How normalizing change can help investors prepare for the unknown

Ontario Teachers' was a pioneer of the modern public pension model. What are some of the drivers behind its success?

The model originated from Ontario Teachers' Pension Plan in 1990. The Government of Ontario, one of two sponsors of Ontario Teachers' (the other is Ontario Teachers’ Federation), decided it was better for pension assets to be invested and managed by an organization that was independent from its sponsors. Our two sponsors also made the decision to bring on a professional board and management to oversee the Plan.

The 1990s also saw a period of real innovation in asset management, which we were part of. We brought our asset management responsibilities in-house – delivering a cost advantage to our members, which are the active and retired teachers in Ontario – and adopted a more rational model of allocating capital to drive long-term returns for our members and meet a specific defined benefit objective. 

How do you keep that long-term focus, while adapting to the very important trends that continually arise?

It’s important to remember, and something that is continually top of mind for us, that we serve one client. Our long-term focus is grounded in delivering on our mandate and promise to our members – it’s a long-term mindset to meet a long-term objective.

One thing we’ve tried to do is create capacity and bandwidth around tracking long-term, secular trends. We want to be able to surf these trends. You can't anticipate them completely, but you can try to navigate them in ways that can provide you with a greater alpha result than others. We are focused on three components of this strategy: prepare, act and innovate.

Prepare means you put thought and energy (and pre-work) into trying to make your organization resilient in the face of things that you can't anticipate. And that means bringing together folks who may be working in different silos to think about the implications of various potential shocks and then trying to build that musculature inside the organization.

Act is all about conviction. There's no formula for investing in this era, in my opinion. You can only do that by learning and recognizing you don't have all the answers. It's working with partners and outside experts who may have more specialized knowledge than yourself and building conviction inside the organization so that you can act.

And innovate is about being open to different ways of doing business and building the capabilities to capture opportunities that arise out of change. This is what we are working towards because we recognize that we are in a different investing era today. 

What are some of the trends you're monitoring at the moment?

One trend we're watching closely is artificial intelligence (AI) and how it may disrupt the business environment, and likewise how it can enhance our approach to investing. The latest advance in AI, Generative AI, dramatically reduces the cost of prediction, which will have extensive impacts on a wide variety of businesses. Meanwhile, this tool can significantly enhance our approach to investing and value creation by helping us to separate the “signal” from the “noise”. We believe those who build facility with these tools will be better able to navigate the marketplace than those who do not. So we need to move with some dispatch, as this technology will rapidly become table stakes. You don’t want to get left behind.

Another trend is the shift in the geopolitical paradigm. Previously, we lived in a hyper-globalized environment. The rules of the global game all felt like they were going in the same direction: Open markets, open societies, open capital. But the underpinnings of this system, including a rock-solid US security guarantee and multilateralism are fading, and the global system is becoming more fragmented. This has greatly increased complexity and made it difficult to have conviction in as many geographies.

The answer is focus. While we invest in many countries, we've been able to reduce the number of geographies in which we're focused and develop real conviction within those geographies. And for each of these strategic countries, we have a plan, and we try to stick to it. 

Investment in climate, specifically in biodiversity, is another big trend. How has your climate strategy developed in recent years?

We believe increasing the positive environmental impacts of our activities plays a critical role in protecting the long-term value of our investments. You must believe that you can make a difference – with the companies you own and with the assets you have under management. Mitigating climate change doesn't happen through words, however. It happens through action. As active managers, we believe in working with our portfolio companies to improve their climate strategy rather than simply divesting. We see the solution as engaging with the companies we own – regardless of size – and taking an active approach, whether through working with management of the private companies we own, or through proxy voting with the public companies we own.

We also recognize that tackling climate change is a process, but it is one that requires discipline and clear targets. We have therefore set clear interim net zero goals for 2025 and 2030, of reductions of carbon intensity of 45% and 67%, respectively. We’re also utilizing our investment levers to tackle emissions well beyond the portfolio footprint of Ontario Teachers'. To do this, we've allocated approximately $5 billion to High Carbon Transition (HCT) assets to accelerate decarbonization of high emitting businesses. We think this makes good business sense as well as having a strong impact.

With regard to biodiversity, we believe this is gaining currency worldwide, much in the same way climate change did 15 years ago. Our aim is to look at this as a growing market that can have a real impact. For example, we've invested in GreenCollar, which works with landowners and managers throughout Australia to develop projects in such areas as regenerative farming and stewardship of land to enhance natural capital which it then monetizes through carbon credits.