Update: Toronto Council approved the proposed policy amendments at its meeting of June 29-30, 2020.
United Nations sustainable development goals (SDGs) will be formally factored into Toronto’s investment decision process if City Council approves. Earlier this week, Council’s executive committee endorsed proposed amendments to the City’s investment policy that would also adjust parameters for allocations to real assets.
The updates flow from an annual review of the investment policy mandated under the City of Toronto Act. The same legislation establishes Toronto as one of the few Canadian municipalities with prudent investor status, which gives it leeway to invest in vehicles beyond provincially prescribed options with the guidance of an investment board.
Introducing the 17 UN SDGs into the investment board’s oversight criteria will not be a dramatic change to the existing environmental, social and governance (ESG) framework since all of the city’s selected third-party investment managers are already signatories to the United Nations Principles for Responsible Investment (UNPRI). However, the proposed amendments more explicitly underscore the pertinence of the sustainable development goals and add a statement to affirm: “Environmental, Social and Governance (ESG) factors are material to risk/return outcomes and must be considered and integrated in the investment approach.”
An accompanying report from Toronto’s Chief Financial Officer and Treasurer notes that prominent Canadian pension funds, including OMERS (Ontario Municipal Employees Retirement System), have adopted similar policies. The city is also applying for membership in the Responsible Investment Association (RIA), which now encompasses more than 100 Canadian organizations that embrace ESG to guide investment in a societally positive way and to mitigate exposure to risk in their own portfolios.
“The recommendations do not change any of the basic principles, objectives, or overall portfolio risk profiles in the current Investment Policy, but are intended to highlight and focus the City of Toronto’s commitment to sustainability and in particular climate change,” the CFO’s report states. That includes UN SDGs that specifically address climate change, affordable and clean energy, and sustainable cities and communities, along with goals related to promoting equity, health, access to basic services, opportunities for innovation and advancement, and freedom from violence and corruption.
Proposed changes in the allocations to real assets are characterized as a housekeeping measure. Currently, the investment policy stipulates a 10 per cent allocation to real assets for both Toronto’s long-term and sinking funds, and further steers it to two sub-categories: Canadian core real estate; and global core infrastructure. The amendment will allow for investment in core and open-end funds that focus more broadly throughout North America and beyond for both asset classes.
“The allocation to real assets was originally included in the strategic asset mix due to its significant diversification properties and beneficial risk and return characteristics,” the CFO’s report states. “These changes could provide greater liquidity and transparency. In addition, widening the geographical scope of both of these sub-categories provides more options and flexibility to improve the portfolio’s risk and return profile.”
Toronto Council will consider the proposed amendments at its meeting next week. The executive committee also supports new requirements for assurance that all investment firms and fund managers working on the city’s behalf are compliant with the policy’s ESG criteria and semi-annual reporting to Council on the investment portfolio’s exposure to climate change risk.