Perfection is not required. But systems that fail to account for what is “reasonably foreseeable” are not excusable.

Due diligence systems cannot be static. They need to evolve and adapt to new information. Typically, we think of “continuous improvement” concepts as applying to learning from day-to-day operations, near-misses, and evolving industry knowledge. But this is by no means a

closed list. New factors need to be considered as they become relevant.

Is Extreme Weather Foreseeable?

So how should we think of climate change and occurrences labelled “extreme weather events”? On its face, one might be tempted to say that by being “extreme” the event is inherently unforeseeable.

But as evidence mounts in support of the scientific predictions, what was once considered “extreme” may well become more common and thus foreseeable. If so, climate change and severe weather impacts will need to be considered when assessing the adequacy of any workplace due diligence program.

The implications for this are wide

CLIMATE CHANGE

www.bpmmagazine.com -ranging. World Health Organization publications list several known hazards resulting from climate change. In addition to an increase in severity and frequency of extreme weather events, these include increased ambient temperature, increased air pollution, and increased exposure to UV radiation.

A published survey of literature lists impacts of increased ambient temperature to include an increased risk of bodily harm and injury caused by fatigue and reduced vigilance. Work performed at a high ambient temperature can change worker skills and capacities when physical tasks are involved. This can then have adverse consequences on worker safety. The potentially negative impacts of increased ambient temperature at the workplace could even be exacerbated by other intersecting variables such as a worker being more than 45 years old, overweight, pregnant, having pre-existing health issues, or being required to wear PPE. Workplaces likely to be most impacted by these factors would include any involving outdoor work – such as construction sites, postal services, first responders, and many natural resource operations.

Indoor workers can also be impacted if they work in poorly ventilated or non-air conditioned environments whether that be manufacturing, office work, or even education and healthcare.

Airborne Pollutants Another predicted impact of increased ambient temperature is the increased risk of exposure to airborne pollutants.

Volatile chemicals (even something as simple as cleaning supplies) will diffuse quicker and more widely in a warmer environment. Forest fires cause an increase in airborne particulate matter which may require outdoor workers to wear additional PPE and may also affect the efficiency of HVAC systems.

Ambient temperature increases cause higher ground level ozone levels which, in turn, could increase the frequency and severity of asthma attacks. Allergy seasons and reactions are also seen to be increasing. One report claims that the northern hemisphere pollen season has increased by 15 days in the past three decades. All of these changes could easily impact a worker’s ability to perform tasks

with the same degree of skill, diligence, and good judgement previously seen in more benign conditions.

Extreme weather events can make hazardous previously safe work areas. Those living in hurricane-prone areas already know the hazards caused by trees, unsecured outdoor bins, and other debris.

Building envelopes may not have been designed for the changed environment.

EMPLOYERS SHOULD TAKE STEPS TO IDENTIFY NEW HAZARDS LIKELY TO ARISE AT THEIR WORKPLACE AS THE WIDERANGING IMPACTS OF CLIMATE CHANGE TAKE EFFECT. THEY WILL NEED TO DEVELOP NEW TRAINING AND AWARENESS TOOLS FOR THEIR WORKFORCE. Unsuspected water ingress can then lead to mold issues. Portable trailers may no longer be appropriate or safe in some workplaces. Power outages during a workday could be a catalyst for a host of previously unanticipated workplace hazards. Any heavy industry employer will know well the hazards of unexpected shutdowns and poorly planned re-starts.

Other workforces could benefit from some of the lessons learned in that sector.

Climate change is leading to the adoption of a host of new technologies in the workplace. These can bring their own set of new challenges. Consider, for instance, the expected increase in electric vehicles, electric charging stations, and the greater use of large capacity batteries and fuel cells – effectively a greater prevalence of lithium polymers and hydrogen in a host of new locations. These may create new workplace hazards both in facilities involved in their manufacture as well as those using them. New material handling

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and waste disposal procedures will be needed. The efficiency, service life, and safety of infrastructure and buildings may need to be reassessed. New hazard analysis, training, and maintenance procedures will be required.

Every Reasonable Precaution So what is a prudent employer to do in light of all this if they are to truly “take every precaution reasonable in the circumstances for the protection of a worker?”

A starting point is to became aware of these rapid changes taking place at their own workplace and take proactive steps to ensure foreseeable risks are minimized.

Employers should take steps to identify new hazards likely to arise at their workplace as the wide-ranging impacts of climate change take effect. They will need to develop new training and awareness tools for their workforce. Changes to the physical environment such as air conditioning or newer types of PPE might be needed.

Work hours and break frequency should be re-assessed. Employers should engage in discussions with other employers in their own sector, other sectors, and possibly also other countries to ensure they are keeping up with the changing standards. If need be, engage engineering and workplace consultants to assist as needed – reliance on expert advice and keeping up with industry standards are both key components of any due diligence system.

Ultimately responsible persons, be they employers, owners, or governors, will need to review all aspects of their infrastructure and operations to assess whether existing due diligence is sufficient to deal with what is now clearly a foreseeable risk of a more physically hazardous workplace arising from the many expected impacts of climate change. What was once considered sufficient to ensure worker safety may well no longer be so in the eyes of the law unless these predicted changes are taken into account.

Bryan J. Buttigieg, Certified Specialist – Environmental Law, LSO), is leader of Miller Thomson’s environmental law group.

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INVESTMENT

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Opportunities Emerge for Long-Term Investing Amidst a Volatile and Unpredictable Market

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BY: NICK CHAMIE

rom a global pandemic to the first foreign invasion in Europe since WWII, no one could have predicted the events that have thus far defined this decade – nor foreseen the seismic impact they would have on global markets and the economy at large.

After decades of relative global stability, it appears we’re entering a new era where investors can no longer rely on the past as a predictor of the future.

For example, after decades of low inflation and steadily declining interest rates, deglobalization, decarbonization, and shifting policy priorities will likely generate higher and more volatile inflation – and, therefore, higher interest rates – over the next decade.

To effectively navigate these trends, investors will need to dig deep into the implications and stay open to adopting new and innovative approaches to investment management.

Outlined below are a few key trends institutional investors should consider as they make investment decisions at the asset allocation and security selection levels.

Weathering Inflation The COVID-19 pandemic and war in Ukraine severely disrupted the global economy and jeopardized the “low for long” era ‒ a time characterized

by relatively low growth, inflation, and interest rates. Looking ahead, even once the immediate fiscal and economic aftershocks of these events subside, inflation looks set to remain elevated and become more volatile than we have been accustomed to.

As the effects of the pandemic and the war in Ukraine continue to linger, deglobalization is becoming a crucial piece to consider within the portfolio puzzle. The rise in onshoring and “friend shoring” of goods and resources is shifting production to higher-cost regions, which could contribute to inflation.

Politically popular “buy domestic” policies and those aimed at building domestic industries in strategic goods, resources,

and technologies add fuel to the fire, spurring companies to potentially duplicate supply chains and shift production home.

Decarbonization efforts could provide additional inflationary tailwinds through various avenues, including via the substantial infrastructure-related investments required to facilitate the net-zero transition. These projects will boost the demand for various commodities crucial to the energy transition drive while their supply remains tight. Additionally, strategies to discourage investment in, and production from, fossil fuels (eg, imposition of carbon taxes) will likely exacerbate price pressures by making such energy sources scarcer

INVESTMENT

www.bpmmagazine.com and more expensive.

High underlying inflation could also create a dynamic where central banks frequently need to slow growth to combat unwelcomed price pressures, leading to shorter economic cycles and increased volatility.

Deglobalization, decarbonization, and governments’ anticipated growing use of policy will raise the likelihood of higher interest rates and yields for years to come.

From an investment perspective, these challenges present both risks and opportunities for investment managers. For instance, higher market volatility can widen the window of opportunity to take advantage of market dislocations. We are also seeing long-term investors consider greater exposure to inflation-sensitive assets, such as inflation-linked bonds, commodities, and real assets in their asset mixes.

A Shrinking World Could Grow Your Portfolio Increased efforts to bring industry and production closer to home may not only increase inflation, but also the opportunity set for investors.

Notably, reshoring requires significant capital expenditure as it involves developing an entire manufacturing base that is more self-sufficient across the value chain. To adequately address these needs, both public and private markets will be called upon to finance and support the required capital expenditures, including infrastructure-related investments.

After more than 20 years of underinvestment across domestic industries in the west, the coming decade appears poised for an investment boom; a stark contrast to the decades of globalization where efficiency (rather than security and domestic control) of production processes and supply chains were top priority.

This downshift in international economic integration can be attributed to a variety of factors, including headwinds from increasingly protectionist policies, many of which are being enacted alongside a renewed focus on domestic employment and in response to rising global tensions.

While deglobalization will have many impacts on how investors design their strategies, it will not eliminate the need to maintain – and manage – foreign exposures. For instance, China is a market that is simply too large to ignore in a truly well-diversified portfolio. Holders

of Chinese and Chinese-related assets should carefully manage risks stemming from broader geopolitical developments – such as China-US relations, Taiwanese independence, and Chinese domestic human rights issues – to ensure their country exposure aligns with their beliefs and clients’ goals. Focusing on highly

MANY OF THE MARKET “ASSUMPTIONS” THAT INVESTORS HAVE TAKEN FOR GRANTED OVER THE PAST FEW DECADES APPEAR TO BE FADING IN THE CURRENT ENVIRONMENT. ON THE ECONOMIC FRONT, THE GLOBALIZATION AND LOW INFLATION TRENDS HAVE BEEN TURNED ON THEIR HEADS. SOCIETAL PRIORITIES HAVE ALSO SHIFTED, WITH DOMESTIC CONCERNS RELATING TO ISSUES SUCH AS INEQUALITY AND CLIMATE CHANGE RISING ON THE POLITICAL AGENDA liquid investments in a market like China provides investors the ability to pivot if needed amidst a potentially fluid situation.

Driving Long-Term and RiskAdjusted Returns with Private Assets In recent years, many long-term investors have leaned into private markets to access the greater flexibility they offer when it comes to introducing strategic, operational, and capital structure improvements that can drive superior risk-adjusted returns. In turn, the options available to finance value creation strategies in private assets have exploded, with

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many investors and companies turning to private market-based financing over traditional bank-based sources. The net result has been an ever-expanding pool of investment capital seeking a similarly growing set of private market opportunities.

However, mere access to private assets isn’t enough. To truly benefit from private market opportunities, investors must be large enough to not only enjoy economies of scale and related cost advantages, but also the better access to potential deals and origination opportunities available to larger investors. These benefits, combined with the ability to build dedicated operational expertise in a wider array of value-enhancement strategies, improve the potential for superior returns.

As the private investment market continues to grow, investors with appropriate resources and patience will have the opportunity to increase their exposure to these investments.

A New Era of Investing Many of the market “assumptions” that investors have taken for granted over the past few decades appear to be fading in the current environment. On the economic front, the globalization and low inflation trends have been turned on their heads.

Societal priorities have also shifted, with domestic concerns relating to issues such as inequality and climate change rising on the political agenda. These foundational shifts suggest that investors may find it increasingly difficult to rely on the past as a predictor of the future, effectively ushering in a new era of investing.

For investors, effectively navigating structural changes requires an elevated level of thought leadership and a willingness to adopt dynamic and innovative approaches to investment management. A flexible research-driven investment process not only helps make sense of the global trends sweeping economies and markets, but is also critical in building resilient portfolios in a changing world.

Nick Chamie is senior managing director of total portfolio and capital markets and chief strategist at IMCO.

BPM

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The 2023 Climate Change Roundtable Net Zero Promises Investment Opportunities

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n the BPM Round Table on Climate Change we met with Adelina Romanelli, director of Responsible Investing at Sun Life Global Investments and Graham Takata, director of Climate Change for Responsible Investment at BMO GAM, to discuss net zero through a fund manager lens.

Assessing net zero through a fund manager lens boils down to understanding its ESG (environmental, social, and governance) or sustainability journey, while playing close attention to the actions that serve to empower its investment professionals, says Romanelli.

The ultimate objective is to help investors achieve long-term financial security. Achieving this is increasingly interchangeable with the ability to retire into a resilient and prosperous ecosystem.

An ambition to achieve net zero by 2050 also helps identify and capture emerging opportunities, says Takata. “Where a focus on emissions reductions alone can lead to carbon lock-in or investing in dead ends, ‘net zero’ elevates the dialogue from simply improving current emissions performance to aligning with future expectations.”

Graham Takata Director of Climate Change, Responsible Investment, BMO Global Asset Management

What does this mean for investors?

Takata: Achieving net zero by 2050 will require significant investment beyond conventional clean energy supply, and into the underlying resources, infrastructure, technologies, and innovative solutions that are needed to support the transition to a lowcarbon economy.

That means we can’t simply look at current carbon pricing, or physical risks, which include increased frequency and severity of floods, for example. We need to also consider policy, technology, and market risks, which we collectively call transition risks.

Ultimately, we are seeking to not only understand how well a company is performing today, but how prepared the company is for a low-carbon economy, what it can contrib-

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Adelina Romanelli Director of Responsible Investing Sun Life Global Investments

ute, and how it plans to navigate the transition.

Romanelli: What we must not forget is that we cannot, in a general sense, continue as is with additional increases in global temperature. Business as usual will not make it.

The impacts of climate change will have far reaching consequences. Climate change is non-linear and multi-dimensional.

We need to focus on the fact that future readiness is not comparable to where we are today. Things need to change. For instance, we’re running out of natural resources ‒ resources that have supported our lifestyles and fostered tremendous growth since the industrial revolution.

There is so much more. There are the

impacts coming from an increase in global temperature. There are the physical risks such as the magnitude and frequency of climate events such as floods. And then there are the transition risks ‒ such as changes in government policies, litigation, and shifting demographics. These are impacting businesses and they’re impacting our landscape. Furthermore, we can’t disentangle climate from other environmental and social issues.

From an institutional investor perspective, we see climate change as material, pervasive, and non-diversifiable at the portfolio level. So collaborating on the global fight against climate change means preserving wealth over time, mitigating downside risk, and seizing investment opportunities that

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The BPM 2023 Climate Change Roundtable will continue to arise from a low-carbon transition over time.

What are the challenges of embedding net zero in a portfolio?

Takata: Net zero reenforces that transitioning to a low-carbon economy is about liberating productivity from carbon constraints, not constraining productivity in order to maintain our current emissions. Many of the long-term solutions we need for a lowcarbon economy require a considerable increase in productivity that may result in a spike in emissions in the short term. For example, the International Energy Agency (IEA) projects that the mineral requirements for clean energy technologies will need to quadruple by 2040 to meet Paris goals. It is a considerable challenge. Not only do we need to address our current emissions, we need to concurrently address the emissions needed to enable the transition, all while working towards net zero.. Systemic changes, such as a shift towards a circular economy in which resources are retained in productive use, is essential to our success.

Obviously, those system level changes cannot be fully captured at the portfolio level, but are critical to the overall ambition. The goal of net zero is often perceived as synonymous with incremental emissions reductions, when in reality it is about transforming the real economy.

Romanelli: These are all important issues and they are connected. It is now widely accepted that further increases in the average global temperature will trigger even greater impacts, impacts which are not linear, but exponential.

But it’s not only climate events such as floods, it also impacts biodiversity, water supplies, sustainability, and food security, all of which are critical to our very essence.

The reality is, and sometimes we shy away from it, is that there’s no such thing as a perfect company or perfect business model.

And if you look through the entire value chain, it becomes even more predominant.

So it has to be an integrated approach. You can’t just isolate one aspect or theme over others.

Takata: Exactly, the value chain is so important as it describes the relationships and interdependencies. And while it has taken decades to bring carbon emissions to the forefront, there is still a need to consider other factors, like our natural capital, biodiversity, and protecting people through a focus on a just transition.

What sort of opportunities or challenges do you see with net zero in Canada?

Takata: One of the biggest challenges in

Canada will be transforming our energy sector while maintaining energy security and affordability for consumers.

These impacts are far reaching and touch infrastructure, forestry, farming, insurance, and the health and well-being of our people.

For our existing energy sector, carbon capture, as well as lower carbon alternatives such as blue hydrogen, are playing significant roles in their go-forward strategy. While there is no consensus among analysts on what our energy sector will look like in 2050, it is essential that we support the decarbonization of carbon-intensive industries

We are likely to become more dependent on less conventional sources of fossil fuels which makes it more costly or potentially environmentally degrading to produce them.

Those are the challenges, but we have so many opportunities. We have the expertise, the knowledge, and abundant mineral natural resources, including some which are critical. It’s a tremendous economic opportunity for Canada to continue to transform and lead.

Is divestment still on the table?

Romanelli: Engagement is now widely accepted by institutional investors because addressing pressing systemic issues boils down to real economy change. We need to address systemic issues and stewardship is rising to the forefront because of net zero and other initiatives that recognize the imperative of real economy changes. You cannot do it without stewardship.

WHILE THERE IS NO CONSENSUS AMONG ANALYSTS ON WHAT OUR ENERGY SECTOR WILL LOOK LIKE IN 2050, IT IS ESSENTIAL THAT WE SUPPORT THE DECARBONIZATION OF CARBONINTENSIVE INDUSTRIES THROUGH OUR INVESTMENTS - Takata

In terms of corporate engagement, to truly catalyze change is to understand where a corporation is at and to understand how net zero and climate action can influence revenue streams, costs, structures, etc. So we really have to talk about financial value and apply a win-win mindset ‒ a collaborative approach ‒ in order to truly drive change.

Takata: Divestment remains on the table, but it’s role has changed as ESG considerations have become more sophisticated for investors and the companies in which we invest. In the context of net zero, divestment is considered when engagement on climate fails. But if a company refuses to consider how climate-related events can disrupt their supply chain or how changing consumer demands will affect their future sales, it’s less about climate and more about how they manage risks to their business and likely is an indicator of other underlying issues.

through our investments. Canada’s Sustainable Finance Action Council (SFAC) recently released a transition taxonomy roadmap which provides conceptual guidance on what could constitute transition finance.

So while divestment can be considered an interventional strategy triggered by a repeated failure to address climate risks, in practice, it is likely that an investor would have already reevaluated their investment strategy.

Romanelli: Fossil fuels have powered our economy and the global economy for over 150 years. Yet, the production, the distribution, and consumption of fossil fuels have contributed to global warming. And Canada is warming twice as fast as the global average according to Environment and Climate Change Canada. We’re starting to see some of the impacts ‒ record high temperatures, flooding, and less snow and ice coverage.

Takata: While typical climate-related disclosures, including the Task Force on ClimateRelated Financial Disclosures (TCFD), have a strong focus on current emissions, a transition plan is an entity’s forward-looking strategy on how it will contribute to and prepare for a low-carbon economy. While transition plans are a more recent con-

What sort of things are you looking for in a transition plan?

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14 cept, it is important that a company uses this plan to acknowledge what is currently achievable and within the scope of its ability, what is not, and what their approach will be to reconcile the two. A credible transition plan would have greater certainty on shortterm actions, such as projects with current capital expenditure support, and outlay actions to navigate uncertainty and achieve longer-term goals. Increasingly, we discuss research and development to better assess medium and longer-term strategy.

The BPM 2023 Climate Change Roundtable Mandatory disclosure, is it coming?

Takata: While already in place in Europe, mandatory climate-related disclosure is being pursued by regulators in the U.S. and Canada. Requiring companies to disclose emissions data alongside their financial disclosures helps improve the assurance of this data and standardize its presentation, which facilitates better peer comparison amongst companies and combats greenwashing.

The International Sustainability Standards

Romanelli: Ultimately, it is a strategic business issue, dealt with at the board and executive levels. It starts there so looking at things like board skill sets ‒ especially around climate ‒ and what they’re doing to build or at least leverage skill sets. Assessing their eagerness to engage with investors and other stakeholders and be responsive to votes or resolutions are all quite telling.

Romanelli: As we’ve already touched upon, the impact of climate change is already adverse. With economic growth, some of it is quantifiable, but most is not.

If you consider climate change, you quickly recognize that adverse impacts are already detrimental to economic growth. If we address it later as opposed to now, impacts will likely become even more disruptive (particularly due to nonlinear and compounding effects). Being proactive on climate action is key to preserving economic wealth over time.

There are many positives. The International Energy Agency has proven that many net zero actions remain viable via efficiency measures or preventative measures (i.e. methane gas leakages), all of which can enhance margins. As you move down the net zero path, there may be greater costs in the shorter term, but the rewards will be more apparent over the longer term.

Romanelli: Scope 3 is so critical because that’s truly where the real economy changes take place, that’s the lever we collectively have to promote positive action.

However, mandatory data disclosures are critical. While they are insufficient on their own, they are critical in terms of shifting mindsets within a corporation.

So, it’s not only welcome, it is the only way to get to where we need to be.

How relevant are biodiversity and natural capital to investors?

Takata: According to the World Economic Forum, more than half of global GDP is reliant in some way on natural capital and ecosystem services. So understanding natural capital is absolutely critical to ongoing prosperity and wealth generation, and protecting natural capital is one of our key climate themes.

Does a transition to a low-carbon economy mean lower returns?

Takata: In terms of ‘lower returns,’ I would reiterate that low carbon is not low productivity. It’s continuing to create value without the unintended consequences caused by our current methods of production. We’ve never been in a period where the economy was not evolving. While we understand that the cost of inaction far exceeds any costs of abatement, it is understanding those needed changes, the risks, and the opportunities that the transition brings, that helps inform sound investment decisions.

take time, but it will be instrumental to our ability to assess transition risks.

BIODIVERSITY DESTRUCTION IS HAPPENING AS WE SPEAK AND IT’S COMPOUNDING – POLLINATION LOSS, SOIL EROSION, FRESHWATER AVAILABILITY, OCEAN ACIDIFICATION, AND THERE’S SO MUCH MORE - Romanelli Board (ISSB) is now calling for Scope 3 emissions disclosure. While we’re often thinking about a company’s own footprint, represented by its Scope 1 and 2 emissions, Scope 3 helps investors contextualize a company within the broader economy, providing insights into its reliance on upstream and downstream emissions.

Achieving reliable Scope 3 disclosures will

In our engagements, we are seeing companies looking more closely at natural capitalrelated risks to their supply chain. Companies need to better understand if their products or raw materials are coming from areas prone to, for example, illegal deforestation or water stress. And with the adoption of the Kunming-Montreal Global Biodiversity Framework this past year, they are looking deeper into protection and restoration of surrounding lands.

Romanelli: Biodiversity risks are already imminent and, at the end of the day, biodiversity is vital to Earth’s functionality.

Biodiversity destruction is happening as we speak and it’s compounding ‒ pollination loss, soil erosion, freshwater availability, ocean acidification, and there’s so much more.

And there is a whole world of additional impacts on companies from natural capitals. For example, last year, low water levels in European rivers drove up shipping costs.

France, when it was trying to ramp up its nuclear power systems to address the oil shortages due to the Ukraine/Russia problem, couldn’t actually turn up its nuclear power generation as it lacked sufficient water to maintain cooling of the reactors.

And that’s why it’s very important to look at biodiversity from a reliance perspective and a company’s contribution to broader supply chain issues.

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Infrastructure and the Impact of Disruptive Technologies BY: RBC GLOBAL INFRASTRUCTURE TEAM

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s the popularity of infrastructure investing has grown, so has the opportunity set. While traditional infrastructure continues to play an attractive role in portfolio construction, a new generation of assets presents both risk and opportunity. As investors seek exposure to this asset class, certain guidelines can help to mitigate risks.

Over the course of the last two decades, we have witnessed considerable growth in investment in infrastructure in institutional portfolios. Investing in infrastructure means investing in tangible assets that support the activities of daily life, our economies, and societies. Familiar examples include power generation, toll roads, shipping ports, and transportation hubs, as well as the recent expansion of the asset class to include industries such as energy transition, renewable power, and certain digital technologies. Infrastructure investment strategies range from relatively low risk core or core plus to higher risk value-add or opportunistic, differentiated by stability of income, sector breakdown, exposure to economic cycles and market demand, and the magnitude of development exposure.

Decades of under-spending on existing infrastructure, growth in global economies, and a heightened awareness of our carbon footprint has created a material increase in the need for investment in infrastructure. Concurrently, public sector balance sheets have been stretched by a number of economic challenges. As a result, the need for private capital to bridge

that spending gap has created an attractive opportunity for investors.

It is not surprising then that investments in core infrastructure assets have become a cornerstone of many institutional investment programs, including some of Canada’s largest pension plans.1 More recently, individual investors with longterm investment horizons are increasingly seeking exposure to infrastructure, given the positive portfolio construction attributes it can deliver.

Infrastructure assets typically provide essential products and services that often generate long-term, contractually based, or regulated cash flows from strong counterparties. They can also add value to a portfolio in numerous ways, including stable income, diversification through low correlations, and positive inflation linkages.

These portfolio construction attributes, along with the stability of income and potential to act as a match to longer-term liabilities within a liability driven portfolio, have made infrastructure assets a material component of many institutional private market allocations.

Infrastructure 2.0 In an investment landscape focused on balancing economic growth with environmental, social, and governance (ESG) targets, the notion of investing in a new generation of infrastructure assets has become progressively important for institutional and individual investors alike. As the responsible investing theme has grown, investments that can contribute to meeting climate goals, or that promote equal access to digital connectivity, transportation, and social services have increasingly

been referred to as ‘Infrastructure 2.0,’ thus broadening the scope of infrastructure investing.

For investment managers, the concept of an ‘Infrastructure 2.0’ investing platform describes both how they invest (ie, a responsible investing model and valuecreation plan), as well as what they invest in, (ie, sectors like renewable power generation and carbon capture). As infrastructure generally consists of very long-lived assets, it is critical that investors carefully consider both the benefits and competitive threats new technology poses to existing underlying businesses, particularly over the long term.

While the emergence of newer technologies can offer great promise, the existence of these technologies often precedes their commercial and economic viability.

As a result, aligning the technology’s life cycle with the risk profile of an investment strategy is critical. Investment in earlystage technology is best suited to a strategy with a higher risk/return profile, whereas investment in mature technologies carries lower risk, but can be vulnerable to value deterioration as newer technologies emerge. Thus, technological disruption is one of the longer-term risks that must be considered through a comprehensive due diligence program to avoid an investment in a stranded asset that might be left behind as emerging technologies erode its competitive position Disruptive Technologies When underwriting any new investment, but particularly in sectors associated with Infrastructure 2.0 themes, infrastructure managers often separate the essential

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www.bpmmagazine.com consumer need (eg, a desire to watch television) from the technological medium enabling that service – in the case of television, this was formerly over-theair, then evolved to cable, and is now dominated by Internet delivered streaming services. Framing the investment in this way can help clarify the potential risks of disruption since the essential consumer needs are usually stable and easily agreed upon (eg, heat, water, electricity, travel), while the technological medium that meets those needs can change over time.

Understanding where a technology and its associated investment lies on the S-curve of adoption is an important conclusion of the due diligence process.

This framing can also help position investments in emerging technologies that may become mature over a shorter adoption period. For example, in geographical areas where the cost of deployment made implementation more attractive (ie, the mountainous regions of South America), traditional land-line telephony was leapfrogged by mobile telephony; or, in North America, power generation has shown significant migration from coal to natural gas, which has both a lower environmental cost (carbon footprint) and a lower economic cost.

Newer technologies – for example, wind and solar power generation – have demonstrated material cost efficiency gains since 2010. Evaluating the rate of these efficiency gains is another way to gain insight into the rate at which newer technologies might displace older ones.

As infrastructure managers think about the risk of protecting value in existing investments, assets that have a lower cash yield (ie, those that have a higher value placed on long-term growth) are more vulnerable to potential disruption.

Understanding the key drivers underpinning the cash yield of an investment can be a useful tool for assessing the value at risk from disruptive technologies.

Future-Proofing Investment Programs The tools that an investor can employ to identify and mitigate these types of risks will vary depending on the investment strategy deployed. For example, an investment manager with a direct investment strategy may implement leading practices in its investment culture and processes, whereas an externally driven program (ie,

fund of funds model) may focus its due diligence on external managers’ processes and ensuring that fee structures are appropriately aligned with investor objectives.

For investors, the following considerations can help assess their exposure to these risks:

THE PRIVATE INFRASTRUCTURE ASSET CLASS IS WELL ESTABLISHED AMONG INSTITUTIONAL INVESTORS. AS INVESTORS EXPAND THEIR ALLOCATIONS TO INFRASTRUCTURE, THE CHANGING INVESTMENT LANDSCAPE PROVIDES BOTH OPPORTUNITIES AND THREATS TO MATURE INVESTMENTS • Underwriting methodology: Understanding a manager’s underwriting methodology can provide valuable information about how they assess and mitigate risk. For example, assessing the proportion of an asset’s value that is realized in the short-term versus long-term can lead to meaningful insights about value at risk from potential disruptions.

• Value drivers: What tools does the manager use to understand the fundamental question, ‘How does the asset make money?’ One effective approach can be to build a layered model showing value in terms of different lines of business, customers, or other risk factors. Each may be subject to different risks and, at times, there may be natural embedded hedges – ie, traditional telephone companies’ landline market declines may be offset by growth in their mobile businesses.

• Active management and responsible governance: How does the manager identify and adjust to emerging risks? What types of models are employed to assess these risks? For example, “real option”

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modelling helps demonstrate value implications of managerial capital budgeting decisions and can be an important element of developing the value creation plan.

• Diversification: Is the manager’s strategy overly focused on a particular sector or technology, to the exclusion of emerging technologies? For example, because natural gas is the predominant heating fuel in certain countries, it is tempting to see that as a perpetual condition. However, maintaining some exposure to emerging technologies (eg, renewable fuels, hydrogen) can help inform investors about how long the mature technology will remain dominant and act as an explicit hedge.

• Clearly articulate and align interests: Alignment of interests is a critical part of any successful investment strategy. This includes alignment on fee structures (without creating unintended risk implications or style drift), investment time horizon, and values. Where there is a pressure to deploy funds, for example, this can undermine what should be a disciplined investment process.

The private infrastructure asset class is well established among institutional investors. As investors expand their allocations to infrastructure, the changing investment landscape provides both opportunities and threats to mature investments. Investors must remain alert to emerging technologies to protect against the risk of obsolescence.

To ensure that disruptive technological risks are identified and mitigated, it is critical for a disciplined investment program to include active management with robust access to information, a focus on emerging threats, and an alignment of interest with partners. Such a program can help investors mitigate risks and exploit the opportunities the future will inevitably deliver.

1. Based on latest publicly available information as of March 31, 2023.

Managers of Alternative Investments Directory Listings – Page 18 Managers of Alternative Investments Asset Listings – Page 21

MANAGERS OF ALTERNATIVE INVESTMENTS DIRECTORY LISTINGS

ADDENDA CAPITAL Janick Boudreau, Executive Vice-president, Business Development & Client Partnerships; 800, boul. René-Lévesque Ouest, Bureau 2750, Montréal, QC H3B 1X9 Phone: 514-908-1989 Fax: 514-287-7200 eMail: j.boudreau@addendacapital.com Website: addendacapital.com/ Style: Core Ownership: Principals - 3.8% Co-operators Financial Services Limited - 96.2% Number Of Alternative Professionals: 13 Year Established: 1985 Minimum Investment: Pooled Accounts - $5M Separately Managed Accounts - $20M Canadian Clients Pension Plans: 31 Foundations: 24 Endowments: 4 Total Canadian Alternatives Clients: 129 Canadian Alternative Assets Under Management Commercial Mortgages: $4,681M Commercial Mortgages: $3,943.1M

AGINVEST FARMLAND Anthony Faiella, Vicepresident of Business Development; 80 Keil Dr. S. - Unit #3, Chatham, ON N7M 3H1 eMail: Anthony.Faiella@AGinvestCanada.com Website: www.aginvestcanada.com Style: Active Managers of Canadian Farmland Assets – Direct Ownership Ownership: Principals Alternative Professionals: 2 Year Established: 2018 Minimum Investment: Pooled Accounts - $25M Separately Managed Accounts - $25M Canadian Clients Total Canadian Alternatives Clients: 92 Canadian Alternative Assets Under Management Direct Real Estate: $120M

ALLIANCEBERNSTEIN L.P. Wendy Brodkin,

Managing Director; 200 Bay St., North Tower, Toronto, ON M5J 2J2 Phone: 647-375-2803 eMail: Wendy.Brodkin@alliancebernstein.com Website: www.alliancebernstein.com/americas/en/institutions/home.html Style: Four platforms of differentiated strategies designed to improve client outcomes – Equities Platform: Through our equities platform, we seek to deliver our firm’s differentiated insights in high conviction strategies. This platform offers strategies with objectives that include seeking stable and consistent alpha, custom alpha, limited downside risk, and style diversification.

Our actively managed equity strategies span both global and regional universes across various capitalization ranges and styles, including value, growth, and core equities. Fixed Income Platform: We offer a globally-integrated fixed income platform, with the strategies on this platform incorporating both fundamental and quantitative research and harnessing our firm’s integrated research and innovative technology tools and systems. This platform offers broad market strategies seeding to generate alpha, Strategies that focus on credit spreads within markets, high yield strategies, and multi-sector and unconstrained strategies. Multi-Asset Platform: Our multi-asset platform leverages our firm’s ability to deliver insights across all markets to build comprehensive solutions focused on client outcomes. Our ‘outcome-oriented’ solutions include retirement strategies, total return strategies, income thematic strategies, and risk-managed strategies. We also offer factor and beta strategies, including alternative risk premix and index strategies. Alternatives Platform – Our alternatives platform offers private credit strategies such as real estate debt and middle market lending as well as opportunistic strategies such as real estate equity and global multi-strategy. Each offering seeks to combine each manager’s independent agility with AllianceBernstein’s institutional strength.

Ownership: Principals - 14% Publicly-held - 25% Equitable Holdings, Inc. (EQH) - 61% Number Of Alternative Professionals: 15 Established: 1971 Minimum Investment: Pooled Accounts - $1M Separately Managed Accounts - $100M Canadian Clients Pension Plans: 9 Total Canadian Alternatives Clients: 9 Canadian Alternative Assets Under Management Direct Real Estate: $50M Private Debt: $872M Hedge Funds: $350M

BENTALLGREENOAK (BGO) Yvonne Davidson, Principal, Investor Relations; 1 York St., Ste. 1100, Toronto, ON M5J 0B6 Phone: 416-6813414 eMail: yvonne.davidson@bentallgreenoak.com Website: www.bgo.com Style: Active Management Ownership: BentallGreenOak Management - 36.2% Sun Life Financial, Inc. - 51% Tetragon Financial Group (a founding shareholder of GreenOak) - 12.8% Number Of Alternative Professionals: 634 Year Established: 1978 Minimum Investment: Pooled Accounts - $70,836M Separately Managed Accounts $41.067M Canadian Clients Pension Plans: 105 Foundations: 15 Endowments: 14 Total Canadian Alternatives Clients: 166 Canadian Alternative Assets Under Management Direct Real Estate: $111,903M

BMO GLOBAL ASSET MANAGEMENT Samantha Cleyn, Managing Director & Head, Institutional Sales & Service, 100 King St. W., Toronto, ON M5X 1A1 Phone: 514-862-2653 eMail: samantha.cleyn@bmo.com Website: www.bmogam.com Style: Global Absolute Return Bond Fund Ownership: BMO Financial Group Number Of Alternative Professionals: 9 Year Established: 1943 Minimum Investment: Pooled Accounts $10M Separately Managed Accounts - $100M Canadian Alternative Assets Under Management Global Absolute Return Bond: $1,548.29M

CIBC Carlo DiLalla, Managing Director & Head, Institutional Asset Management; 161 Bay St., Ste. 2230, Toronto, ON M5J 2S1 Phone: 416980-2768 eMail: carlo.dilalla@cibc.com Website: www.cibcam-institutional.com Style: Top

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MANAGERS OF ALTERNATIVE INVESTMENTS DIRECTORY LISTINGS down macroeconomic fundamental process, integrating quantitative inputs with qualitative research Ownership: Wholly owned subsidiary of the Canadian Imperial Bank of Commerce Alternative Professionals: 48 Year Established: 1972 Minimum Investment: Pooled Accounts - $10M Separately Managed Accounts - $25M Canadian Clients Pension Plans: 22 Endowments: 1 Total Canadian Alternatives Clients: 23 Canadian Alternative Assets Under Management Private Debt: $40.8M Currency Overlay: $9,405.6M

CLARION PARTNERS, LLC Hugh Macdonnell, Managing Director; 230 Park Ave., New York, NY 10169 Phone: 212-883-2500 eMail: hugh. macdonnell@clarionpartners.com Website: www.clarionpartners.com Owners: Principals: - 18% Franklin Templeton – 82% Number Of Alternative Professionals: 280 Year firm was established: 1982 Canadian Clients Pension Plans: 14 Total Canadian Alternatives Clients: 14 Canadian Alternative Assets Under Management Direct Real Estate: $4,277.6M

DESJARDINS GLOBAL ASSET MANAGEMENT INC Natalie Bisaillon, Vice-president, Business Development & Client Relations; 1, Complexe Desjardins, 20th Floor, South Tower, Montréal, QC H5B 1B2 Phone: 1-877353-8686 X5554450 Fax: 514-281-7253 eMail: Natalie.bisaillon@desjardins.com Website: www.dgam.ca Style: Long-term investments, Fundamental research, Quantitative tools Ownership: Desjardins Group Number Of Alternative Professionals: 22 Year Established: 1998 Minimum Investment: Pooled Accounts - $5M Separately Managed Accounts - $50M Canadian Clients Pension Plans: 3 Total Canadian Alternatives Clients: 12 Canadian Alternative Assets Under Management Direct Real Estate: $4,077M Long/short Equities: $945M MultiAsset/GTAA: $1,215M Infrastructure: $4,273M

FIERA CAPITAL CORPORATION Krista McLeod, Head of Client Relations; 1981 McGill College Ave., Ste. 1500, Montreal, QC H3A 0H5 Phone: 514-954-3300 eMail: globaldistributionanalytics@fieracapital.com Website: www.fieracapital. com Ownership: Principals - 16% Publicly-held 67% Third Party - 17% Alternative Professionals: 65 Year Established: 2003 Minimum Investment: Pooled Accounts - $5M Separately Managed Accounts - $20M Canadian Clients Pension Plans: 43 Foundations: 121 Endowments: 9 Total Canadian Alternatives Clients: 275 Canadian Alternative Assets Under Management Direct Real Estate: $5,802M Private Equity: $296.4M Private Debt: $3,340.7M Hedge Funds: $56.4M MultiAsset/GTAA: $233M Infrastructure: $2,762M Agriculture: $1,072.9M

FRANKLIN TEMPLETON Duane Green, CEO & Head of Institutional; 200 King St. W., Ste. 1400, Toronto, ON M5H 3T4 Phone: 416-957-6165 eMail: duane.green@franklintempleton.ca Website: www.franklintempleton.ca Style: Various investment style across 10 distinct alternatives investment manager teams Year Established: 1947 Canadian Clients Pension Plans: 23 Foundations: 4 Total Canadian Alternatives Clients: 27 Canadian Alternative Assets Under Management Direct Real Estate: $504M Private Equity: $2,155M Hedge Funds: $218M Infrastructure: $190M

GUARDIAN CAPITAL Robin Lacey, Head of Institutional Asset Management; 199 Bay St., Commerce Court W., Ste. 2700, Toronto, ON M5L 1E8 Phone: 416-947-4082 Fax: 416-3649634 eMail: rlacey@guardiancapital.com Web-

site: www.guardiancapital.com Style: Seeks to achieve its investment objectives by primarily investing in or selling short securities of issuers located primarily within North America.

The strategy will be driven by ongoing credit research and macro-economic analysis performed by the manager. Composition will vary depending on market conditions and various phases of the economic and credit cycle.

Principally holds investment grade and noninvestment grade bonds, broadly diversified by issuer and industry, but may also invest in other securities including, but not limited to, floating rate bank loans, convertible bonds, equities, warrants, real estate investment trusts, and exchange traded funds (ETFs). The strategy may also invest in credit, interest rate, and index swaps or employ income generating option strategies. May engage in strategies relating to special situations such as reorganizations, restructurings, distressed situations, mergers or acquisitions as well as the use of leverage in order to hedge or enhance returns.

Ownership: Guardian Capital Group Limited Alternative Professionals: 3 Year Established: 1962 Minimum Investment: Pooled Accounts - $1M Separately Managed Accounts – Varies by mandate Canadian Clients Foundations: 1 Total Canadian Alternatives Clients: 2 Canadian Alternative Assets Under Management Other: $128.66M

LEITH WHEELER INVESTMENT COUNSEL Daren Atkinson, Principal, Portfolio Manager – Institutional Clients; Ste. 1500, 400 Burrard St., Vancouver, BC V6C 3A6 Phone: 604-683-3391 Fax: 604-683-0323 eMail: darena@leithwheeler.com Website: http:// www.leithwheeler.com Style: Value Ownership: Principals - 100% Alternative Professionals: 7 Year Established: 1982 Minimum Investment: Pooled Accounts - $340,000 Canadian Clients Pension Plans: 7 Foundations: 4 Endowments: 5 Total Canadian Alternatives Clients: 24 Canadian Alternative Assets Under Management Infrastructure: $85.1M Private Assets Fund: $52.7M

Benefits and Pensions Monitor directories can be found at www.bpmmagazine.com

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SPONSORED FEATURE

19

MANAGERS OF ALTERNATIVE INVESTMENTS DIRECTORY LISTINGS

MFS INVESTMENT MANAGEMENT CANADA LIMITED Stephane Amara, Managing Director of Sales – Canada; 77 King St. W., 35th Floor, Toronto, ON M5K 1B7 Phone: 416-361-2273 Fax: 416-862-0167 eMail: SAmara@mfs.com Website: www.mfs.com Style: The MFS Global Real Estate Equity Strategy puts emphasis on sustainable current income and durable free cashflow growth of the companies we invest in. In order to assess attractive ideas, we approach real estate as a hybrid asset class and as such consider equity, credit, and commercial real estate perspectives. Ownership: Principals- Up to 20%, remainder is owned by Sun Life Financial, Inc. Number Of Alternative Professionals: 14 Year firm was established: 1924 Minimum Investment: Separately Managed Accounts - $25M Canadian Clients Pension Plans: 2 Total Canadian Alternatives Clients: 7 Canadian Alternative Assets Under Management Indirect Real Estate: $549.8M

PENDERFUND CAPITAL MANAGEMENT LTD. David Blyth, Director of Institutional Sales; 1830-1066 W Hastings St., Vancouver, BC V6E 3X2 Phone: 416-795-8258 eMail: dblyth@penderfund.com Website: www.penderfund.com Style: Bottom-up fundamental active management Ownership: Principals - 89% Founding Shareholder – 11% Alternative Professionals: 8 Year Established: 2003 Minimum Investment: Pooled Accounts - $10M Separately Managed Accounts - $25M Canadian Clients Total Canadian Alternatives Clients: 58 Canadian Alternative Assets Under Management Private Equity: $75M Liquid Alternatives: $198M

PICTET ASSET MANAGEMENT François Forget, Head of Distribution – Canada; 1000 de la Gauchetière W., Ste. 3100, Montreal, QC H3B 4W5 Phone: 514-518-8587 eMail: fforget@pictet.com Website: www.am.pictet Style: Hedge Funds (Asian event-driven, Distressed & special situations, Emerging markets relative value, Europe directional, Europe market neutral, Global directional, Global market neutral, Greater China, Multi strategy), Private Equity (Entrepreneur capital, Co-investments, Multistrategy, Thematic), Real Estate (European value add, European core plus, Global multi manager) and Private Debt (European private debt).

Ownership: Principals Number Of Alternative Professionals: 139 Year Established: 1980 (Parent in 1805) Minimum Investment: Pooled Accounts - $1M Separately Managed Accounts - $100M

PICTON MAHONEY ASSET MANAGEMENT Taras Klymenko, Head of Institutional Business; 33 Yonge St., Ste. 830, Toronto, ON M5E 1G4 Phone: 416.955.4108 eMail: institutional@ pictonmahoney.com Website: https://www. pictonmahoney.com/ Style: Active Ownership: Principals Alternative Professionals: 42 Year Established: 2004 Minimum Investment: Pooled Accounts - $1M Separately Managed Accounts - $25M Canadian Clients Pension Plans: 1 Foundations: 1 Total Canadian Alternatives Clients: 5 Canadian Alternative Assets Under Management Hedge Funds: $1,791M Long/ Short Equities: $2,633M Multi-asset/GTAA: $761.8 Long/Short Credit: $1,986M Merger Arbitrage: $1,230M Special Situations Credit: $116M Total: $51M

SLC MANAGEMENT Heather Wolfe, Senior Managing Director, Head of Canadian Business Development; 1 York St., Toronto, ON M5J 0B6 Phone: 416-408-7834 eMail: heather.wolfe@slcmanagement.com Website: www.slcmanagement.com Style: Our primary source of valueadd within our fixed income teams is credit analysis. We typically do not take active interest rate positions. Ownership: Wholly-owned subsidiary of Sun Life Financial Inc Number Of Alternative Professionals: 56 Year Established: 2013 Minimum Investment: Pooled & Separately Managed Accounts: Varies by fund Canadian Clients Pension Plans: 52 Total Canadian Alternatives Clients: 78 Canadian Alternative Assets Under Management Private Debt: $43,983M Other: $562M

TD GLOBAL INVESTMENT SOLUTIONS Mark Cestnik, Managing Director; 161 Bay St., 34th Floor, Toronto, ON M5J 2T2 Phone: 416-2741742 Website: www.tdgis.com Style: Core Plus/ Diversified Ownership: Wholly owned subsidiary of The Toronto-Dominion Bank Number Of Alternative Professionals: 73 Year Established: 1987 Minimum Investment: Pooled Accounts - $5M Separately Managed Accounts - $500M Canadian Clients Pension Plans: 217 Foundations: 2 Endowments: 48 Total Canadian Alternatives Clients: 320 Canadian Alternative Assets Under Management Direct Real Estate: $22,575.54M Private Debt: $8,772.86M Infrastructure: $1,986.72M Global Real Estate: $108.91M

TREZ Shoghig Kulidjian, Managing Direc-

Benefits and Pensions Monitor directories can be found at www.bpmmagazine.com

20

SPONSORED FEATURE

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MANAGERS OF ALTERNATIVE INVESTMENTS DIRECTORY LISTINGS ternatives Clients: 32,000 Canadian Alternative Assets Under Management Private Debt: $4,600 Indirect Real Estate: $500M

tor, Institutional Sales; 401 Bay St., Ste. 1404, Toronto, ON M5H 2Y4 Phone: 416-342-0466 eMail: ShoghigK@trezcapital.com Website: trezcapital.com Style: A diversified commercial real estate financier for both debt & equity.

Focus on capital preservation, income generation across opportunistic, value add, and core investments. Ownership: Principals Alternative Professionals: 29 Year Established: 1997 Minimum Investment: Separately Managed Accounts - $5M Canadian Clients Pension Plans: 85 Foundations: 3 Endowments: 3 Total Canadian Al-

tor Relations; 40 University Ave., Ste. 1200, Toronto, ON M5J 1T1 Phone: 416-941-1284 eMail: lluppi@triovest.com Website: www.triovest. com Style: Core, Core Plus, Value Add, Opportunistic Alternative Professionals: 460 Year Established: 1985 Minimum Investment: Pooled Accounts - $20M Separately Managed Accounts - $20M Canadian Alternative Assets Under Management Direct Real Estate: $13,500M

TRIOVEST Luigi Luppi, Vice President, Inves-

Portfolio Under Development: $3,000M

AGINVEST FARMLAND

u

ALLIANCE BERNSTEIN

u

BGO

u

BMO

u

u

u

u

u

u

u

u

u

$3,943.1M

u

u

u

u

u

u

u

u

u

u

$1,548.29M

u

$9,446.4M $4,277.6M

CLARION

u

DESJARDINS

u

u

u

u

FIERA

u

u

u

u

FRANKLIN TEMPLETON

u

u

u

u

u

u

u

u

u

$10,510M u

u

u

u

u

u

MFS

u

u

u

u

$128.66M

u

$137.8M $549.8M

u u

PICTET

u

u

u

u

u

PICTON MAHONEY

u

u

u

u

u

SLC

u

$51M

u

$51M

u u

u

u

u

$43,983M

u

TD

u

u

TREZ

u

u

TRIOVEST

u

$13,506.9M $3,093M

u

GUARDIAN CAPITAL

PENDERFUND

$1,271M $14,478M

u

u

u

$125M

CIBC

LEITH WHEELER

Total

ADDENDA

Other

Infrastructure

Multi-Asset GTA

Indirect Real Estate

Alternative Risk Premia

Long / Short Equities

Hedge Funds

Private Debt

Direct Real Estate

ASSET LISTING

Private Equity

ALTERNATIVE ASSETS

$31,245.88M

u

$1,000M u

Benefits and Pensions Monitor directories can be found at www.bpmmagazine.com

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SPONSORED FEATURE

21

ESG

22

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Navigating the Complexities of ESG Integration in Pension Governance

A

BY: SEAN LISS

nyone working towards retirement understands how important it is to have a well-rounded portfolio that can weather the storm in any market. Naturally, investment managers have to carefully consider the companies they include in their funds and plan fiduciaries have to carefully consider the funds they offer to retirement plan participants. For both investment managers and plan sponsors, due diligence on investments is an important part of the risk management process and a growing consideration over the last decade has been how well companies are scoring on ESG (environmental, social, and governance) factors. ESG has been a contested topic with many proponents and critics, but where does pension governance fit in the conversation?

Before we answer this question, it is important to first understand what ESG is and why it continues to be such a relevant topic.

First off, there is no single definition of ESG. CAPSA, the Canadian Association of Pension Supervisory Authorities, defines ESG factors as “qualitative or quantitative ESG information that may positively or negatively affect assessments of the financial performance of individual

companies, industries, or markets generally.” Environmental considerations relate to impact on the environment, such as climate change, carbon emissions, and resource depletion. Social considerations relate to impact on people, including DEI (diversity, equity, and inclusion) and labour standards. Governance considerations relate to internal policies and procedures such as business ethics, cybersecurity, corporate transparency, board composition, and executive compensation.

Key Role Many managers understand that ESG plays a key role in risk management and view it as an enhancement to their investment approach. Some companies do very well in certain aspects of ESG and poorly in others. For instance, a manager may believe a company does well on ‘G’ and poorly on ‘E.’ The question then emerges, which carries the most value and does a strong ESG approach add value for a portfolio over the long term?

Proponents claim that companies that score high on the ESG scale increase long-term value and profitability, creating win-win scenarios for stakeholders by being accountable to the wider society in which they operate. As an example of why it is important for managers to strongly

consider and dig into the ESG practices of companies they are investing in, just recently, Adani Group, which trades on India’s National Stock Exchange (NSE), was in the news after being accused of accounting fraud and stock manipulation. It was also found to have been using shares of Adani Green Energy, a renewable energy company owned by Adani Group, as collateral for the financing of a coal mine in Australia. In the one-month period following the surfacing of these claims, Adani Group stock dropped 65 per cent. If these accusations are found to be true, this demonstrates how paying close attention to the ethical management practices of companies can improve risk and return characteristics of a portfolio and, by extension, the retirement outcomes of plan members.

On the other hand, ESG critics claim that considering factors that are not financial in nature is unsustainable and comes at the expense of short-term profitability.

There is also concern that some companies and managers have been ‘greenwashing’ ‒ using ESG as a marketing exercise. Critics are quick to point out that exclusionary tactics employed by some managers, such as not investing in the energy sector, drastically constrict a manager’s opportunity set and affect the risk and return of a fund.

To pull a recent example, oil and gas pro-

ESG

www.bpmmagazine.com ducers in Canada generated record profits in 2022. Canadian equity managers who excluded energy stocks from their portfolio due to concerns that these companies do not have a high ‘E’ score would have had a difficult time outperforming their benchmark last year.

Best Financial Interest Where this can begin to play into the role of pension governance is that plan fiduciaries must do what is in the best financial interest of plan members. One could argue that excluding energy stocks from a Canadian equity mandate may worsen retirement outcomes over the long term and, therefore, not be in members’ best financial interests. The concept of responsible investing, of which ESG is a subset of a wider overarching theme, is a broad spectrum, with exclusionary strategies on one end and ESG integration on the other. If choosing exclusionary strategies, plan sponsors should be aware that these investments may not be suitable for all of their members.

Also important to note is that ESG integration is often misunderstood to be an exclusionary approach. To the contrary, ESG integration also includes the practice of stewardship and engagement.

This allows managers to integrate ESG by maintaining exposure to sectors traditionally avoided by exclusionary strategies (for instance oil and gas) by engaging these companies to reduce their carbon footprints and transition to a low carbon future.

Now that we have highlighted what ESG is and some of the sticking points in the ESG debate, we can determine how pension governance fits into the ESG conversation.

Pension governance refers to the obligations of plan administrators to adhere to their fiduciary duties in managing a plan.

As already noted, the ESG framework can be thought of as another tool in the risk management toolkit; an extension of the traditional financial metrics one would consider when conducting financial analysis. At the end of the day, a pension plan’s primary purpose is to provide retirement income to employees. This means plan fiduciaries have a duty to consider both financial and non-financial risks to plan members.

It is important to note that in Canada,

there is no existing legislation that obliges or prohibits the integration of ESG factors in investment decisions. There is also no widely accepted definition of what qualifies as ESG considerations. A lack of standardization in ESG reporting and a need for better data and analysis to support ESG investment decisions is currently one of the biggest challenges of including ESG in pension governance. In response to no clear legislation, CAPSA released

FROM AN ORGANIZATIONAL PERSPECTIVE, INCORPORATING ESG FACTORS INTO PENSION PLAN GOVERNANCE CAN HELP ENSURE THAT PLANS ARE ALIGNED WITH THE VALUES AND CONCERNS OF PLAN BENEFICIARIES, WHILE ALSO PROMOTING MORE SUSTAINABLE AND RESPONSIBLE INVESTMENT PRACTICES draft guidelines in June 2022 to guide plan administrators in their consideration of ESG factors when making investment decisions. The guidelines are expected to be finalized in 2023.

From an organizational perspective, incorporating ESG factors into pension plan governance can help ensure that plans are aligned with the values and concerns of plan beneficiaries, while also promoting more sustainable and responsible investment practices. In today’s business landscape, investors are increasingly calling for transparency and action regarding ESG. As it is becoming commonplace to have a dedicated ESG section on a company website, where sustainability goals are discussed, embracing these principles is becoming a vital aspect of corporate governance. Applying these principles to

23

pensions, a significant component of an organization, is a logical fit for many organizations.

Black And White However, determining whether to incorporate ESG factors into decision making is not as black and white as it may seem. To effectively integrate ESG considerations into a company’s investment philosophy, plan administrators must dedicate sufficient time to evaluate the relevance of specific ESG factors to investment performance and take appropriate actions based on their assessment.

This entails understanding each manager’s investment approach and ensuring that a manager’s values and ESG approach align with those of the organization, plan fiduciaries, plan members, and society as a whole. This can be particularly difficult in Canada since there is no legal obligation for public companies to disclose their ESG practices. Adding to the challenge, ESG ratings are subjective and there is a low correlation among the various ratings agencies, which makes it even more important for plan administrators to have their own opinion on ESG. In summary, organizations are increasingly integrating ESG into their governance frameworks as risk management considers both financial and non-financial factors. As stakeholders increasingly expect corporate social responsibility to act as a fundamental aspect of their employer’s operations, expect more standardized ESG reporting and disclosure and a greater focus on what exactly drives long-term value creation. One could also anticipate increased engagement with companies on ESG issues and continued evolution of ESG standards. While ESG remains a contested topic with both proponents and critics, it is undeniably drawing increased attention from regulators and will undoubtedly continue to grow in importance.

Sean Liss is a consultant with HUB Proteus.

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DB PENSIONS

26

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The New Funding Regime for Defined Benefit Pension Plans

M

BY: CHUN-MING (GEORGE) MA

any Canadian jurisdictions have implemented reforms to their pension legislation, adopting a new funding regime known as ‘going-concern plus’ for defined benefit pension plans. The objective of this reform is to lower and stabilize the required contributions to DB plans, primarily by reducing solvency funding requirements and by strengthening the going-concern funding requirements. As part of the new regime, pension plans are required to hold a reserve, called a provision for adverse deviations (PfAD), to buffer against unexpected deviations in actual experience from the assumptions used in actuarial valuations I have conducted a stochastic analysis to evaluate the impact of the fundingrelated policies on the risks and costs of a DB plan under the new funding regime.

The study considers the amortization period, target asset mix, limits on surplus use, and the PfAD as key policy decisions for the plan. The findings of my analysis are published in the Canadian Institute of Actuaries (CIA) paper ‘A Stochastic

Analysis of Policies Related to Funding of Defined Benefit Pension Plans.’

The new funding regime aims to determine if a DB plan has enough assets and expected contributions to meet its promised benefits, given its continued existence. It permits plans to use a discount rate based on the expected long-term return on plan assets to calculate funding requirements.

Long-Term Impact My research aims to assess the potential long-term impact of the new funding regime on DB plans and to inform the appropriate values of its parameters.

In my analysis, I have used three risk measures based on the projected funded ratio of a DB plan over a 20-year period.

The three measures are: • The range within which 90 per cent of the potential funded ratios fall – the wider the range, the more uncertain the future funding level of the plan will be • Underfunding risk – the probability that the projected funded ratio will fall below the lower bound of a risk tolerance band

• Overfunding risk – the probability that the projected funded ratio will exceed the upper bound of a risk tolerance band The risk tolerance band is a range of funded ratios with a lower bound below 1.0 and an upper bound above 1.0, representing the accepted level of funding risk by plan stakeholders (such as shareholders, taxpayers, and/or employees).

The key policy insights from my research are summarized below.

• Amortization Policy Under the new funding regime, goingconcern deficits must be amortized over 10 years, with a fresh start, as opposed to the previous 15-year closed amortization.

This 10-year open amortization strikes a balance between stable annual funding requirements and adequate provision for plan liabilities. A longer amortization period would stabilize funding requirements more, but it increases the risk of both significant underfunding and overfunding.

• Investment Policy The funding requirements of DB plans under the new regime are primarily driven by going-concern valuations, which are based on a discount rate determined as the expected long-term rate of return on plan

DB PENSIONS

www.bpmmagazine.com assets. The investment mix has a significant impact on the plan’s costs and risks.

A higher allocation of the pension fund to return-seeking investments (e.g., equities) could potentially lower funding costs, but also increases the volatility in the funded ratio, the risk of underfunding, and the uncertainty in funding requirements.

“In making investment decisions, plan sponsors/trustees should weigh the cost of funding against the risk of the future funded ratio.”

The employer’s financial capacity to meet unexpected increases in funding requirements should also be taken into account. For example, a low-risk investment strategy may be more appropriate if the potential deficit amortization payments are sizable relative to the employer’s cash flow and operating budgets.

• Surplus Policy My modelling results show that unrestricted use of surplus could increase a plan’s exposure to underfunding risk over time. Thus, there should be limits on the use of surplus to control this risk.

Canadian jurisdictions adopting the new funding regime require pension plans to maintain a funding threshold above 100 per cent (on a going-concern or solvency basis) before any use of surplus is permitted. Typically, a plan is not allowed to use any amount of surplus that will result in it having a solvency shortfall. However, this solvency-based requirement may be too restrictive as it could prevent a plan from taking a contribution holiday even if there is a considerable amount of surplus on the going-concern basis. It could also result in significant overfunding and undermine intergenerational equity.

• Funding Reserve Policy Incorporating a PfAD in the funding process can greatly enhance the future funding level of a pension plan and minimize the risk of underfunding over the long term. The larger the PfAD, the more significant the improvement in funding and the lower the risk of underfunding.

However, it is important to note that a higher PfAD also increases the potential for overfunding.

To achieve a plan’s long-term funding goal, a risk-based PfAD can be established. This PfAD should aim to achieve full funding at the end of a specified time horizon (eg, 20 years) with a desired level of confidence (eg, 75 per cent). The PfAD reflects the investment risk that the plan

is taking on. Plans with a higher proportion of their pension fund invested in return-seeking assets are likely to require a higher PfAD compared to plans with a more conservative investment strategy, all other factors being equal.

Under the new funding regime, plans that adopt a higher-risk investment policy, with a higher expected return, will have lower funding requirements compared to plans that opt for a more conservative investment policy. However, the discount

PLANS WITH A HIGHER PROPORTION OF THEIR PENSION FUND INVESTED IN RETURN-SEEKING ASSETS ARE LIKELY TO REQUIRE A HIGHER PfAD COMPARED TO PLANS WITH A MORE CONSERVATIVE INVESTMENT STRATEGY, ALL OTHER FACTORS BEING EQUAL rate alone should not incentivize plan sponsors or trustees to increase investment risk and benefit from lower required contributions.

The risk-based PfAD helps to mitigate this potential issue by considering the degree of investment risk associated with the plan.

I have found that the membership profile of a plan (ie, stationary versus non-stationary) is not a significant factor in determining a risk-based PfAD. This result calls into question the regulation that mandates a closed plan to fund for a higher PfAD compared to an open plan.

“In conclusion, I believe that policymakers should adopt a dynamic PfAD policy that aligns with the funding ratio risk inherent in a pension plan. The PfAD should vary based on the evolving funding position and investment risk associated

27

with the plan.”

For a given investment policy, the PfAD should be adjusted upwards or downwards in response to significant changes in the plan’s funding level.

Developing a Long-Term Funding Strategy For DB plans that are expected to continue operation in the foreseeable future, it is possible to develop a long-term funding strategy that meets their funding objectives. A combination of the following policies can be used to control the risk of future funding levels, either upside or downside: • the level of PfAD included in the plan’s funding requirement • the limit on the amount of surplus available for use as a contribution holiday or for other purposes Where an investment policy and deficit amortization rule have already been established for a plan, setting appropriate values for these parameters can help ensure the plan’s long-term sustainability.

Each DB pension plan has unique funding objectives based on its structure, membership characteristics, and stakeholders’ risk preferences. It is challenging to predict the long-term funding level of a plan due to the uncertainty of economic and demographic factors. However, the insights gained from this research can assist plan sponsors or trustees in developing a sustainable long-term funding strategy that meets the plan’s funding objectives.

Chun-Ming (George) Ma (FCIA) is a retired actuary with more than 30 years of experience in retirement consulting and prudential pension regulation in Canada. He served as the chief actuary of the former Financial Services Commission of Ontario (now the Financial Services Regulatory Authority of Ontario) until his retirement in 2014.

This article was originally published by the Canadian Institute of Actuaries

DRUG PLANS

28

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Why It’s Time to Change the Prior Authorization Process BY: DENISE BALCH & RADIYYAH KARODIA

M

edical technology and digitization have revolutionized healthcare in Canada and around the world, creating new opportunities and solutions for patients, healthcare providers, and practitioners, including electronic prior authorization for specialty drugs to expediate the prior authorization process.

The insurance industry in Canada is familiar with electronic claims adjudication and should welcome the opportunity for efficiencies in the current largely manual process. The introduction of real time, pay direct, adjudication for prescription drugs in the 1980s and 1990s came with many benefits, including the ability to manage reimbursement through formularies, utilization reports, and developing benchmarking for claims utilization.

By 1990, the first 10 specialty drugs were also available in the market. These medications usually come with a high price tag and may require special storage, handling, or administration. To manage access to these medications, insurers began with a manual prior authorization claims review process. Thirty years later, this remains the same, even with an estimated 500 specialty drugs in the market and many more in development.

Wet Signature To those who are unfamiliar with the prior authorization process, it can be very confusing, particularly to patients.

The process is largely paper-based, often requiring wet signatures from prescribers and patients on authorization forms that are unique to the drug prescribed, the indication (disease)

PRIVATE PAYERS IN CANADA RECOGNIZE THE NEED TO MOVE TO DIGITIZATION OF A NUMBER OF INSURANCE PROCESSES THAT REMAIN PAPER-BASED, INCLUDING EPA. THE BENEFITS FOR ALL STAKEHOLDERS ARE HIGH AND, AT A TIME WHEN ACCESS TO MEDICAL RESOURCES CAN BE DIFFICULT, HELP RELIEVE OVERALL HEALTHCARE ADMINISTRATIVE BURDEN – Joan Weir, vice-president, group benefits, Canadian Life and Health Insurance Association

and the payer. Once complete and signed by multiple parties, the form is faxed or mailed to insurers with any required medical documentation. In addition to the administrative burden on all parties, the process can take valuable time when the patient may be unable to access their prescribed medication, particularly when there are errors or missing or additional information requirements.

To address the complexities and the burden of the prior authorization process, an industry of third-party assistance programs has evolved. These programs help physicians and patients complete the unique claim form and gather any additional documentation required by payers.

Third parties include patient assistance programs, drug access navigators, and pharmacies.

Drug trend reports from Express Scripts show the specialty spend increased from 13.2 per cent of total drug spend in 2007 to 29 per cent in 2021 because of the growing number of patients and the development of new specialty therapies.

New drugs in development are largely in the specialty drug space, according to human data science company IQVIA, with oncology and immunology growing into the two largest. The administrative burden of prior authorization on all stakeholders will continue to grow unless an electronic prior authorization (ePA) process is implemented.

Today, the technology is available to Canadian private sector stakeholders to adopt ePA to simplify the submission and claims process, reducing the administrative burden for stakeholders, particularly physicians, and improve access for patients. ePA is the only solution to date that respects the proprietary nature of payer claim requirements and claims criteria.

In the signif-

DRUG PLANS

www.bpmmagazine.com icantly larger and more complex US market, federal legislation required eRX standards as early as 2003. Since then, there has been a series of ePA related legislations that have addressed capabilities, standards, and technology. Most recently, the Seniors’ Timely Access to Care Act passed into law in September 2022, supported by the American Medical Association. It means that more than 28 million Medicare members will benefit from ePA, reducing wait times for medication.

Faster Care The US private sector has also been active in this space. In 2021, the America’s Health Insurance Plans (AHIP) PATH study found that “ePA can significantly reduce the time between a request for prior authorization, a decision, and the time to a patient receiving care.” Based on 40,000 transactions over 12 months, 71 per cent of patients received faster care, ePA reduced the time between submitting a PA request and receiving a decision by 69 per cent, and 60 per cent of providers said ePA improved transparency of prior authorization requirements.

In Canada, provincial payers in British Columbia and Ontario have already implemented their own ePA solution.

While private payers have shown an interest in ePA, none have made the move to adoption. Until ePA is implemented in the private sector, all stakeholders will continue to experience a heavy administrative burden, particularly physicians, and some patients will experience longer wait times to access specialty medications.

What many Canadians familiar with ePA agree on is that an agnostic ePA platform should be available to all stakeholders in the process. Rather than starting the process themselves, it is likely that physicians will refer patients to patient assistance or support programs, drug access navigators, or specialty pharmacies for assistance with preparing and submitting

29

ELECTRONIC PRIOR AUTHORIZATION SHOWS PROMISE TO GET THE RIGHT MEDICATION TO THE RIGHT PATIENT AT THE RIGHT TIME. WHEN A PATIENT IS PRESCRIBED A TAILORED TREATMENT OPTION FOR A MODERATE TO SEVERE FORM OF A DISEASE, THEY HAVE OFTEN DEALT WITH LENGTHY WAITS TO GET A DIAGNOSIS AND TRIED FIRST- AND SECOND-LINE THERAPIES THAT DID NOT DO THE TRICK OR EVENTUALLY FAILED THEM. ADMINISTRATIVE DELAYS CAUSED BY OUTDATED, MANUAL, AND PAPER-BASED PROCESSES ADD INSULT TO INJURY. ELECTRONIC PRIOR AUTHORIZATION IS A CREATIVE SOLUTION THAT CAN GET PATIENTS STARTED ON A NEW TREATMENT, AND HOPEFULLY, BACK TO THEIR LIVES – Rachael Manion, executive director at the Canadian Skin Patient Alliance. their ePA claim. This will relieve most of the administrative burden on physicians.

Through ePA, claim fields that are unique to each payer for the drug prescribed and indication will be completed online by the assistance provider, the physician, and patient. Electronic signatures will be collected from physicians and patients and only medically relevant files will be attached from a patient’s electronic medical record (EMR). Payers can receive submissions electronically via integrations with agnostic ePA solution providers. Approvals, denials, or requests for information can also be made through ePA from the payer to whomever submitted the initial claim.

The success of ePA depends on adoption by prior authorization stakeholders, and physicians are unlikely to assume the role of initiating ePA claims. The US CoverMyMeds 2020 ePA Report found that while nearly 100 per cent of US pharmacies, payers, and electronic health

records (EHR) had adopted an ePA solution, only 17 per cent of requests started at the prescribing point. This suggests that physicians will not be the linchpin to the success of ePA in Canada. A Canadian ePA solution would have the highest chance of success by engaging the existing prior authorization support infrastructure that currently assists physicians and patients with the PA process.

Denise Balch is project manager for Simplify Prior Authorization and president of Connex Health.

Radiyyah Karodia is reimbursement educator and researcher co-op student at Connex Health.

ESOPs

30

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The Need for Employee-Owned Share Plans in Canada

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BY: PERRY PHILLIPS

he federal government has missed the mark with the proposal for Employee Ownership Trusts (EOTs) in its recent budget.

While this could provide an additional mechanism for structuring employee ownership plans, its use appears to be for a business that is steady, has stable cash available, is not growing much, and whose owner has no other exit options.

Under the proposal, the employees do not actually own the shares; rather, they become beneficiaries of the EOT that owns the shares. The employees are only entitled to dividends while they are employed. It is thus perhaps more like an employee benefit trust than an EOT. As well, there doesn’t seem to be much incentive, tax or otherwise, to create employee ownership plans through EOTs. Mechanisms available through the Income Tax and Provincial Security Acts are currently being used in Canada to design and implement ESOPs and have been used successfully for decades. The advent of the EOT does not take away any of these mechanisms.

There are also many alternatives to achieve employee ownership that we

have worked with – share equity purchase plans, stock option plans, and equity value ownership plans (EVOPs), commonly known as phantom plans. Which mechanism to use depends on the goals of the owner and the company. Since every company and owner is different, it

FROM AN EXIT STRATEGY STANDPOINT, WE ARE CURRENTLY SEEING A WAVE OF BUSINESS OWNERS LOOKING TO EXIT WITH MINIMAL TO NO SUCCESSION PLANS IN PLACE is important to identify those goals from the outset. This creates a foundation to strategically design a successful ESOP. Provincially, there is ESOP legislation in British Columbia, Manitoba, and Saskatchewan. However, this legislation

is very limited in its benefits and has not had large participation rates from businesses.

EOT legislation changes to support ESOPs should include these aspects: • Allow the selling owners to designate the percentage of shares available to be sold to employees • Correct the current income tax act that is anti-ESOP in function, such as having shares repurchased by the company treated as a deemed dividend instead of a capital gain • Create conditions so that financial institutions can make loans at sub-prime interest rates to the ESOP company • Encourage ESOP formations by sharing the cost of design and implementation • Budget for communications to promote the ESOP concept. u When are ESOPs used The major reasons for Canadian owners to use ESOPs are for succession or exit planning, attracting new employees, retaining key employees, maintaining the owners’ legacy, and creating an ownership culture.

From an exit strategy standpoint, we are currently seeing a wave of business owners looking to exit with minimal to no succession plans in place. In a

ESOPs

www.bpmmagazine.com recent study, the Canadian Federation of Independent Business (CFIB) found that 76 per cent of owners plan to leave their businesses within the next 10 years.

Time Frames For Exiting We have many clients who have multiple people in ownership and who have different time frames for exiting. One company had three owners aged 67, 55, and 50. The eldest wanted to retire within two years while the other two had a 10to 15-year horizons for exiting. We were able to design the ESOP to meet their time frame. u Participative versus non-participative ESOPs in creating an ownership culture In differentiating between successful versus unsuccessful ESOPs, it is important to differentiate a participative from a non-participative ESOP. A participative ESOP is defined as having a culture that is transparent and communicative. Elements of a participative ESOP include the building of trust between the owners who control the company and the employee-owners, having open communication channels, sharing of various levels of financial information, and training employees how to think and act like owners.

A non-participative ESOP is the opposite, with little or no trust within the company, lack of communication, little or no sharing of financial information, and lack of training in ownership thinking.

Studies have shown that a participative ESOP will show increases in productivity of up to 10 per cent per annum while a non-participative ESOP could actually show less productivity, up to six per cent per annum. u Employee Financing Alternatives Many owners at the beginning of the planning stage believe that their employees cannot afford to buy ESOP shares, but there are eight different strategies for helping employees fund their purchase.

In addition, there are strategies that allow shares to be gifted to employees at nominal or low prices.

Many clients, however, want their employees to have skin in the game to foster an ownership mentality. Each of the strategies can be accommodated by a participative ESOP that is well planned and communicated clearly to employees.

From a retention perspective, a NCEO (National Centre for Employee Ownership in the US) study in 2022 found that ESOP companies had fewer workers quit in 2020, with a median six per cent quit rate for ESOP companies versus 20 per cent for non-ESOP companies. As well, ESOP companies were more likely to retain key employees compared to non-ESOPs. A study by the Employee Ownership Foundation in the US found that ESOP

FROM AN OWNER’S VIEWPOINT, A SUCCESSFUL ESOP WILL ENCOURAGE OWNERSHIP THINKING AND ENGAGE EMPLOYEES TO BE MORE CONSCIOUS OF THE ‘BIG PICTURE.’ IT WILL ENCOURAGE AND MOTIVATE EMPLOYEES TOWARD INNOVATION AND VALUE ENHANCEMENT FOR ALL SHAREHOLDERS

companies had an average job satisfaction rating of 6.8 out of 10, compared to a national average of 5.9. The study also found that ESOP companies had an average employee engagement rating of 4.2 out of five, compared to a national average of 3.8.

An exciting benefit of a properly designed and implemented ESOP is the desire of many owners to leave a lasting legacy. Success rates of business transitions (success is defined as still being in business five years after the owner leaves the company) are interesting. If an owner sells to family members, the success rate is around 30 per cent for first-generation transition and declines for the second generation. If the owner sells to a third

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party, the success rate is around 50 per cent. If the owner sells to the employees (which could be in conjunction with family or third parties) the success rate goes to 80 per cent. u Characteristics of a successful ESOP From the employee viewpoint, a successful ESOP must be financially rewarding. For employees, as gratifying as it is to be part of a team, there must be financial benefit at the end of the day.

Also important is that most employees live paycheck to paycheck; therefore, the ESOP must be affordable. The payment method should be simple. The ESOP must be tax-effective so employee-owners will enjoy the significant tax benefits of buying shares. Employees must also clearly understand the ESOP. The Big Picture From an owner’s viewpoint, a successful ESOP will encourage ownership thinking and engage employees to be more conscious of the ‘Big Picture.’ It will encourage and motivate employees toward innovation and value enhancement for all shareholders. In addition, it must reward employees’ commitment through sharing in the growth in the company. Integration into the corporate culture and incentive programs is essential. Finally, it must be a basis to attract and retain employees.

Canada does not have an effective strategy for dealing with employee ownership. The main problem is a lack of political will to support employees in investing in their own companies.

We estimate there are between 500 and 1,000 ESOP companies in Canada at the moment. Whatever your political point of view, ESOPs make sense for our future economy and for our democratic freedoms. The growth of wealth among the middle class is a prerequisite for creating a strong and successful country, which allows us to be socially responsible.

Perry Phillips is president of ESOP Builders Inc. Research provided by Colleen Johe, an ESOP specialist.

WORKPLACE TRENDS

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Tips for Embracing the Future of Flexible Work

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BY: MIKE SHEKHTMAN

s the pandemic swept across the world in 2020, the way we work was instantly changed, with many companies shifting abruptly from full-time in-person workplaces to fully remote. Following public health mandates left little wiggle room for managers or employees to determine set ups tailored to individuals and, to a certain extent, people were in the same boat when it came to working from home requirements.

Now, three years later, businesses and professionals are navigating more options than ever before when it comes to work arrangements and while the opportunities are endless, so are the possibilities for friction and managers must strive to ensure productivity, team building, and equity on their dispersed teams.

Recent Robert Half research reveals that 85 per cent of Canadian professionals are interested in hybrid or fully remote positions, with not having to face a commute the main motivation for 61 per cent,

followed by better morale and work-life balance.

More Hours Now Nearly three-quarters of professionals who can work where and when they are most productive are putting in more hours now than three years ago, yet despite longer workdays, 43 per cent report higher job satisfaction. In fact, a quarter of workers are willing to take a pay cut for the ability to work remotely all the time.

However, professionals do admit that there are still benefits to in-person working, with 65 per cent saying they have more effective relationships with colleagues whom they’ve met face-to-face versus those they have not. Additionally, nearly half of workers feel more comfortable collaborating in person versus virtually.

From the manager perspective, Robert Half research shows that managers would pay salary premiums of 14 per cent (on average) for their employees to be inoffice four days a week and 83 per cent are making active efforts to entice their

teams back in, including offering perks such as free meals and commuting benefits, providing an enhanced workplace setup, and ensuring a healthy and safe environment.

Some of the main challenges they face when it comes to managing hybrid teams are ensuring comparable productivity among dispersed team members, effective collaboration across locations, and co-ordinating schedules for those coming into the office.

Flexibility is here to stay and is the future of work, though there is no onesize-fits-all approach, and it will manifest differently according to the needs of each business. With historically low unemployment and a continued tight labour market, companies that offer flexibility in some form will have a competitive edge when it comes to attracting and retaining valued talent ‒ which is more crucial than ever.

The following are some ways to embrace a flexible work model that can benefit the business, managers, and employees alike: • Make the positive case for flexibility Understand the positive impact that

WORKPLACE TRENDS

www.bpmmagazine.com flexibility can have on the business: Allowing employees a degree of autonomy over where and when they work can boost productivity, job satisfaction, and, subsequently, loyalty. Use employee feedback and data (productive hours lost to daily commutes, for example) to win over skeptics on your leadership team and advocate for support in establishing effective flexible models.

• Determine your business goals and clearly define expectations Establish how much in-office time will be required to meet specific business needs and build your flexible model around that. It’s critical that teams at all levels are informed and aligned on the expectations, and aware of the reasons behind them. Flexibility means different things to different people ‒ some may feel that a hybrid arrangement means alternating between home and office whenever they please, for example, whereas you may understand it to mean working three days on site and two days at home. Make sure there is no ambiguity around the arrangement you both agree to.

• Stay alert for proximity bias

PRINT

Avoid cultivating an us-vs.-them mentality amongst your workforce. Proximity bias, or unconsciously favouring employees you’re in close contact with, is a particular risk in the age of hybrid and remote working. Ensure that you are measuring performance rather than simply observing it. Focus on outcomes over visible outputs and stay committed to having regular career pathing conversations with all employees, ask them about their interest in professional development opportunities, and set up one-on-one time with all team members regardless of where they are working. If you yourself work some days from home, use that time to complete performance assessments and project assignments to avoid being swayed by recent personal interactions.

• Get creative about collaboration At the height of the pandemic, virtual collaboration tools helped keep connections alive and projects moving. Now, as some workers return to the office, there’s a danger that these brainstorming sessions may become fragmented or exclusionary, with remote workers left out of the loop.

One way to avoid this is to continue some

DIGITAL

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of the collaboration methods that worked for you during the pandemic, and to make sure your technology is up-to-date and adding value for all.

• Hold inclusive team-building sessions Workers on hybrid teams can become isolated (either at home or in the office) or even feel like they don’t belong. Regular team-building activities can prevent this, and having all-hands in-person days can be a great way to provide regular opportunities for connection and collaboration. Providing a clear purpose for inoffice days helps employees understand the value of coming in and scheduling informal time for team bonding alongside critical project work is a great way to keep team relationships going strong.

Mike Shekhtman is senior regional director for Robert Half, Canada.

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ANNUAL REPORT ON ETFs

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A Closer Look at the Evolution of the Canadian ETF Landscape Toth Charts Chart 1

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BY: ERIKA TOTH

here is no question that the Canadian ETF industry has grown significantly over the last decade, having become popular for their low cost, their transparency, instant diversification, and liquidity benefits. Over the last five years, the industry has doubled in size to C$338 billion in assets under management (AuM). There are now over 1,300 listed products on the Toronto Stock Exchange, offered by 42 different issuers. However, over two-thirds of the industry assets under management (AuM) are managed by the largest three providers (see Chart 1). The 10th Annual 2023 Global ETF Investor Survey, conducted by Brown Brothers Harriman, confirms that issuer brand and experience, management expenses ratios (MERs), and index methodology are at the top of the list of most important criteria when selecting an ETF. In this article, we look at the evolution of ETFs over time, home in on a few key areas attracting interest and capital and consider how the evolution may continue in the future.

Quickly Gained Popularity ETFs were first introduced in 1990 in Canada with the launch of the TIPS (Toronto 35 Index Participation Fund) and in the U.S. in 1993 with the launch of the SPDR S&P 500 ETF. Exchange traded funds quickly gained popularity among retail investors, but it wasn’t until the early 2000s that institutional investors, including pension fund managers, began to take notice. One of the first large institutional investors to make a significant allocation to ETFs was the California Public Employees’ Retirement System (CalPERS). In 2000, it invested $1 billion in the SPDR S&P 500 ETF.

ETF Providers

an illiquid, OTC-traded asset class onto the exchange. Institutions are now able to buy a diversified basket of bonds in one trade that targets specific segments of the bond market, credit quality, and duration.

Often, the bid-ask spread on the ETF will be tighter than the average spread of the underlying bonds (See Table 1).

Within the fixed income landscape, investors can now pinpoint their desired Toth Charts exposure and allocate to U.S. corporate Chart 1 bonds, ESG-screened corporate bonds, emerging market bonds, or U.S. TIPS for ETF Providers inflation protection, for example. So far in the first quarter of 2023, institutional clients have been allocating to a barbell strategy – allocating to ultra short-term (Source: National Bank of Canada Financial Markets, bond and money market ETFs (such as (Source: data is asNa8onal of April 6,Bank 2023)of Canada Financial Markets, data is as of April 6, 2023) ZST, ZUS.U, and ZMMK) to take advantage of the dramatic rise in interest rates As the number of products and strateseen over the last year. They have been gies 2offered grew, they started to appeal to Chart combining this with long duration governa variety of different user groups includStrategies & Tac8cs ment bond exposure (ZFL and ZTL have ing advisors, retail investors, private fambeen two of the top selling fixed income ily offices, asset managers, and instituETFs in Canada so far this year). Using tions like pension funds, endowments, and ETFs, a pension fund or asset manager foundations. Numerous studies and invescan nimbly lengthen or shorten duration tor surveys over the last decade have conor calibrate the level of credit risk to their firmed that investors are using ETFs both desired exposure given market conditions for longer term strategic allocations and and can do so in a very cost-efficient manfor shorter term tactical uses (see Chart 2). ner. When bond markets froze up during At first, exchange-traded funds were the onset of the COVID-19 pandemic in (Source: Na8onal Bank of Canada Financial Markets, data is as of April 6, 2023) associated with broad equity index expoMarch of 2020, many corporate and prosures. The early 2000s saw the first bond vincial bonds in Canada went no bid. ETFs ETFs listed north and south of the border, were one of the few investment options Chart 2 a tremendous innovation which brought that remained liquid and many pension Chart 1: ETF Providers

Strategies & Tac8cs

Chart 2: Strategies & Tactics

www.bpmmagazine.com fund managers and asset managers used them to quickly adjust their portfolios to reduce risk.

Table 1

ANNUAL REPORT ON ETFs

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Bid-Ask Spreads Table 1: Bid-Ask Spreads

Evolved Dramatically The spectrum of equity ETFs has also evolved dramatically. Smart beta and factor are often referred to as the halfway point between indexing and traditional active management. The investment universe is screened using a specific set of criteria to achieve an investment objective that differs from traditional market capitalization weighting, for example, by reducing risk, or investing in companies with a track record of sustainable dividend growth or profitability. These rules-based strategies are often a fraction of the cost of traditional actively managed mutual funds, yet still offer the potential of outperforming the market. BMO’s Canadian Low Volatility Equity ETF (ZLB, the 2022 recipient of the Lipper Award for Best Fund Over 10 Years in the Canadian Equity Category) has been a popular choice for investors looking for equity exposure with

THE ETF INDUSTRY IN CANADA HAS DOUBLED IN SIZE OVER THE LAST FIVE YEARS, HOWEVER, THE SIZE OF THE INDUSTRY GLOBALLY INDICATES THAT WE COULD BE SEEING THE $500 BILLION MILESTONE REACHED OVER THE NEXT THREE YEARS OR SO lower drawdown risk in challenging market environments. The quality suite, on the other hand, has resonated with investors looking for companies with a track record of profitability and earnings growth, yet strong balance sheets. Enhanced income strategies, like covered call ETFs, have been popular with investors seeking the tax efficient1 monthly cash flows provided by selling options – be it retail investors

or ultra high net worth family offices. As one of the pioneering ETF providers in Canada, many of BMO’s smart beta ETFs now have track records of over 10 years.

Areas Of Growth For The Future In the last several years, there have been more actively managed, thematic, and alternative investment ETFs launched.

It is very likely that these types of strategies will see important growth over the next few years. More asset managers are offering their funds in an ETF wrapper.

Most investors, retail and institutional alike, have tended to use active and index strategies simultaneously, in a complementary manner.

Interest in thematic investing has also grown and is sometimes thought of as the next evolution of traditional sector ETFs, focused on areas of the market undergoing rapid innovation such as clean energy, robotics, or artificial intelligence.

In recent years, there has been a trend towards socially responsible investing, with environmental, social, and governance (ESG) ETFs experiencing a 40 per cent compound annual growth rate (CAGR ) over the last five years, and 43 consecutive months of inflows.2 ESG criteria has become an important consideration for pension fund managers who want to be responsible stewards of capital and invest in companies that align with their values. In Europe, ESG ETFs accounted for 65 per cent of all ETF inflows in 2022.3 In the alternative investment space,

infrastructure is an example of how investors have harnessed the benefits of real assets in an exchange-traded vehicle (think: companies that operate toll bridges, wireless towers, and electricity transmission, which have steady cash flows and lower correlations with broad markets).

Defined-outcome ETFs would be a natural evolution in the alternatives category.

The ETF industry in Canada has doubled in size over the last five years, and the size of the industry globally indicates that we could be seeing the $500 billion milestone reached over the next three years or so. With market volatility levels reaching extremes in 2008, 2020, and again in 2022, ETFs have not only demonstrated resiliency, but have also proven to be a valuable tool for fund managers looking to tap into liquidity, manage risk, or exploit opportunities.

Erika Toth (CFA) is director, ETF distribution – institutional and advisory, eastern Canada, at BMO Global Asset Management.

1. Tax Efficient: as compared to an investment that generates an equivalent amount of interest income 2. CEFTA Monthly Report, based on AUM as at February 28, 2023, NEW-CEFTA-February-2023 3. Source: The 10th Annual 2023 Global ETF Investor Survey, Brown Brothers Harriman

ESG

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2023 ETF SHOWCASE

BENEFITS AND PENSIONS MONITOR | APRIL 2023

DIRECTORY LISTINGS Equities: $10,609,988,383.39M Emerging Markets Equities: $16,885,469,84.74M Fixed Income: $25,188,743,822.55M,C ommodities: $414,350,691.68M Multiasset: $486,912,823.16M Total Assets Managed: $85,593,638,578.3M Asset Inflows $6,855,073,995M* *Net

BMO GLOBAL ASSET MANAGEMENT Kevin Prins, Managing Director, Head of ETF & Managed Accounts Distribution, 10 King St. W., Toronto, ON M5X 1A1 PH: 416-947-3703 eMail: kevin.prins@bmo.com Website: bmogam. com Professional Staff: 16 Established: 1982 Ownership: BMO Financial Group Minimum Investment for Institutions: Pooled & Separately Managed Accounts – Negotiable Manager Style: Active, Strategic Beta, Traditional Index Canadian Institutional Clients: 12 Canadian Institutional Funds: 144 Products Launched in 2022: BMO Japan Index ETF, BMO Brookfield Global Renewables Infrastructure Fund ETF Series, BMO Short-Term Discount Bond ETF, BMO Brookfield Global Real Estate Tech Fund ETF Series, BMO Corporate Discount Bond ETF, BMO All-Equity ETF, BMO Canadian Bank Income Index ETF, BMO Laddered Preferred Share Index ETF (US$ Units), BMO Balanced ETF (T6 Series), BMO Covered Call Canadian Banks ETF (US$ Units), BMO ARK Innovation Fund ETF Series, BMO Monthly Income ETF (US$ Units), BMO ARK Next Generation Internet Fund ETF Series, BMO ARK Genomic Revolution Fund ETF Series, BMO MSCI ACWI Paris Aligned Climate Equity Index ETF, BMO Japan Index ETF (Hedged Units) Average Management Fees: 0.35 Benchmarks Tracked: Bloomberg Barclays Index, BNY Mellon Index, Dow Jones Index, FTSE Index, MSCI Index, NASDAQ Index, Standard & Poors Index, Shiller Barclays CAPE Index, Solactive Index Transparency Rules: Full portfolio holdings are disclosed daily and are publicly available on our website: https://www.bmo.com/gam/ca/advisor/products/etfs#--tabs-1553694970691-. Some of our active mandates, however, will only show Top 10 monthly holdings, as opposed to the entire portfolio. Canadian domiciled mandate mix by client type: Corporation - $1,022,200,279M Endowment - $296,838,308M Foundation $450,490,892M Insurance - $9,551,743,267M Sub-advised - $121,867,357,686M Pension - $2,690,490,206M Sub-advised $4,372,636,307M Trust - $13,856,710M Asset distribution by relationship size for Canadian domiciled clients: Captive: $133,553,275,226.29M External: $6,712,338,428.7M Fund assets under management for Canadian clients – Canadian Equities $23,340,703,471.17M, US Equities: $23,864,392,401.61M, Global

CIBC ASSET MANAGEMENT Carlo DiLalla, Managing Director & Head, Institutional Asset Management, 161 Bay St., Ste. 2230, Toronto, ON M5J 2S1 PH: 416-980-2768 eMail: Carlo.

DiLalla@cibc.com Website: www.cibcam-institutional.com Professional Staff: 85 Established: 1972 Ownership: Wholly owned subsidiary of the Canadian Imperial Bank of Commerce Minimum Investment for Institutions: Pooled Accounts - $10M Separately Managed - $25M Manager Style: Diverse range of manager styles including beta, quantitative, and active equity/ fixed income Canadian Institutional Clients: 21 Products Planned In 2023: CIBC Canadian ShortTerm Bond Index (CSBI), CIBC US Equity Index ETF (C$ Hedged) (CUEH), CIBC International Equity Index ETF (C$ Hedged) (CIEH) Average Management Fees: 0.39% Benchmarks Tracked: Morningstar Canada Core Bond Index, Morningstar Canada 1-5 Yr Core Bond Index, Morningstar Global ex-Canada Core Bond Hedged C$ Index, Morningstar Canada Domestic Index, Morningstar US Target Market Exposure Index, Morningstar Developed Markets exNorth America Target Market Exposure Index, Morningstar Emerging Markets Target Market Exposure Index, CIBC Atlas Clean Energy Select Index, Morningstar Developed Markets ex-North America Target Market Exposure Hedged C$ Index, Morningstar US Target Market Exposure Hedged C$ Index Transparency Rules: The ETF dashboard allows investors to access daily price, performance, and outstanding shares, historical prices, monthly NAVPS, fund profiles, monthly portfolio details (Top 10 holdings, sector breakdown, country mix) and quarterly commentary. The disclosure of portfolio holdings to investors within the investment fund marketplace in Canada and in other jurisdictions is governed by regulatory requirements in respect of the disclosure of investment funds’ full and partial portfolio holdings. With the exception of ETF investment management, subsidiaries have poli-

cies in place which provide for guidelines for which the subsidiary may disclose holdings to prospective institutional clients, consultants, rating organizations, analytical service providers. Fund assets under management for Canadian clients – Canadian Equities $147.9M US Equities: $346.4M, Global Equities: $50.5M Emerging Markets Equities: $54.6M Fixed Income: $1,758.4M International Equities: $94.9M Balanced: $135.2M Total Assets Managed: $7.4M Asset Inflows $706.3M Asset Outflows $987.7M

DESJARDINS GLOBAL ASSET MANAGEMENT Natalie Bisaillon, Vice-president & Chief of Partnerships & Institutional Client Relations; 1, Complexe Desjardins, 20th Floor, South Tower, Montreal, QC H5B 1B2 PH: 877-353-8686 X5554450 Fax: 514-281-7253 eMail: Natalie.bisaillon@desjardins.com Website: www.dgam. ca Professional Staff: 22 Established: 1998 Ownership: Wholly owned subsidiary of the Desjardins Group Manager Style: Active, Strategic Beta, Traditional Index, Quantitative Canadian Institutional Clients: 33 Canadian Institutional Funds: Desjardins Canadian Universe Bond Index ETF; Desjardins Canadian Short Term Bond Index ETF; Desjardins 1-5 Year Laddered Canadian Government Bond Index ETF; Desjardins 1-5 Year Laddered Canadian Corporate Bond Index ETF; Desjardins Canadian Preferred Share Index ETF; Desjardins RI Active Canadian Bond Low CO₂ ETF; Desjardins RI Canada Low CO₂ Index ETF; Desjardins RI USA Low CO₂ Index ETF; Desjardins RI Developed ex-USA ex-Canada Low CO₂ Index ETF; Desjardins RI Emerging Markets Low CO₂ Index ETF; Desjardins RI Canada Multifactor Low CO₂ ETF; Desjardins RI USA Multifactor Low CO₂ ETF; Desjardins RI Developed ex-USA ex-Canada Multifactor Low CO₂ ETF; Desjardins RI Emerging Markets Multifactor Low CO₂ ETF; Desjardins RI Global Multifactor Fossil Fuel Reserves Free ETF; Desjardins Alt Long/Short Equity Market Neutral ETF Products Launched in 2022: Desjardins SocieTerra American Equity ETF, Desjardins Alt Long/Short Equity Market Neutral ETF - US$ Hedged, Desjardins Alt Long/Short Global Equity Markets ETF - CA$ Hedged, Desjardins Alt Long/Short Global Equity Markets ETF US$ Hedged Average Management Fees: 0.43 Benchmarks Tracked: Solactive Canadian Bond Universe TR Index, Solactive Short-Term Ca-

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SPONSORED FEATURE

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2023 ETF SHOWCASE DIRECTORY LISTINGS nadian Bond Universe TR Index, Solactive 1-5 Year Laddered Canadian Government Bond TR Index, Solactive 1-5 Year Laddered Canadian Corporate Bond TR Index, Solactive Canadian Rate Reset Preferred Share TR Index, FTSE Canada Universe Bond Index, Scientific Beta Desjardins Canada RI Low Carbon Index, Scientific Beta Desjardins United States RI Low Carbon Index, Scientific Beta Desjardins Dev ex US ex CA RI Low Carbon Index, Scientific Beta Desjardins Emerging RI Low Carbon Index, Scientific Beta Desjardins Canada RI Low Carbon Multifactor Index, Scientific Beta Desjardins United States RI Low Carbon Multifactor Index, Scientific Beta Desjardins Developed ex US ex CA RI Low Carbon Multifactor Index, Scientific Beta Desjardins Emerging RI Low Carbon Multifactor Index, Scientific Beta Desjardins Global RI Fossil Fuel Reserves Free Multifactor Index, S&P Composite 1500 Index, FTSE Canada 91 Day T-Bill TR Index, FTSE 3-Month Treasury Bill Transparency Rules: Positions published on website. For active ETFs, positions are published with a 30-day lag. Canadian domiciled mandate mix by client type: Property & casualty & life & health insurance companies, Pension funds, Foundations, Trust companies, Invest-

ment funds, Private companies, Public sector entities Worldwide breakdown of your firm by each domiciled region: All our institutional client are Canadian domiciled. Asset distribution by relationship size for Canadian domiciled clients: Fixed Income: $58.2B Equities: $10.5B, Real Estate: $4.1B Infrastructure: $4.3B Fund assets under management for Canadian clients – Canadian Equities $819.3M US Equities: $219M Global Equities: $160.6M Emerging Markets Equities: $238.9M Fixed Income: $176.5M Total Assets Managed: $1,614M Asset Inflows $292.3M Asset Outflows $631.4M

FRANKLIN TEMPLETON Bobby Eng, Senior Vice-president-Head of Platform & Institutional ETF Distribution, 200 King St. W., Ste. 1400, Toronto, ON M5H 3T4 PH: 416-957-6000 eMail: bobby.eng@franklintempleton.ca Web-

site: www.franklintempleton.ca Professional Staff: 12 Established: 1940 Ownership: Principals – 35% Public – 65% Manager Style: Active, Strategic Beta, Traditional Index Products Launched in 2022: Franklin Bissett Ultra Short Bond Active ETF (FHIS), Franklin Western Asset Core Plus Bond Active ETF (FWCP) Average Management Fees: 0.39% Benchmarks Tracked: FTSE Canada All Cap Domestic Index, S&P/TSX Composite Index, FTSE U.S. Index, Russell 1000 Index, FTSE Japan Index, Solactive GBS Developed Markets ex North America Large & Mid Cap CAD Index, Solactive GBS Emerging Markets Large & Mid Cap CAD Index, MSCI World Index-NR, Russell 1000 Growth Index, MSCI EAFE Index, MSCI ACWI ex-REITs Index, S&P 500 Total Return Index, FTSE Canada 0-1 Year Universe Overall Bond Index, FTSE Canada Short Term Overall Bond Index, FTSE Canada Universe Bond Index, Bloomberg Barclays Global Aggregate (100% Hedged into C$) Index, Bloomberg U.S. Aggregate Index (Hedged to C$), FTSE Canada All Corporate Bond Index, S&P Global Infrastructure Index. Transparency Rules: Passive, Smart Beta, non-feeder active are fully transparent. Feeder of mutual fund ETFs- non transparent

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THE BACK PAGE

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Textbook Learning

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BY: JIM HELIK

n the world of books, there is one book category that I assume few of Benefits and Pension Monitor’s readers pay attention to ‒ the textbook category. It makes sense. You probably still have a few textbooks in your home that you haven’t had a need to look at in years, but given their initial cost, you probably dragged them around in your moves after graduation. At least that is my story and it’s why I still have a few very out-of-date textbooks … someplace.

Which brings us to Nobel Prize winning economist Eugene Fama. A wonderful collection of many of his papers, and the works of others who worked with Fama, has been assembled by John Cochrane, of Stanford University, and Tobias Moskowitz, of Yale University.

Coming in at over 800 pages, The Fama Portfolio is often categorized as a textbook by publishers and book retailers, though it really isn’t. Rather it is an examination of key investing elements such as risk, the role of skill, and market forecasting, all built around the career of a person best known for his work on what market efficiency really means to stock investors.

as anomalies for academics and today are known as “factors,” started appearing in the early 1980s. Beginning with the higher returns of low market capitalized stocks compared to their historic risk, other market participants quickly found a positive correlation between low price/ earnings ratios, book-to-market value ratios, market leverage as expressed by debt, and literally hundreds of others over the next 40 years. Fama boiled this down to a model that explains stock returns that

UNLIKE MANY ACADEMICS WHO BUILD A MODEL AND STICK WITH IT THROUGH THICK AND THIN, FAMA ADAPTED HIS VIEWS WITH THE RISE OF WHAT WE NOW KNOW AS BEHAVIOURAL INVESTING

Fat-Tailed Some of this work has yet to be fully understood.

He tested, as part of his PhD thesis, whether stock returns fit a normal distribution and found that stock returns were fat-tailed in that there were far more extreme positive and extreme negative returns than would be expected. Booms and crashes have reconfirmed this, but some people still assume that academics assume a rational market with a normal distribution. As Fama writes, “Given the accusations of ignorance on this score recently thrown our way in the popular media, it is worth emphasizing that academics in finance have been aware of the fat tails phenomenon in asset returns for about 50 years.”

In one of the other articles in this book, he notes that “violations” of the standard models for pricing equities based on totally efficient markets, which were labelled

portfolio decisions depend solely on the properties of the return distributions of assets and the portfolios they are in, the “tastes for other characteristics of assets” unrelated to properties of returns, also play a role. Drawing on the concepts of market over-reaction to events, as well as the actions of investors who chase the last fad (such as socially responsible investing), he notes that these taste preferences can have a persistent effect on asset prices and returns.

Fama’s interests are wide ranging, from examining the market efficiency

incorporated Beta (risk compared to the market as a whole) and just two factors: size (capitalization) and a value/growth factor, which is still a useful way to think of the market today.

But unlike many academics who build a model and stick with it through thick and thin, Fama adapted his views with the rise of what we now know as behavioural investing. In 2007, he noted that while asset pricing theory typically assumes that

proposition that in setting Treasury Bill prices the market uses information from past spot market rates to corporate finance issues such as the separation of firm ownership from firm control (this can be an efficient form of economic organization, he concludes). Few academics are as prolific and, more importantly, as eager to examine new ideas and limitations in his past work.

This is a “textbook” that you will want to keep.

Jim Helik is a contributing author to the ‘Managing High Net Worth’ and the ‘Commodities As Investments’ courses published by CSI Global Education. He is also one of the first holders in Canada of the Human Resource Management Professional designation from the Society for Human Resource Management.

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