Inflation among key factors for investing decisions

What are some of the key factors informing your investment decisions?

Jo Taylor: Probably, the biggest issue influencing our outlook at the moment is inflation. Our liabilities are inflation linked, so they go up as inflation goes up. And we've seen other situations more recently where if you don't match your activities to your liabilities, you can get into difficulties beyond just liquidity.

What we try to think about is getting a balanced portfolio that will withstand the shocks and the turbulence we see in the world. But also, we're very focused on looking to make sure we've appropriately assessed the risk we're taking, and we get paid for the risk we take. 

How has the evolving market backdrop influenced the way you source deals?

Nick Jansa: Although the market looks a bit different than it did a few years ago, it's important to remember that the market is cyclical and that investing is for the long term. Over the last few years, we saw people get caught up in the belief that private equity investing is like an intermediary financial services business, where it's all about the deals. Everybody was working so fast that they forgot about their portfolio companies. Now, the focus has shifted back again to those portfolio companies. In time, as the market comes back, that should equate to a better middle ground.

Ultimately, a successful long-term investment strategy is not just about high transaction volumes. When you're sourcing deals, it's the same private world, the same public world, and the same companies; things just shift in terms of where people see the best opportunities. Every five to 10 years there will be a phase when people talk about public to privates, but long-term investors are always looking at public, they're always talking to corporates, and they're always looking at the private sphere. The only difference today is that there are more companies in private hands, which means we should see a heightened level of transaction volumes in the next five to 10 years.

How should investment firms value businesses in the current climate?

NJ: In a rising interest rate environment, the base case for most investment firms should be to start with “multiple compression” and see if the investment case still works. That hasn’t necessarily been the case for many years, when people could rely more on good macro-economic tailwinds.

I think it's incumbent on the industry to make sure they're investing the right way – looking for growth building opportunities, but not relying on being able to buy low and sell high ('multiple expansion') as part of their basic investment thesis. If firms base their judgment on the right multiples, we should see some very interesting investments over the next couple of years.

Where is the focus within ESG currently and how could it evolve?

NJ: We should look at these as three separate areas. In general, governance is on a good path as most companies understand its value. It’s also moved quite a long way and continues to move in the right direction. For us, governance has been key and long-running within Ontario Teachers' for 30 years. Our stakeholders are the teachers and the government – they set a high bar when it comes to ethics. Our pension plan needs to provide sustainable long-term returns and best-in-class governance practices to ensure we provide lifetime pensions to our members.

When it comes to environment, much of the conversation today is about the data. The industry went from questioning the science 10 to 15 years ago to total acceptance today, and that was data driven. The next challenge is around creating the ecosystem for more detailed Scope 1, 2 and 3 emissions to allows more consistency for businesses to measure and address these.  That's another five- or 10-year journey but it's accelerating at a fast pace.

The social aspect of ESG is probably the most topical, but it's also the most difficult, the most political and the one with the least data. For us, focusing on the positive impact we can have as a pension plan, while striving to make good risk-adjusted returns, is an important business driver. Social is where we as an industry will have to invest the most thought to accelerate this area. It's also somewhere we see younger generations having a much stronger viewpoint, more than any previous generation.

Is investing in talent a key focus for Ontario Teachers'?

NJ: Investing in talent is a permanent task. We believe it's important to build the next generation of talent because diversity of thought is important. Younger generations think differently and we can't just rely on existing views of what is going to happen in the next 10 or 20 years. We need expertise, but we also need different perspectives; an 18- to 25-year-old thinks very differently from the investors of the past.

How are you thinking about artificial intelligence at Ontario Teachers'?

NJ: Artificial intelligence is a huge theme – we think of it as part of a much broader disruption question. We created our own venture studio, Koru, to work exclusively with our portfolio companies to test and build new products and capabilities that help them thrive in the face of disruption. We also created a new asset class, Teachers' Venture Growth (TVG), to invest in late-stage companies building technology to help shape a better future. These are some of the ways, as a pension plan, we're looking to invest in this theme but also to better understand how the world we operate in will shift and how we could be disruptive ourselves.

Tell us about Ontario Teachers' climate strategy, including decarbonization and fossil fuels.

JT: [For] our existing portfolio, we've set out some pretty clear goals about [helping] our companies collect data to know what their carbon intensity footprint is and then find ways to reduce it. On the new activity side, we [work with] industries which may not be as attractive to many investors but have high levels of carbon where we can help them decarbonize. We do that partly to make a positive contribution, but also we think we can make good returns by having a business in our portfolio that's better set after our involvement. Some of that change will take a reasonable amount of time. [This means] you have to be accurate in terms of your assessment of how long it's going to take, what it's going to cost, and does it look like a good investment over that course [of time].

A common question I always get asked is, how do you feel about fossil fuels. The answer I've always given is that we're trying to operate on a basis where there will be some fuels which will be necessary for a transition over the next 10 or 15 years. To some extent nuclear power and certainly natural gas will feature there. What we're trying to do, while that's going on, is make sure the businesses we back are conscious about [their] climate footprint, but also layer in new opportunities with new sources of energy and power.

We're very keen on electricity transmission as one way of providing greener energy around the world. We're also looking at newer sources of power. We've done quite a lot of work around hydrogen, looking at fusion, looking at some innovative ideas of moving forward in those industries. We have a target of moving green assets within our portfolio from about $33 billion to $50 billion, but [ensuring] we make an appropriate rate of return.