Building on success: McGill’s SRI strategy enters Phase 2 

Chief Investment Officer Sophie Leblanc explains new socially responsible investing (SRI) measures, including divestment from the endowment’s direct holdings in CU200 fossil-fuel firms 

Editor’s note: Two percentages mentioned in this article have been corrected based on January 2024 information. 

Following a major 49% reduction of the McGill Investment Pool (MIP) listed equity portfolio’s carbon footprint between 2019 and 2022, the Board of Governors has approved Phase 2 of the University’s socially responsible investing (SRI) strategy. The new eight-point plan comes after the April 2023 announcement that the University had surpassed its previous targets two years early. 

Under the plan, McGill commits to:  

  • divesting from the minimal remaining direct holdings in Carbon Underground 200 companies, for implementation in 2024 and completion in 2025; 
  • sustaining a carbon footprint of its investments in listed equities and corporate bonds that is at least 33% below emissions generated by companies in McGill’s listed equity and fixed income benchmarks, as outlined in the University’s Statement of Investment Policy; 
  • allocating 10% of the MIP to Sustainable Investment Strategies aligned with the United Nations Sustainability Development Goals (SDGs) by 2029; 
  • enhancing our engagement initiatives by broadening the scope of topics to encompass social and governance considerations, while continuing to address climate change; 
  • continuing to offer a fossil-fuel-free fund to McGill donors – the first such fund in a major Canadian university endowment 
  • improving McGill’s United Nations Principles for Responsible Investment (UNPRI) score, the first such commitment for a major Canadian university endowment;  
  • integrating an Environmental, Social & Governance (ESG) scoring system and risk metrics into our fund manager monitoring processes; and 
  • continuing to report annually on our progress. 

Sophie Leblanc, McGill’s Chief Investment Officer, spoke with the McGill Reporter about the thinking underlying the University’s approach and the importance of setting – and reaching – ambitious targets. 

Q: McGill has achieved excellent decarbonization results without divestment. Why are we now choosing to divest from direct holdings in CU200 companies? 

A: Up until now, the University’s decarbonization strategy for the McGill Investment Pool was to focus primarily on divesting from big consumers of fossil fuels, for example producers of steel or cement. This allowed us to remove about 73,000 tonnes of annual carbon emissions from the MIP in just three years, the equivalent of taking more than 14,000 gas vehicles off the road. 

With respect to the big producers of energy, the strategy has been to engage with them, through a third-party organization that specializes in shareholder engagement, to ask them to refrain from extracting from new reserves, for example. If you are a shareholder, you can use your vote and your voice to help bring change. Once you divest, you lose that influence. 

So, when our initial plan was adopted in 2020, the decision was to continue to engage rather than simply divest from big oil and gas companies, and to decarbonize the portfolio mainly by reducing our holdings in the companies that were the big users of fossil fuels.  

But now, following years of decarbonization, direct holdings in the largest 200 oil and gas companies (the Carbon Underground 200, or CU200), make up such a minimal portion of the MIP (just 1% as of December 31, 2022) that it makes sense to divest*. Liquidating these small remaining holdings will send a symbolic but nonetheless important message to our community that our future must be built upon renewable energy and sustainable technologies.  

Q: So, McGill has decided to go in a different direction?  

A: It’s not a different direction, because we’ll continue to decarbonize the portfolio, it’s just adding another layer to the decarbonization strategy that is part of our overall socially responsible investing strategy. 

Q: Why did McGill decide to divest only from direct CU200 holdings? Why not indirect ones, too? 

A: When we did the calculation back in December 2022, we had about 0.7 %* of the MIP in indirect investments in the CU200. Indirect investments offer McGill the advantage of participating in investment pools alongside other investors in a cost-efficient manner. This exposure allows the MIP to access markets, such as emerging markets, that would otherwise be challenging and costly to invest in, facilitating optimal portfolio diversification. But those indirect investments are scattered within larger pools of investment funds that are managed on behalf of perhaps 1,000 clients, many of whom don’t share our priorities. Unlike directing a manager exclusively dedicated to McGill, divesting from these holdings would entail selling approximately 33% of the entire MIP to eliminate that remaining 0.7%*. Such an approach would be inefficient and costly. 

Q: How do you balance SRI considerations with the need to generate returns? Is it a trade-off? 

A: Divesting from direct holdings in CU200 firms, which are now such a minuscule part of the portfolio, should not have a long-term impact on MIP returns.  

At the same time, we expect our increased investments in sustainable funds to enhance our returns. We are moving from investing 5% of our portfolio in sustainable investments to 10%. These are investments that advance the United Nations Sustainable Development Goals, which address not only climate change, but such goals as alleviating poverty and advancing sustainability. These funds are becoming highly popular with investors seeking to tackle global challenges. So, I think it actually will be positive for the portfolio to invest another 5% in these strategies.  

Q: If this is an area where you expect strong returns, then why not invest more of the MIP in this way? 

A: Diversification within a portfolio is always an important consideration in investing, to mitigate risk. We’re working to strike a balance – increasing sustainable investments within the endowment’s holdings, while ensuring it generates the annual returns needed to keep funding research, student aid, internships, and other priorities. 

Q: The University has worked with SHARE, an organization that, leveraging shareholders’ influence, advocates for corporate sustainability. How will the new measures change that relationship? 

A: Our collaboration with SHARE will deepen during Phase 2 of our SRI strategy. In Phase 1, our emphasis was primarily on the environmental aspect. Moving forward, our engagement will broaden to encompass not only the environmental (E) considerations but also on the social (S) and governance (G) aspects within the realm of ESG (Environmental, Social, and Governance) concerns. 

Q: What are the United Nations Principles for Responsible Investment, and what will it mean to improve our UNPRI score? 

A: There are six UNPRI principles. Essentially, they require investors to incorporate ESG concerns into their decisions and advocacy, and to report on their activities and progress toward implementing the principles. We became signatories of the UNPRI in 2022. We will receive our first score this year. Our intention is to improve that score in the coming years by enhancing our SRI practices, that’s one of our commitments in this SRI plan.  

At the end of the day, if you do not commit to improving your score through tangible enhancements, reporting to the UNPRI is worthless. If other universities see that we are transparent with our UNPRI score and see our improvement, it might spark a chain reaction to help generate change.  

Q: How does McGill stack up against comparable Canadian universities when it comes to SRI? 

A: We have meetings every year with other universities that are also part of the engagement that we have with SHARE, there are about 12 or 15 universities at each meeting, and we discuss our strategies and best practices. What we’ve done is use others’ best practices to inform our own strategy. And without naming names, I would say that we’re in the top quartile when it comes to leadership in this area. 

Many universities have committed to divestment but have not followed through yet. In many cases they made commitments with a 10-year timeframe that ends in 2030. We don’t know whether, at the end of the day, they will meet their commitments.  

Our strategy is ambitious, and we’re committed to it. We’ll try to achieve our goals quickly, as we did with the first phase where we reached our targets two years early. 

Q: Of the eight points in the plan, do you think there’s one that may fly under the radar but in fact will have a major impact? 

A: In my opinion, among all the commitments that we’ve made, the one to increase sustainability investments to 10% of the MIP is the most important. Some students had requested that the proceeds from our divestment from direct CU200 holdings be redirected to investments in sustainability, but in fact through this commitment we’re investing much more than the divestment proceeds. Divestment matters, but I hope it won’t be the only element that people talk about, it’s more symbolic than anything else, because direct CU200 holdings are such a small part of the McGill investment Pool. 

Q: Will there be a Phase 3? 

A:  A scheduled review is already in place in five years, during which the Committee on Sustainability and Social Responsibility (CSSR), which reports to the Board of Governors, will be presented with updated options. These recommendations will reflect the evolving landscape of responsible investment practices and adhere to the latest best practices in the field. In the meantime, continuous improvement remains a priority, and our team proactively recommends strategies to the CSSR. We actively monitor the evolution of the latest best practices and broaden our perspective by examining not only other endowments but also the strategies employed by pension plans and industry leaders. Our commitment to improvement extends to refining the factors we consider and expanding the scope of our initiatives. 

* When this information was first published, our analysis indicated that direct investments in CU200 firms constituted 0.5% of McGill Investment Pool (MIP) assets on December 31, 2022, while indirect investments represented 0.4%. During a detailed review in January 2024, we discovered that direct CU200 holdings on December 31, 2022 had in fact constituted 1% of MIP holdings, with a further 0.7% in indirect holdings. 
 
McGill University regrets this error and has implemented corrective measures to ensure accuracy going forward. Notably, we are working to have CU200 holdings verified by an external firm, and in the meantime will ensure that all calculations undergo rigorous internal verification involving two peer reviews. McGill remains fully committed to its socially responsible investing (SRI) goals – including its commitment to full MIP divestment from direct CU200 holdings by 2025. 

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David Clarke (McGill BA 1990)
5 months ago

I am happy to see that McGill (albeit belatedly) has decided to take steps towards fossil fuel divestment within the Endowment Fund. Perhaps McGill will finally be able to catch up with the best practices already instituted at other Quebec universities as well as Canadian peers such as University of Toronto. However, I have great concerns with the plan as outlined as well as some of the specific claims made in the recent press release and in this interview. My review of the recent quarterly holdings reports as of September 30 2023, shows a total of about $18.5M invested in… Read more »

Keith Hay MD CM 1983
5 months ago

Let’s keep in mind that if humanity survives the climate crisis, it will do so by dramatically reducing fossil fuels extraction. In time, fossil fuel-focused corporations will be left with stranded assets, greatly reducing their investment value. Thus, fossil fuel divestment is not only better for our future, but it will become a wise investment strategy.

Alison Hackney
5 months ago

I would like to know more about what Sophie Leblanc means when she refers to “sustainable investments”. Is there really such a thing? I am wary of investments in so-called “clean energy” such as electric batteries. The proposed NorthVolt plant, for example, will destroy at least 8,000 trees and many wetlands at a point in time where biodiversity loss and climate change are catastrophic. Quebec’s government quickly modified the Loi sur l’environnement so as to exempt it from scrutiny by the Bureau des Audiences publiques sur l’environnement (BAPE).

David Clarke (McGill BA 1990)
4 months ago

“During a detailed review in January 2024, we discovered that direct CU200 holdings on December 31, 2022 had in fact constituted 1% of MIP holdings, with a further 0.7% in indirect holdings. “ As the member of the McGill community who first raised this obvious error in CU holdings, I regret to inform you that the updated percentage of CU200 exposure in indirect holdings is still miscalculated. They do not include “passive exposure” to the CU200 via synthetic ETFs tracking the S&P500. This additional exposure has consistently held at 0.3% since 2022; thus, there was 1% in indirect holdings, not… Read more »