An Overview of BCI s Approach to Responsible Investing Protecting the Long-Term Value of our Clients Funds

Transcription

1 An Overview of BCI s Approach to Responsible Investing 2015 Protecting the Long-Term Value of our Clients Funds British Columbia Investment Management Corporation

2 Table of Contents About BCI... 1 In a Snapshot... 2 Our Mandate... 3 Responsible Investing Defined... 4 Why Does Responsible Investing Matter to BCI?... 4 BCI s Responsible Investing Principles... 5 BCI s Approach to Responsible Investing... 6 Fixed Income... 7 Mortgages... 8 Public Equity Private Markets Real Estate Advocacy and Capital Market Stability Collaboration and Strength in Numbers Divestment Disclosure and Reporting Concluding Comments Appendix 1: Principles for Responsible Investment Appendix 2: International Standards Appendix 3: BCI s Collaborative Partnerships About BCI BCI is a leading provider of investment management services to British Columbia s public sector. Our role is to generate investment returns that will help our institutional clients build a financially secure future. With our global outlook, we seek investment opportunities that will meet our clients risk and return requirements over time. This compels us to integrate long-term environmental, social and governance matters into our investment decisions and activities. We offer investment options across a range of asset classes: fixed income; mortgages; public and private equity; real estate; infrastructure; and renewable resources.

3 BCI S APPROACH TO RESPONSIBLE INVESTING 2 In a Snapshot Responsible investing is an essential part of the investment beliefs shared by BCI and the pension funds and many of the other clients for which we invest. We believe that companies that do a good job of managing environmental, social and governance matters (ESG) have less risk and perform better financially over the longer term. Our primary mandate is to create long-term client wealth and protect the value of our clients funds. The majority of the funds we manage belong to pension plans. As pension funds have long-term obligations and seek a specified rate of return to fund these obligations, BCI is required to invest our clients funds to generate the expected returns. BCI adheres to the applicable requirements of the Pensions Benefits Standards Act and other legislation, as well as the legal contracts established by our clients. Assessing and managing investment risk is an integral part of how we meet our responsibility. As part of the prudent investment management of our clients funds, we aim to actively manage the longterm risks that ESG matters present, both now and into the future. This begins with the integration of ESG considerations into our investment analysis, decisions and processes. And as an active owner, we monitor ESG factors and engage with companies to raise awareness that good corporate governance is the over-arching framework for effective management of risks. We also use our influence as a shareholder to encourage companies to manage and report on their ESG risks. Returns are important: on average $75 of every $100 a pension plan member receives in retirement benefits is provided by BCI s investment activities. Many of our clients have thus specified that responsible investing should be implemented in a way that does not interfere with the efficient investment of their funds to meet their investment return objectives, which are in the best financial interests of their current and future beneficiaries. 1 BCI became a founding signatory to the Principles for Responsible Investment (PRI) in Our approach is aligned with the PRI which provides a set of principles for institutional investors to consider as they integrate environmental, social and governance factors into their investment processes and analysis, ownership activities and interactions with other longterm investors. This document outlines BCI s approach to responsible investing, our beliefs and guiding principles, as well as the international standards and initiatives that we look towards. 1 As specified in our clients respective statements of investment policies and procedures

4 BCI S APPROACH TO RESPONSIBLE INVESTING 3 Our Mandate BCI provides investment management services to British Columbia s public sector. We invest the funds not currently required by our clients to pay pensions and other benefits. BCI is accountable to our clients (pension and non-pension) for the investment returns that they rely on to meet their financial objectives and liability obligations. As their investment manager, BCI is responsible for growing long-term client wealth while also protecting the value of their funds. BCI works within the framework of applicable legislation, including the appropriate provisions of the Pension Benefits Standards Act, as well as the legal contracts negotiated with our clients. Achieving the required returns with a prudent level of risk is a fundamental consideration in all investment decisions. Clients do not own the individual assets within the investment portfolios; BCI holds all assets in trust. We acknowledge that people will have different opinions and conflicting views on the companies we own, including our responsible investing activities. Our mandate requires that we maintain our fiduciary responsibility while considering ESG factors throughout the investment management process; it does not permit us to select or exclude investments based solely on environmental, social, governance or values-based considerations.

5 BCI S APPROACH TO RESPONSIBLE INVESTING 4 Responsible Investing Defined BCI defines responsible investing as: Considering environmental, social and governance factors when selecting and managing investments, allows BCI to manage long-term investment risk with the view of protecting and enhancing the financial value of our investments. Responsible investing also includes contributing to initiatives that enhance the stability and integrity of global capital markets. WHY DOES RESPONSIBLE INVESTING MATTER TO BCI? BCI considers responsible investment as a necessity as we believe that companies that do a good job of managing ESG matters have less risk and perform better financially over the longer term. Our business involves taking on investment risk and pricing it accordingly while also having the ability to avoid or minimize those risks that are costly and may reduce the value of our investments. Understanding and assessing the likely material financial risks and returns of the investment is an inherent requirement of fulfilling our responsibility to our clients. As these factors may significantly affect a company s operations and long-term cash flows, BCI believes that such risks may be managed to either eliminate or mitigate their impact. As we have a responsibility to ensure reliable long-term returns, BCI integrates ESG into our investment decisionmaking processes. Responsible investing is one of BCI s investment beliefs. Accordingly our focus is driven by the management of investment risks and we pursue activities that are expected to have the greatest impact for the given level of risk. BCI s responsibility is to act in the best financial interests of our clients. Responsible investing is also important to our clients; they share our belief that companies with sound practices have less risk and generate long-term value. We have a common belief that ESG factors may affect investment performance over time and to varying degrees across companies, sectors, regions and asset classes.

6 BCI S APPROACH TO RESPONSIBLE INVESTING 5 BCI s Responsible Investing Principles The following principles, informed by the PRI 1, guide our approach: As our primary responsibility is to ensure enduring long-term investment returns, environmental, social and governance matters are addressed when these factors present material risk to an investment and/or the portfolio. As significant ESG risks vary between asset classes, regions, sectors and companies, we adapt our approach and strategy to what is appropriate for the investment. Knowledge and reason, while looking out for our clients investment return expectations, inform our responsible investing decisions and activities. We encourage companies to identify practical and realistic solutions to ESG risks, and recognize that introducing good governance and operational practices takes time. We must own a company to be able to influence its governance and operational practices. As a longterm owner, we have a responsibility to interact with companies about their governance structures, policies and operations. We believe that engaging is more effective in seeking to initiate change than divesting, and that aligning with like-minded investors and organizations is sometimes more effective than working in isolation. As a significant investor, we have a duty to advance responsible investing within the investment industry. As responsible investing continues to evolve, integrating ESG considerations into our investment approach is constantly under development; we shall continuously learn from our own practices and experience. Each asset class is responsible for integrating and embedding responsible investing into their investment processes. This is an ongoing priority and we continue to expand our programs and practices. Each asset class serves as a knowledge centre for BCI and monitors the trends and advancements in responsible investing practices and approaches. 1 Refer to Appendix 1 for a listing of the Principles for Responsible Investment

7 BCI S APPROACH TO RESPONSIBLE INVESTING 6 BCI s Approach to Responsible Investing Responsible investing is part of our investment style; our approach is based on three core activities: Integrating ESG considerations into investment analysis & decision-making which we invest this alignment is an essential part of responsible investing. We consider good corporate governance to be the over-arching framework for effective company management. Strong governance is the foundation of a company s ability to manage risks and capitalize on opportunities. Active Participant in capital markets Active Ownership We monitor ESG factors and where appropriate, use our influence as a shareholder to encourage companies to manage and report on their risks, and enhance governance and operational practices. BCI expects companies and external managers to: 1 Comply with the laws of Canada, and/or the laws of the jurisdiction within which they operate. As responsible investing is integrated into our investment analysis and decision-making processes, we consider environmental, social and governance factors. ESG risks vary and we adapt our approach according to what is appropriate for the asset class or investment. Understanding ESG risks is an important part of our due diligence on prospective acquisitions as it allows us to assess potential investment risks and determine opportunities for engagement. Yet the decision to invest is based on the ability of the investment to meet our clients risk and return objectives. The long-term matters for BCI; a company s ability to create value and sustain its competitive advantage is essential to long-term business performance. As many of BCI s investments will be held for more than 20 years, we expect the companies we own to pursue activities and practices that will increase their value over the long term. As a long-term investor, BCI brings more than capital to the companies we own once invested we are active owners. Our investment outlook, combined with our philosophy of active ownership, allows for the alignment of interests with the companies in Aspire to align their practices and adhere to international standards. 1 Apply best practices for corporate governance and be transparent about their practices, risks, and opportunities. Meet all environmental regulations and seek to reduce their operational impact on the environment. Be responsible in their operations, adopt good standards of occupational health & safety, and effectively manage stakeholder relationships. BCI relies on well-functioning capital markets. As a large-scale global investor, we see it as our responsibility to contribute to the overall stability of the financial system. As an active participant in the capital markets, we address systemic risks, with the expectation that our efforts will lead to greater stability and integrity within the markets. 1 Refer to Appendix 2 for a listing of the standards that BCI looks towards

8 BCI S APPROACH TO RESPONSIBLE INVESTING 7 Fixed Income BCI acknowledges that fixed income investments are subject to the same financiallyrelevant ESG matters as corporate equity. Governance failings and broader environmental and social factors play a role in credit rating downgrades and defaults. And we recognize that flawed corporate governance practices can adversely affect bondholders by exposing us to excessive or unforeseen credit risk. Pre-investment Analysis: As an actively managed program, our in-house investment professionals purposely select and invest in debt offered by government and agencies (Canadian and global) and corporate entities with the goal of outperforming the investment benchmark. Active investments require skilled management supported by rigorous due diligence and research. We assess the financial status of an issuer, its governance structures and risks and will review an issuer s operations and litigation history. As good corporate governance is the over-arching framework for effective company management and operations, we pay particular attention to matters such as ownership, executive succession planning, board effectiveness, compensation and disclosure. Post-investment Monitoring: Our review of ESG matters begin prior to our initial investment and continue throughout our investment holding period. Due diligence and on-going monitoring involves reviewing annual reports and company filings and understanding the implications of economic trends and cycles for the particular issuer. Where appropriate, we will engage with the issuer to enhance our assessment of the potential investment.

9 BCI S APPROACH TO RESPONSIBLE INVESTING 8 48 Quarry Park Boulevard SE, Calgary, Canada Mortgages BCI is a major lender to Canada s commercial real estate industry and we focus on strong-yielding loans with attractive risk-return profiles. We hold direct and indirect mortgage investments. Indirect mortgage investments (such as mortgage funds) are managed by external managers. BCI believes that mortgaged properties that incorporate ESG initiatives will have higher tenant satisfaction, reduced vacancies and increased property cash flows which, in turn, will lower our investment risk. We acknowledge that lenders do not have controlling interests over their mortgaged properties and are unable to directly influence ESG matters. However, we look for opportunities to integrate ESG considerations into our mortgage investment process. Pre-investment Analysis: We favour industrial, office, multi-family (apartment and townhouse projects) and retail properties with environmentallysound principles that match our clients risk-return parameters. BCI considers green properties to have a lower investment risk as they have reduced operating costs, stronger occupancy rates and higher net rents than other properties. For each commercial mortgage application, we assign a credit risk rating after assessing its risk-return profile and the project s environmental features. Consideration is also given to the retrofitting of existing buildings to achieve BOMA BESt or LEED certifications. Higher credit risk ratings assigned by BCI results in lower mortgage credit spreads which, in turn, equates to a lower borrower interest rate. Where possible, and provided that the investment meets our required risk-return parameters, BCI may finance properties that provide social benefits (i.e. affordable housing), support healthy working and living environments and promote the use of alternative transportation facilities.

10 BCI S APPROACH TO RESPONSIBLE INVESTING 9 Post-investment Monitoring: BCI takes all reasonable and necessary steps to mitigate potential environmental risks to our mortgage holdings. This includes complying with all applicable federal, provincial and municipal environmental legislation, permits and orders. Prior to financing new mortgage investments, borrowers are required to submit satisfactory environmental site assessments to BCI. BCI also looks for opportunities, and where appropriate, encourages its borrowers to enhance their environmental, social and governance practices. Activities include ensuring that borrowers comply with all environmental and occupational health & safety regulations. Expectations of Fund Managers: Prior to engaging external managers, BCI reviews and assesses their approach to managing ESG risks. Once engaged, we encourage our managers to formally and systematically consider ESG matters. In addition to complying with applicable regulations that govern environmental, occupational health & safety and labour matters, we expect our managers to assess material risks and use best practices to mitigate such risks. We also require our managers to demonstrate good governance and effective oversight of audit and risk management processes.

11 BCI S APPROACH TO RESPONSIBLE INVESTING 10 Public Equity BCI s public equity program invests in thousands of publicly traded companies in Canada and around the world. The majority of the funds are managed by BCI s investment professionals; best-in-class external managers from around the world are contracted to invest the remainder. Pre-investment Analysis: ESG considerations have been integrated into the fundamental analysis of our internally-managed active Canadian mandate since Companies are assessed and rated in accordance with a sector-appropriate checklist that accounts for the diversity of companies and the complexity of ESG issues that may be encountered. Our checklist, developed in-house, includes a range of key performance indicators identified for each ESG factor. ESG KPIS ENVIRONMENT SOCIAL GOVERNANCE Energy Energy Intensity / Emissions Reductions Land Management Renewable Energy Employed Water Risk / Stress Labour Management Occupational Health & Safety Privacy Protection & Data Security Product Safety Stakeholder Relations Accounting / Legal Board Structure Executive Compensation

12 BCI S APPROACH TO RESPONSIBLE INVESTING 11 Post-Investment Management: As a large-scale investor, it is our responsibility to interact and, where appropriate, challenge companies and market participants about their policies and activities. It is through engagement and constructive dialogue that BCI raises awareness of ESG factors and risks to the investment portfolio that may emerge over time. We also encourage companies to be transparent and report on their risks, and adopt good corporate governance and operational practices. BCI s engagement activities are multi-faceted and include proxy voting, engaging directly with companies (either independently or in partnership with likeminded investors), as well as influencing the regulatory process. Our voting is based on our Proxy Voting Guidelines, available on our website. These guidelines clarify BCI s beliefs on governance and corporate responsibility. BCI has identified seven areas of interest, each supported by proxy voting guidelines: Facilitating shareholder rights and interests Board of directors Audit process Proxy Voting 4 5 Executive compensation Capital issues Regulatory Influence METHODS OF ENGAGEMENT Direct Dialogue 6 Merger, acquisitions and corporate restructuring Collaborative Dialogue 7 Shareholder proposals on environmental and social risk a) Proxy Voting: Voting is one of the most important shareholder rights. As an active and engaged owner, we consider informed voting an important component of our commitment to engagement. It is a means of fostering good corporate governance and accountability by companies. We conduct all proxy voting activities in-house and vote all our Canadian, U.S. and the most significant global holdings based on market value.

13 BCI S APPROACH TO RESPONSIBLE INVESTING 12 b) Direct and Collaborative Dialogue: We focus on three areas that we view as being long-term, persistent business challenges and therefore, a natural fit for an investor with an investment horizon that stretches forward many decades. Our engagement focus is driven by the management of investment risks and we pursue activities that are expected to have the greatest impact. In view of what are by definition limited resources, BCI chooses to be selective, specific and pragmatic at all times. ESG Engagement: Public Equities Process and Priorities outlines our engagement approach, and is available on our website. In exceptional cases, BCI may choose to present a shareholder proposal to raise awareness and bring about change. This is an approach that involves putting an issue to the vote of all shareholders at a company s annual general meeting. While BCI supports the right to use it, and has exercised our right, we recognize that these are public and sometimes blunt instruments. And it is only after careful consideration, and when we feel we are unable to advance a company s practices through private dialogue and negotiation, that we will pursue this course of action. Thoughtful and constructive dialogue is our preference. BCI S ENGAGEMENT PRIORITIES PRIORITY WHO DO WE ENGAGE WITH? OUR DISCUSSION TOPICS Climate Change and Water Heavy CO 2 emitting companies Regulators Industry associations We focus on reporting and disclosure, emissions reduction, resource efficiency and regulatory preparation. Where appropriate, we also encourage companies to prepare for a world where water is an increasingly constrained resource. Human Rights Companies with the greatest exposure to worker safety Companies with significant exposure to countries where human rights is an issue Regulators Industry associations We encourage companies to enhance reporting and disclosure of appropriate occupational health & safety metrics. We also actively encourage companies to implement best practices, such as those specified in the United Nations Guiding Principles on Business and Human Rights and the International Labour Organization Standards. Shareholder Rights Board of directors and management of companies that we believe should be held accountable for their governance practices Regulators Industry associations We address the composition of the board, including the election of directors and executive compensation. We have encouraged regulatory bodies to improve board diversity, strengthen proxy voting infrastructure and enhance reporting and disclosure requirements.

14 BCI S APPROACH TO RESPONSIBLE INVESTING 13 BCI may engage directly with companies either on our own or in partnership with other like-minded investors and organizations. At times, collaborative engagements may be more effective in encouraging change and adopting good corporate governance practices and standards. BCI is committed to engaging companies, regulatory bodies and industry organizations on matters that will enhance corporate practices, increase disclosure and where applicable, influence regulations. c) Regulatory Influence: As a global investor, BCI relies on well-functioning capital markets. We engage with Canadian and international regulators and advocate for legal and regulatory changes to ensure that principles of good corporate governance are integrated into the regulatory framework. We collaborate with like-minded investors and other organizations to draw attention to the legal provisions that we believe should be changed or enhanced. Pooled Fund Product Offering: For those clients with a deeper interest in responsible investing and screening, BCI offers an indexed fund that adopts a best-in-class approach for selecting companies and excluding those with controversial activities. The fund replicates investments in companies held within the Morgan Stanley Capital International (MSCI) World ESG Index. Investments include bestin-class ESG performers while excluding companies with significant activities that involve nuclear power, alcohol, tobacco, gambling, firearms and/or military weapons.

15 BCI S APPROACH TO RESPONSIBLE INVESTING 14 Open Grid Europe GmbH, Germany Private Markets BCI holds investments in infrastructure, renewable resources, privately-held companies as well as private equity funds. These investments are made with a very long-term outlook sometimes extending beyond 20 years. As ESG risks can develop over time and affect companies, sectors and regions, the assessment of these factors is integral to the pre- and post-investment processes. We promote the integration of best governance practices within our portfolio companies and fund investments. And we also encourage our external managers and portfolio companies to formally and systematically integrate ESG matters into their activities. Our annual Investment Governance Retreat, attended by directors appointed to represent our interests, is one way in which we address principles of good governance, risk management and executive compensation. BCI endorsed the Institutional Limited Partners Association s Private Equity Principles in These principles serve as BCI s framework for governance and transparency. Our activities are also guided by the PRI s Responsible Investment in Private Equity guide for limited partners. Pre-investment Analysis: In addition to assessing financial performance, we review the governance model of each prospective acquisition and commission detailed reports on legal, environmental, regulatory and occupational health & safety matters. Potential risks are incorporated into our investment strategy. As the circumstances and issues differ by investment, deal structure, industry and region, we tailor our approach for evaluating ESG factors of each potential transaction.

16 BCI S APPROACH TO RESPONSIBLE INVESTING 15 Post-investment Management: Once invested, we monitor the company s operational and financial performance. We expect our portfolio companies to focus on long term value creation meaning that they must apply good governance practices, effectively manage their business and stakeholder relationships and be responsible in their business operations. Our expectations are outlined in guideline documents for private equities and infrastructure. Risks identified in the due diligence phase may be addressed directly with the company, or through our investment partners. When we have a significant ownership interest, we appoint representatives to the board of directors. Depending on our ownership position, we may play a more active role in addressing these risks with the companies. Our involvement at the board level, in areas such as long term strategy and governance, helps ensure our governance standards are applied to our investments. Fund Managers: Our private market portfolio includes private equity funds managed by best-inclass managers with sector and regional expertise. Prior to committing clients funds to a new fund manager, we analyze and assess how they incorporate ESG factors into their processes. During the due diligence phase, BCI may review and question the internal policies and steps taken to address, manage and mitigate material ESG risks. Our assessment may include the manager s track record with managing environmental risks, governance practices, compliance with applicable laws and regulations, as well as their overall approach to responsible investing. ILPA s Private Equity Principles informed the development of a checklist for fund investments, which is incorporated into our standard operating procedures and each fund investment memorandum. Once invested, we regularly promote our responsible investing principles and expect each fund manager to acknowledge their understanding of BCI s approach and beliefs. We also monitor the agreements, treaties and international standards that fund managers may or may not endorse.

17 BCI S APPROACH TO RESPONSIBLE INVESTING King, Toronto, Canada Real Estate As property investments involve longer time horizons than other asset classes, our investment strategies consider long-term issues and the consequences these may have on fund and asset performance. Responsible property investing allows us to integrate environmental, social and governance issues into our decisions, especially where BCI can exert significant influence. In so doing, we can build a resilient real estate program that maximizes the value of our holdings without undue risk of loss while also positioning the portfolio for future opportunities. Longer term issues include changes in regulations that govern environmental and social matters, and the evolving expectations of consumers and tenants. Physical risks to our properties resulting from climate change, flooding and droughts as well as changing societal needs that may influence macro real estate trends are considered. As our clients investment manager, we have a responsibility to understand the implications of these issues and seek appropriate risk-adjusted investment returns. We pursue economic ways of ensuring the viability of the properties we buy, develop and manage for the long-term. BCI focuses on the strategic ownership, operation and development of real estate assets. Within our domestic and global programs, BCI is committed to: Integrating responsible property investing throughout our policies, due diligence activities, investment mandates, partnerships, property strategies and business plans. Full compliance with local environmental regulations (federal, state, provincial and/or municipal) is an essential requirement of our real estate portfolio. Consideration is also given to the implications of occupational health & safety regulations on the physical property. Communicating, engaging and encouraging our stakeholders (investment partners, external advisors, property managers, tenants and suppliers) to align with BCI s practices. We expect our investment partners and property managers to align their practices with BCI s commitments, and provide transparent reporting. Tracking and understanding the consumption and emission trends of our domestic portfolio. By measuring greenhouse gas emissions, energy consumption, water use and waste generation, we identify efficiencies for lowering operating costs and reducing the portfolio s environmental footprint. We have measured and tracked energy consumption and greenhouse gas emissions in our domestic portfolio since Waste audits and tracking water consumption were started in 2008.

18 BCI S APPROACH TO RESPONSIBLE INVESTING 17 Enhancing tenant satisfaction and acceptance by the local community. We develop properties that facilitate healthy working environments and promote the use of alternative transportation. We support our investment partners and property managers in selecting contractors and service providers that adopt responsible business practices, and encourage our partners and advisors to accommodate reasonable community interests and events. Supporting initiatives that enhance responsible property investing policies and practices. We may also routinely conduct pilot projects to test new technologies and assess the feasibility to lower operating costs while also reducing the portfolio s environmental footprint. Adopting sound governance practices to enhance the performance of our real estate business enterprises. We expect our Canadian enterprises to comply with the Canada Business Corporations Act and all relevant laws. The appointed board of directors are required to promote sound corporate governance, enhance the value of our investments and align executive compensation with company performance. Certification programs such as the Leadership in Energy and Environmental Design (LEED) and BOMA BESt encourage sustainable building and development practices through standards and performance criteria. Given the economic costs associated with formally certifying our buildings, certification is not a stated goal of our program. Together with our investment partners and property managers, BCI takes LEED or equivalent ratings into account in the design, building and operating of our properties. With newer buildings and multi-land use developments, the incorporation and adherence to LEED and other standards is considered from the very beginning. We examine the ability to enhance the value of our existing properties through upgrades, renovations and retrofitting initiatives. All decisions are based on an assessment of the expected return on investment.

19 BCI S APPROACH TO RESPONSIBLE INVESTING 18 Advocacy and Capital Market Stability As a global investor, BCI relies on well-functioning capital markets. Risk and the return on investments depend on fair markets. The integrity of the market is a joint responsibility of governments, regulators and market participants. As a large-scale investor it is our responsibility to contribute to the overall stability of the financial system. Our activities are aimed at addressing systemic risks, with the expectation that our efforts will lead to greater stability and integrity within the markets. BCI advocates for legal and regulatory changes that make responsible investing principles part of the regulatory framework and improve the investment environment for all investors. We work with like-minded investors and organizations to draw attention to the legal aspects which we believe should be changed or enhanced. Our activities extend to encouraging policy makers around the world to place more emphasis on corporate governance and shareholder accountability in their regulatory frameworks.

20 BCI S APPROACH TO RESPONSIBLE INVESTING 19 Collaboration and Strength in Numbers Cooperation with like-minded investors leads to synergies and increases influence. By collaborating with pension funds, asset managers, and organizations, we can deploy our resources more effectively and strengthen our voice. We actively support and contribute to initiatives that focus on governance practices, enhance transparency and disclosure of ESG risks and advocate for long-term thinking within the investment industry. Appendix 3 contains a list of our collaborative partnerships. Divestment We do not believe that divestment is an effective strategy for addressing long-term and persistent ESG risks. Ownership gives an investor the right to raise concerns and influence a company on matters relating to corporate governance, as well as its environmental and social practices. Engagement is our preference. In our view: BCI may divest only in instances where there are legal considerations such as government enacting federal legislation to implement Canada s commitment to the Anti-Personnel Mine Ban Convention (Ottawa Treaty) and the Convention on Cluster Munitions (Oslo Process). BCI restricts affected companies from our pooled funds. Divestment eliminates our rights as a shareholder to engage with management and raise awareness of long-term risks and encourage change of practices. Divestment does not encourage companies to amend their policies and practices. Divestment may compromise our investment strategy, increase risks and costs, and negatively affect our clients investment returns.

21 BCI S APPROACH TO RESPONSIBLE INVESTING 20 Disclosure and Reporting As a founding member of the PRI, BCI has pragmatically applied the principles (see Appendix 1) into our operations. The principles require signatories to report on their activities, and BCI is committed to reporting to our clients and publicly disclosing our initiatives. Our reporting includes annually publishing three Responsible Investing Newsletters and a Responsible Investing Annual Report. We also disclose our proxy votes, and rationale for when we vote against a proposal, ahead of a publicly-traded company s annual general meeting. The searchable database, available on our website, provides an account of our voting. BCI also briefs clients on specific initiatives and responsible investing trends. Clients are also involved in discussions relating to BCI s proxy voting guidelines and engagement priorities. BCI also assists clients with their stakeholder communication. As a PRI signatory, BCI participates in the annual PRI survey that assesses our responsible investing practices across our asset classes in line with the six principles. Our newsletters, annual report, Proxy Voting Guidelines, ESG Engagement: Public Equities Priorities & Process, and annual PRI Transparency Report are available on BCI s website. Concluding Comments As a responsible investor, BCI brings more than capital to our investments, meaning that: We take environmental, social and governance matters into account in our investment analysis and decision-making processes. We monitor our investments and engage with our portfolio companies to foster enhanced corporate governance and operational practices. We collaborate with like-minded organizations to promote ESG practices within the industry and advocate for regulatory and industry reform. We are transparent in the reporting of our activities. We exercise our right to vote proxies and nominate representatives to the boards of our companies.

22 BCI S APPROACH TO RESPONSIBLE INVESTING 21 Principles for Responsible Investment Appendix 1 BCI is a founding signatory to the Principles for Responsible Investment (PRI). The PRI provides a set of principles for institutional investors to consider and through our endorsement, BCI is committed to: 1 Integrating responsible investment into investment analysis and decisionmaking processes Being an active owner and incorporating ESG issues into our ownership policies and practices 2 3 Seeking appropriate disclosure on ESG issues by the entities in which we invest Promoting acceptance and implementation of the Principles within the investment industry 4 5 Collaborating with like-minded investors and organizations to enhance effectiveness in implementing the Principles Reporting on our responsible investing activities 6

23 BCI S APPROACH TO RESPONSIBLE INVESTING 22 International Standards that BCI Encourages Portfolio Companies and External Managers to Consider Appendix 2 INTERNATIONAL STANDARD EXPLANATION International Finance Corporation Performance Standards on Environmental and Social Sustainability Developed by the International Finance Corporation and effective January 1, The Performance Standards provide guidance on how to identify risks and impacts, and are designed to help avoid, mitigate and manage risks and impacts as a way of doing business in a sustainable way, including stakeholder engagement and disclosure obligations of the client in relation to project-level activities. Together, the eight Performance Standards establish standards that are to be met throughout the life of an investment by IFC. International Labour Organization Declaration on Fundamental Principles and Rights at Work Adopted in 1998, the Declaration commits Member States (and ratified by Canada) to respect and promote principles and rights in four categories, whether or not they have ratified the relevant Conventions. These categories are: freedom of association and the effective recognition of the right to collective bargaining, the elimination of forced or compulsory labour, the abolition of child labour and the elimination of discrimination in respect of employment and occupation. OECD Principles for Corporate Governance First released in May 1999 and revised in 2004, these principles are one of the 12 key standards for international financial stability of the Financial Stability Board. They are the basis for the corporate governance component of the Report on the Observance of Standards and Codes of the World Bank Group. UN Global Compact Encourages businesses worldwide to adopt sustainable and socially responsible policies, and to report on their implementation. A principles-based framework (10 principles), providing recommendations in the areas of human rights, labour, the environment and anti-corruption. UN Guiding Principles on Business and Human Rights Developed by the United Nations and endorsed by The Human Rights Council in These principles clarify the responsibilities of the states and apply to all business enterprises, regardless of size, sector, location, ownership and structure. Fourteen principles apply to business enterprises.

24 BCI S APPROACH TO RESPONSIBLE INVESTING 23 BCI s Collaborative Partnerships Strength in Numbers Appendix 3 Founding signatory in 2006 Active member of steering committees and working groups Member since 2016: one of 216 Canadian chapter members Member of steering committee Advocate for companies to enhance gender diversity Member since May 2017 Signatory to Financial Stability Board Task Force on Climate-related Financial Disclosures since 2017 Member since 2005 Contribute to and support regulatory efforts

25 BCI S APPROACH TO RESPONSIBLE INVESTING 24 Founding member in 2011 Serve on board of directors Member of financial regulation committee Founding member in 2004 Served as the CCGG chair ( ) Member of the environment and social committee Member since 2015 Former member of CDP Canada advisory council Signatory to climate change program since 2006 Signatory to water program since 2009 Investor member since 2016 Associate member since 2017 Member since 2017

26 BCI S APPROACH TO RESPONSIBLE INVESTING 25 Investor signatory since 2011 Member since 2016 Coordinated by Japan s Government Pension Investment Fund (GPIF) Participant since 2016 Member of the investor stewardship committee Serve on board of directors 16 asset owners Member since 2017 Member since 2007

27 BCI S APPROACH TO RESPONSIBLE INVESTING 26 Member since 2005 Member of investor advisory group since 2016 One of 28 asset owners Mandate is to promote standards for sustainable reporting Member since 2002

28 BRITISH COLUMBIA INVESTMENT MANAGEMENT CORPORATION 750 Pandora Ave, Victoria BC V8W 0E4 CANADA / BCI.ca BCI is the investment agent for many institutional clients; the views and opinions expressed in this report are those of BCI and do not necessarily represent the views of its clients. The information in this report is provided as of the date hereof. Neither the delivery of the report nor any further discussions in relation to BCI will under any circumstances create any implication that there has been no change in the affairs of BCI since the date of this report. All rights reserved. Contents copyright BCI Photos provided by: Dave Aharonian Photography; Remington Development Corporation; Open Grid Europe; Shutterstock; Thinkstock