MASTERCLASS: ESG - November 2019

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  • 01 hr 06 mins 05 secs
With today's more global-minded markets, investors are looking beyond a compelling growth profile or investment thesis, and they're demanding that companies also have a demonstrated commitment to environmental, social and governance mandates. While there's no formal definition of what makes a particular investment suitable for an ESG portfolio, there seem to be common threads among many of the ESG focused products.

To help us understand the evolution of the ESG market, and what to look for when considering ESG products for your clients, we hear from three experts at the forefront of the Canadian ESG community:

  • Andrew Simpson, Portfolio Manager, IA Clarington Inhance SRI Funds and Portfolios, iA Clarington Investments
  • Rosa van den Beemt, Senior ESG Manager at NEI Investments
  • Hugh Smith, Director ESG, Investment Management, Refinitiv


MASTERCLASS: ESG - November 2019

Clare O'Hara: With today's more global-minded markets, investors are looking beyond a compelling growth profile or investment thesis, and they're demanding that companies also have a demonstrated commitment to environmental, social and governance mandates. While there's no formal definition of what makes a particular investment suitable for an ESG portfolio, there seem to be common threads among many of the ESG focused products. To help us understand the evolution of the ESG market, and what to look for when considering ESG products for your clients, we've invited three experts at the forefront of the Canadian ESG community. Joining me today is Rosa van den Beemt, Senior ESG Manager at NEI Investments, Andrew Simpson, Director at Vancity Investment Management, and Hugh Smith current Responsible Investment Association Board Member and head of ESG with Refinitiv. I'm Clare O'Hara with The Globe and Mail, and this is Asset TV's ESG Masterclass.

Welcome everyone. Thank you for joining me today. So just before we jump into the complexities of ESG, Hugh, I'm wondering if you can give us a brief overview of what ESG is.

Hugh Smith:  Yeah, I can give it a shot. It's definitely a complex and nuanced question. I feel like the more you learn about ESG, the more difficult it is to put a completely saint definition on it. But I would say very broadly, it's taking into consideration non-financial metrics into investment decision, but then in terms of how that gets put into practice, there's a myriad of ways, and I'm sure we'll get into some of those different approaches in the conversation.

Clare O'Hara: Great. So, we will jump into those. So Andrew, I'll jump over to you. Your firm has included ESG analysis as part of their investment process for over 10 years, and I'm wondering what does ESG analysis mean to you?

Andrew Simpson: Well, ESG analysis firstly for us means a way to measure, as Hugh actually alluded to, risks that aren't necessarily reflected in the financial statements of companies. And so for that perspective, sometimes these risks, if you look at environmental long-term costs, they're costs that aren't reflected in the balance sheets, they're actually, economists consider them externalities. So, they're born by the greater public and over time, they may get reflected on balance sheets. So if you can identify risks of those issues with a company, we look to save investors costs to their portfolios.

Clare O'Hara: Great. So Rosa, over at NEI, it's also a long-time stakeholder in the ESG space, and I'd like to ask you the same question. When we're thinking about EGS analysis, what does that mean at NEI?

Rosa van den Beemt: Yeah. I think it means a lot of similar things as to what Andrew was saying. We believe that ESG can also add opportunity, so looking at environmental, social and governance factors at the companies that we invest in, shows you how they're positioned for long-term performance. For example, if you have a company that produces medicine, but it is not really proactively marketing its medicine in developing countries where there actually could be a really good market for their product, that's a missed opportunity that we try to steer companies towards to be aware of both the risks as Andrew mentioned of ESG and the opportunities. And then I think for us, it really means actively engaging companies on those types of issues to ensure they become better companies over the long-term.

Hugh Smith: If I can add on to both of those, a lot of our partners who are integrating these ESG considerations, they consider it time arbitrage, the example of both the risk and opportunity of environmental externalities, medicines for emerging markets, these things are discounted, and not properly taken into consideration by investors who are being overly short-term. So by identifying these things that aren't on financial statements and might be being overlooked, they find they're finding a lot of value that's going to bear fruit in the long run.

Clare O'Hara: So to take it a step further, Andrew, when we're looking at the ESG analysis, how do you incorporate that into your investment decision process?

Andrew Simpson: Well, we actually look at companies from the lens of a stakeholder. So, a company really has the stakeholders of the employees, how they are treated, how they add value to that company's business, you look at the community, which really provides the license for that company to operate. Is the community in dialogue with that company? Is there an agreement or is there frictions in place? We look at the suppliers, that's really key for a lot of companies. So this supply chain, are there sustainable processes in place there that brings that end product to that business that generates revenue? So I think from a stakeholder based approach, you can get a 360 view of how a company operates.

Clare O'Hara: Great. And Rosa, I'll ask you the same question. When you think about the investment decision process, how does that look?

Rosa van den Beemt: We hire external asset managers. Some of them already have an ESG process in place, others don't have anything. And I think historically, because we've been in the responsible investing market for so long, when we started our business, there weren't any asset managers that were incorporating ESG, so we had to do it ourselves. What that meant for us was really looking sector by sector, what are the material, environmental and social and governance risks that company faced in the sector and how are they positioned toward managing those risks.

So, for example, we have a proprietary framework that looks at per sector. So if we continue with the healthcare example, what type of access to their medicine do pharmaceutical companies provide? How are they performing on product safety of their medicine, what type of products are in the pipeline and is it addressing healthcare needs, what about the safety of clinical trials for example? So those risks look very different than in the mining sector where you would, for example, look at how mining companies cooperate with the communities in which they operate and how they take into consideration environmental factors. So, it's a really sector-based approach, meaning that we have the end say on what our asset managers can and can't buy. So we do a review of companies they request to buy and then say basically yes or no.

Clare O'Hara: Great. So, Hugh, I'm going to ask you something a little but different. As one of the world's largest providers of financial data, how does your firm approach ESG information?

Hugh Smith: We try and approach it just like we would approach any other financial data set in that for us ESG really is fundamental. It's not some niche area of data that exists for a different set of users than those who would use our financial data, fundamentals estimates, so it's traditional data sets. And ESG investing is becoming more and more mainstream, and I think a lot of practitioners and companies doing this for a long time would like to see it go mainstream, but for that to truly happen it has to have the same institutional quality and standards that normal financial data has. We try to make everything completely transparent and auditable, so that you could defend an investment decision that's based on an ESG consideration with the same amount of research backing that up as you would if it was based on a valuation or a growth prospect or any other type of traditional investment decision.

Clare O'Hara: So, Rosa, I want to jump back to you for a minute. We're talking about you've been in the industry for 10 years and things have changed. You mentioned asset managers, there weren't very many of them doing it. So how has the ESG approach evolved in, I'd say the last five years?

Rosa van den Beemt: Yeah. I think historically ESG has been seen as a screening. So, screening out companies that might have bad behavior or screening out sectors that could be harmful to a stakeholder, such as tobacco or weapons. And I think especially in the last five years, there's been so much more data that has come on to the market. There are more data providers that provide really useful data to investors. So, the range of investment products has just skyrocketed, and ESG has really evolved. I think it used to never just be screens. If you have a rigorous ESG process in place, but it was typically the view of people that ESG was screening out bad companies.

And so nowadays, I think you have such a wide range of ESG products, I can't even begin to list them all, but what's really popular at the moment is the opportunity-based ESG investing or impact investing depending on what you define as impact, but really looking at how can your investment dollars make really positive change rather than just I don't want these types of companies in my portfolio.

Clare O'Hara: What would be an example of impact investing? Because that's a new term that you just brought in there, so if an investor was looking at that space, what would it look like?

Rosa van den Beemt: Historically, impact investing has been really closely tied to community bond based investing, and I think the term has evolved a little bit or maybe been co-opted by some of the larger more mainstream firms. And so we probably define as impact investing today is making investments that create tangible change that's measurable, and that you can report on. So anything from metrics on the type of carbon emissions that have been saved by investing in a certain way, or any type of impact engagement with companies in your portfolio makes that type of change, and I think the industry is really grappling at the moment at how to quantify that type of change, and how to be accountable for using standardized metrics across the board, so we're all trying to figure that out still. But, the idea is really that some type of positive impact has been produced.

Clare O'Hara: Great. So Andrew, I want to throw the same question over to you. How have you seen things change over the last five years?

Andrew Simpson: Well, I'd add to what Rosa has been saying is really ways that we measure the positive impact on our portfolios relates to the sustainable development goals that the United Nations put in place a few years ago. And for us, being able to look at our portfolio and analyze with the tools that are out there, the percentage of sustainable revenues that we have versus a benchmark, can really differentiate the way that we're thinking about portfolio construction process. And so whether that's looking from an environmental aspect at carbon footprinting, what is the carbon emissions of your portfolio versus a benchmark or a competitor for example. Or on the sustainable development goal side, those revenues can be broken down into environmental, social and governance aspects and bring them together for a value that is quantifiable. It's a broad area, and there's many different ways to look at things, so the idea to be able to analyze a company and delve into those aspects can help us make better investment decisions.

Clare O'Hara: Great. So, Hugh, on the data side, what have you seen over the past five years in shifting? Rosa brings up the point that there wasn't a lot of data providers looking at this sector. So what have you seen firsthand?

Hugh Smith: I think the conversations with clients have shifted from do we want to buy good ESG companies, and are we willing to sacrifice a return, let's use this as a competitive advantage because you really can uncover opportunities or identify risks that you wouldn't otherwise be able to. To do that, it goes much beyond just using an ESG rating for a company, you have to think about what business is this company in, what is its competitive advantage, what are the specific risks and how are we going to use that in our analysis.

An example might be if you're looking at banks, ESG scores are traditionally driven off of what a company does in terms of its operations. So a bank would get a very good ESG score if their environmental footprint was lighter than its peers on Bank Street or Wall Street. But, none of those companies really have a big carbon footprint to start from in terms of their operations, but what you see is some of them are doing great things on that hand, and then their commercial lending department is leading the market in financing coal. And if you really are trying to stay away from stranded asset risk or transition risk, then maybe looking at how much of this financial institution profitability is tied to coal or fossil fuels rather than what's the ESG score that just covers its own operations.

So just getting more specific in using the data on a company-by-company basis. And more so, I find for certain clients, that resonates as well. Just saying ESG, that's a lot of different things under one umbrella but you might have clients who are particularly passionate about animal rights. Maybe corporate governance structures don't really resonate with them, but you could look at well let's not investment in companies that do animal testing. Or you can even go further and say, maybe animal testing for pharmaceutical companies that are doing cancer research, that would be a necessary evil perhaps, but if cosmetic companies are doing that, that's not a company that we'd want to buy. And the data exists to be able to do that now and really enhance the tailored solution you're giving to your clients and providing value that way by giving them something that really speaks to their values rather than a predetermined score that was applied to that company.

Clare O'Hara: Great. So, Andrew, I'm curious about what do you see as the most important ESG issue facing the market today?

Andrew Simpson: I definitely think climate risk is the biggest issue that we're facing, and it just encompasses so many different areas of the investing sphere. And for us really, that's looking fossil fuel as a key risk. It's one of the reasons why we transition our portfolios now to a fossil fuel free focus. You can look at the plastics issues that is out there. What is plastic made from? It's made from fossil fuels. So there's many different aspects to that. And the dangerous interference that we're seeing in climate change right now, there's a lot of work that has to get done. Hugh just mentioned stranded assets, so from a risk basis we think that's actually a key issue that will be facing investors a lot sooner than they think at this stage.

Clare O'Hara: And Rosa, your thoughts on what the biggest issue would be?

Rosa van den Beemt: Yeah. I tend to agree with Andrew. I think in order to get to a lower carbon economy, there is a lot of work that we need to do. I think tied to that is the risk that we do need to move to a low carbon society, how are we going to make sure that it doesn't leave people behind? For example, people working in the oil and gas industry in Canada. Our market is so heavily reliant on that industry, and so we really need to come together to work on solutions, which is also a reason why we think divestment isn't always the option. Divestment from oil and gas or fossil fuels, so we proactively try to work with the oil and gas companies that we consider to be leaders so they can view themselves as energy companies rather than oil and gas companies and start to work towards creating systemic change.

I think we're seeing a shift towards consumers are becoming so much more vocal and informed and really call for transparency at the company levels. And also the investment firms that they invest with. And a trend that we've been seeing is really workers who may have shares in their own companies trying to create change from within. For example, large companies like Amazon or Google and I think that's a really interesting development. Workers using their shares to create change and the human capital management that these companies, one of their main assets is their worker base and how do they manage that.

And then also lastly, I would say going back to basics, and looking at human rights. I think that human rights and the S component of ESG is often overlooked. And we're finding that some of the troubles that for example, the consumer industry had in the '90s with child labor and forced labor, they're still valid today. And I think that we've seen more transparency also on how people are being treated throughout the supply chain of companies and everyone is trying to address it, but there's still a lot of I would say, companies are trying to address it proactively but we're not really seeing the systemic change that is needed. And I think certain things like mass production of goods and services, I think we just really need to rethink the way that our economy works today.

Clare O'Hara: Great. And Hugh, over to you. I know you started off the conversation, but the biggest issues that you're seeing in this space.

Hugh Smith: I definitely agree. It's always going to be in the eye of the beholder, but climate change unites everyone, because we're all living on the planet together sharing this existential crisis. But, a point that Rosa made about consumers being more informed is really important, because consumers have much more power over capital markets than they ever had in the past. The study that's been done is on the S and P 500, but it would be similar if you looked at the Canadian market or the global stock market in general. If you go back to the '70s and '80s, more than 80% of the value of listed companies was in tangible assets, so things like plant equipment, capital assets that produce economic value and so the intangible assets were less than 20%. And then fast forward today, that's completely flipped and the intangibles are now more than 80%.

So if in the '80s, a company like US Steel or General Motors did something that consumers or society disagreed with, there's still a lot of value in all of those assets. They couldn't really have a crisis like that, that would completely wipe out all of the shareholder value. Whereas if you think of a company like Facebook, there's really not a lot that Facebook could sell or salvage if society revoked Facebook's social license to operate. So as an investor, when you look at these companies, these big tech companies, being weary of the risks that are applicable to those intangible assets make up the lion's share of the values of those companies. So understanding stakeholders outside of shareholders has become more and more just prudent risk management rather than something that's good to do just for the sake of doing it, I would say.

Clare O'Hara: Great. So just to flip over now to talk about misconceptions, some of you touched upon misunderstandings or maybe the thought process from 10 years ago, but Andrew, in your view, what remains today one of the biggest misconceptions around ESG?

Andrew Simpson: I think it has to do with performance, that you have to give up performance to invest in what you deem as a socially responsible process or way and from that perspective, I think that myth has been busted. The Responsible Investment Association of Canada has done some good work there, highlighting that the average RI fund, responsible investment fund is actually, the category average has outperformed traditional funds over a five year basis for example. That was a recent study that I saw.

So, the aspect of looking at these issues and incorporating them into your investment process, really should add value, because we see it as a means of risk management so you can avoid problems, you can see it as a positive aspect in terms of investing in companies that are aligned with the positive views that you have in certain industries. And you put that together, you should end up over the longer term doing better. We've talked about the social licenses of companies to operate, I think they're getting called into question more than they used to. So, I do believe that companies are taking this much more seriously than they have in the past.  So that's great and as an investor, we are able to have much more wholesome dialogues with management on these issues.

Clare O'Hara: Rosa, I was going to ask if you agree. I see you nodding, so just some thoughts on the misconceptions around ESG.

Rosa van den Beemt: I think Andrew hit the nail on the head addressing the performance myth that the ESG industry or responsible investment industry has been grappling with for so long. I think another misconception that we still have is there are good ESG companies and there are bad ESG companies, that's something that Hugh touched on earlier as well. But because of the complexity of ESG, you can't really say this is a good company versus a bad company. There are ways that companies are both good and bad at the same time. And so how do you address those risks at the company level or sector level, it just varies on what the investment strategy is for those using an ESG investing strategy.

And then lastly I think that... This is not necessarily a misconception, but it is a challenge that we have in the industry, is that I think advisor find it still very difficult to speak to that complexity that ESG investing has. And I think that is why sometimes the uptake of ESG products or investing in ESG products, we've seen an enormous growth of new products coming on the market, but I think investments are still lagging behind a little bit because there seems to be a barrier between the ESG investing complexity, and what the advisor perhaps can translate to their clients. So, we're trying to address that in various ways. Maybe we can touch on those later but I think that's really a challenge, especially the mutual fund industry has to address.

Andrew Simpson: Yeah. I would agree with Rosa on that. I actually think this is one of the greatest opportunities an advisor has to dialogue with their clients. When you look at who takes environmental, social, governance responsibility and just climate and such seriously, it's generally the younger generation. Certainly the older generation as well, but when we talk about this big issue in the industry of the intergenerational wealth transfer, if you're not addressing your client's kids, that portfolio is at risk. And so there I think what's key here is you don't have to be an expert in this. What you're doing is starting a conversation, and you let your client guide you, because then you can take that back and understand what the risk is. In a sense, the government has given us an opportunity here because everyone owns a pipeline now. So if you don't like owning pipelines, you have a choice here in your personal investments to allocate to align your investments with your values.

Clare O'Hara: And Hugh, your thoughts on the misconceptions.

Hugh Smith: I would follow right along that line. I think there's a misconception that as an advisor, you have to be an expert in this to even get started, and a lot of the underpinnings of the client/ advisor relationship is that the advisor is the expert and the client goes to them because they're supposed to have all the answers. But I think with this, it's a very new thing, very few advisors are doing it. It's absolutely an opportunity. The Responsible Investment Association of Canada that you mentioned I think, I might get the figures wrong, but it was something like more than 70% of respondents who are investors wish that their advisors would bring up these issues and something like 20% had ever had that conversation with their advisor.

And to the performance issue, I think that's back to the very beginning on the definition of ESG and what that really is. I think a lot of people would still think of it as well there's just certain companies that we can't own no matter what, so we're shrinking our investable universe and that just on basic financial theory, hurts your overall returns if you have less companies to choose from. You might not own oil because that's the rule and then the price of oil goes down and you outperform, but that's more getting lucky than a strategy that's going to outperform in the long run.

But today ESG really is not that for most practitioners. It's considering these metrics or other issues in every investment decision, and if you were going to argue that that hurts performance, you can flip it around and then you'd be arguing that ignoring materiel risks in your portfolio companies helps performance and no one would ever take that argument. So I think the performance myth has been busted any anyone who would take the other side, it's a misconception on what ESG is rather than would it help or hurt performance.

Clare O'Hara: Great. So Rosa, I want to jump back to you for a second, your firm is particularly known for its leadership in active ownership, so I'm wondering if you can give us a brief overview of what that is and some of the benefits of active ownership for investors.

Rosa van den Beemt: So active ownership is really the idea that when you invest in a company, basically from the time that you make the decision to invest in the company along the whole time horizon that you might hold shares in that company, that you are actively looking at risk, actively trying to address that risk, actively holding companies accountable, but also making them aware of opportunities for growth. And in practice, what that means is think active ownership compasses three different buckets so to speak, or tools and ways that you can be an active investor or an active owner.

And that is corporate engagement, so that would be really sitting down with a company in dialogue with either the board of directors or management to speak about ESG issues that are material to the company. Then there is proxy voting, so really actively voting your shares, and then the third one would be policy advocacy, making sure that if you have a view as an investor on the policy level whether that be at the government level or certain institutions that create standards for certain industries that you make your voice heard so that you can create change at the broader level rather than just company by company. So active ownership, I'm really passionate about the topic because that's my daily job, talking to companies about their ESG risks and opportunities.

Clare O'Hara: Great. And Andrew, your thoughts on active ownership.

Andrew Simpson: I agree with Rosa. So within our firm, we encapsulate much of what Rosa is saying under shareholder engagement. So, we have an integrated team of ESG analysis and fundamental financial analysts and so we sit as a group together in the same office and then develop what is our engagement strategy going to be for the year, who are the companies or what are the risks that we see this year that we want to tackle and then we set about contracting the companies and engaging with them, as Rosa said. Identifying those material ESG risks that are out there that are not evident in the company's financial reporting that we haven't seen it, are you aware of this issue, how are you going to respond to this issue.

And then also on the positive engagement side, we talk about things like gender pay equity for example. So going to the big banks out there and saying we understand that there are big discrepancies here within your company, how are you going to be dealing with that. So it's quite rewarding from that perspective that you can make and investment and hopefully see a positive result from that in the future.

Clare O'Hara: Great. And Hugh, what are you hearing about active ownership?

Hugh Smith: I think there's definitely more positive stories around wins than there have been in the past. A lot more of these issues that shareholders are bringing up at the annual general meeting are being heard by management. We're seeing more and more collaboration on these things, so groups of shareholders coming together to get to that critical mass where they really could influence management. And Rosa alluded to it earlier, but it's a way to really drive impact beyond the traditional divestment or not holding companies that you disagree with.

We see a lot of investors now who hold shares in companies they disagree with and they take all of the dividends out and invest in somewhere they'd like to see but they maintain that ownership so they can vote and continue to file proxies and try to push for change in a positive way. I think it's really something that's gaining a lot of momentum and getting to critical mass where shareholders will have a lot more power to influence management in ways that are going to create long-term sustainable value.

Rosa van den Beemt: And if I can add to that, just to say that I think in a time where we discussing customers voices are louder and they have bigger expectations from the companies that they do business with but also the investments that they have, active ownership can really be a way of bringing the investor voice at the table of large companies that they invest in.

Clare O'Hara: So just following that note, how do you define success in the corporate dialogue when you're talking about active ownership? And maybe you can give us some examples of the advances you've made with companies when we're talking about active ownership.

Rosa van den Beemt: So I think there's different ways to measure success. In the very simplest way, we ask the company to do something, and they did the thing. That can be anything from they have a supply chain policy in place that looks at ES and G risks across the supply chain. It could be having a board diversity policy in place and hiring more diverse board members, women on to the board, so it could be something like that. We ask something and they did it. It could also be was the company generally responsive to the engagement. It could be that multiple investors are asking the same thing that we're asking from them so it could be that the company is not necessarily responsive to us but in general will do the thing that we expect them to do or at least show some progress towards it.

And I think that process can take a really long time. So sometimes you have a simple ask and there's a simple solution, but for certain things like systemic company-wide change it can take years and so often that means corporate engagement is an intensive long-term project that really requires a lot of resources and expertise and tenacity as well.

Clare O'Hara: I was going to say it's going to take a lot of manpower, constantly ongoing to get that success.

Andrew Simpson: I'll just add to Rosa's comment too, because it's interesting that the effort you put in, if you are engaging with a company and you have a success, it means you generally haven't gone to the annual general meeting and stood up and made a resolution. You've pulled your resolution because as Rosa said, they've done what you had asked them to address. So it's actually a big success, but it's not a high-profile published success and so the ones where you're at the AGM and asking for change... We engaged with major food distributor company about the living wage. And this was a company that everyone knows, but it's owned by some independent majorities that can control the shareholder road. But by going to the AGM we weren't able to establish the dialogue in the way that we wanted and so it went to a proxy vote and it actually raised the issue across the country, which is great. So we took it as a win that way but the ones we're happiest about is when management actually sees the risk that we've identified and does something about it.

Clare O'Hara: In the example of the food company, did they end up addressing your concern to a successful level or is still an ongoing process?

Andrew Simpson: I think it's an ongoing process. What is great though when we talk about what has happened say 10 years ago to today, I think the ability to dialogue is much better. And so people recognize these, maybe 10, 20 years ago it was a lot more of a challenge and if someone had a company that was shareholder controlled by one majority that can just say forget about it, now you can get in the front door and spend some more time with them.

Rosa van den Beemt: Yeah. So Andrew was saying something really interesting, because I think active ownership also looks different depending on what market you're in, so in Canada we tend to be quite respectful and we tend to try to dialogue with the company before we file a shareholder proposal. For example, we really want to withdraw the shareholder proposal before it gets to the annual meeting, if we can get to some sort of agreement. But then in the US for example, the strategy that responsible investors apply is quite different. They tend to file a shareholder proposal first, and then start the dialogue process. In Europe, it's even different, I think. Not a lot of investors use the shareholder proposal strategy at all, although we're seeing some shifts of European investors now trying to file shareholder proposals in the US because they can't really get anywhere through dialogue. So just interesting cultural differences across the responsible investing industry.

Andrew Simpson: Yeah, especially in the US. The first contact you get from a company is from their lawyer. And so it's litigious right from the start.

Clare O'Hara: And this might play into my next question Andrew, how do you in your firm measure the positive impact of ESG analytics? So we started talking about active ownership but what are some other elements when we're talking about the positive impact that it can have?

Andrew Simpson: On the positive ownership side, one of the key things we look at is the positive sustainable revenues. If we use the UN Sustainable Development Goals as a framework for this, I think that's really quite important, and companies are really adopting these goals as part of their overall long-term sustainability process. So for us, it's measuring companies sustainable revenues. How does that compare to just owning a benchmark for example because we're taking an active investing strategy versus a passive approach and measuring that to show that making this active approach adds value from a positive aspect.

Clare O'Hara: Right. And Hugh are you able to walk us through the process of how that works?

Hugh Smith: Yeah and back to the point in this data is more and more being considered fundamental data, and so you can do portfolio analysis using ESG data the same way you would with any other data. So you can benchmark your returns versus the index. You could also say do we have a lighter emissions intensity? So if we looked at emissions per million dollars of revenue, are we above the index or blow? Or in terms of women on the board or women in senior leadership, are we doing better than the benchmark? What sector are we good and which are we not? Which companies are dragging us down. So it is becoming much more easy to measure against those factors and see where you are being successful.

But more and more I think what success looks like is when companies are able to take one of these positive outcomes, and really bake it into their competitive advantage. I think a lot of what companies are doing they want to be seen to do good for the sake of doing good. I think a lot of people in marketing would even feel like, "Oh if it looks like we're doing this to make money, then that's not a good thing." But if you're doing it just to do it then it's inherently isn't sustainable. Because if you saw a downturn in revenues well then maybe you don't have that money to make charitable donations, but if you're doing something for the greater good that ties into your competitive advantage then it's inherently sustainable because as the market turns and you need to do more of that to protect your competitive advantage.

So just an example that might clarify that a little be it. If you looked at a software company or a financial institution, they could do a lot of planting trees, which is obviously great, but doesn't really tie into what they're doing long-term. Whereas if those same companies were to go into a demographic that they're not currently serving or a new emerging market that they don't currently have a footprint and we're going to do things around financial literacy or training on computers then they're creating a positive good for society but that's also going to feed back into what they're doing as a company and that's something that could really create a positive feedback cycle.

And we're seeing a lot of predatory lending is a big one that investors are trying to screen out. It's a more difficult one because companies don't disclose it, so you have to look to transcripts of calls or research or even news to find mentions of that sort of thing. But if financial institutions are going to go into the areas where check cashing or predatory lending was really rampant and do financial literacy then they're taking market share away from those institutions, which benefit them, it benefits the community, it benefits society as a whole. So I think those are more success stories that you're starting to see investors are striving towards.

Clare O'Hara: Great. Rosa, anything to add on the positive impact?

Rosa van den Beemt: Yeah. So I think similar to what Andrew was saying, we're also looking at the SDGs, the sustainable development goals as a significant driver of positive impact. Exactly how that is measured, there is several ways in which you can measure that. I think a positive development recently has been really the creation of standards on certain ESG topics that weren't there before. So for example the Task Force for Climate- Related Financial Disclosures, the TCFD, really has set a standard reporting framework for companies to report their climate impact, climate strategy against. It also will be applicable to investors who are signatures to do TCFD, so it's really creating that standard across industries to look at how can we look at climate risks and what are companies and investors doing to mitigate that risk going forward. So standards like those are super useful. They might not necessarily look to positive impact but they will look to mitigating negative impact and then if a company does really well on the reporting side, they will probably also look at the positive impact side of things.

And then I think we tend to use a lot of issue specific benchmarks. Things like the Access to Medicine Index, Access to Nutrition Index, Ranking Digital Rights, those are benchmarks that look at the company's performance on specific issues. Ranking Digital Rights looks for example at the world's largest ICT and telecom companies and how they address the issues of data privacy, freedom of expression, that sort of thing and then ranks companies based on their performance. So we can look a little bit deeper into company performance on specific issues that might be important to our clients.

Clare O'Hara: Great. So I want to stick with you for a minute. We've all touched upon different surveys and metrics of how much investors want to hear about ESG but how much they're actually putting their money into it. So when we're talking about the advisor community, how broadly accepted is ESG. Now I think Hugh, you pointed out that less than 20% of advisors are having that conversation, so while they're not talking to their clients about it, they're definitely looking for resources to use to begin to have that conversation.

Rosa van den Beemt: Yes and I think that even the uptake of the amount of advisors that are getting their certification through the Responsible Investment Association, there's been a significant rise in that, so you can see advisor are starting to grasp that this is an extraordinary opportunity for them to really hone in on responsible investing as a way to further grow their practice and also to keep the investors who are currently with them happy whenever the wealth transfer does happen to a younger generation. So we do see a lot of advisors coming to us to ask questions. We are trying to help advisors by creating just RI basics, simple ways that you can talk to your client about responsible investing and what it means.

We have, for example, developed a conversation based framework that really looks at what are your client's needs and instead of having to lead with are you interested in ESG product, which might create some confusion, it's really based on what are the client's needs, and if it's risk management, if it's values-based, if it's looking at how to create impact and change, all of those needs is something that responsible investing can address and so it just really depends on how you talk about it and how you create a connection with your client.

Clare O'Hara: And Andrew, what are you hearing from the advisor community?

Andrew Simpson: I think I agree with Rosa that there is a substantial increase in interest. And I think that all the companies that we work with want that to grow and there's room for it to grow. There's a greater understanding, we like to do our part to help enhance that understanding of how we approach portfolio construction. And having that integrated process for us, I think, adds value.

Clare O'Hara: Great. And Hugh what are you hearing from the advisor community in Canada?

Hugh Smith: Yeah. So I think just to echo the sentiments, it's being seen as a real opportunity to grow a practice. If you just look at the markets in general, it's well documented that passive is gaining market share relative to active, but the responsible investment side is one particular area where there's a lot of in-flows, so I think a lot of asset management firms are looking at that as a way to protect their market share because that's much more difficult to do with a passive vehicle than it is an active one. And on the retail side, it's very easy to buy inexpensive index funds, but it's much more difficult to get one that specifically address your own values and that's something where an advisor can really add a lot of value to a client.

And I think Andrew mentioned the intergenerational wealth transfer, when you look at the demographics of who really cares about these issues, it is millennials, it is women who are inheriting a lot of money, and then more immediately advisors are going after endowments that are designed to be managed in perpetuity. Things like climate risk, that actually matches up perfectly with the time horizon of their investments. And charitable foundations that are looking for an advisor to manage their money, obviously the ESG is going resonate very well with them. So from an advisor, it's big clients and millennials and women who are inheriting money in terms of protecting the business so just having a story around this really makes a lot of sense just in terms of protecting your assets under management and growing your business.

Clare O'Hara: Just to talk a bit about the flows, and we're talking about the flows and relative to traditional investments and we're talking about responsible investing mutual funds, there is a lag in assets. So what do you think is happening there and what can we do about it?

Hugh Smith: Well I think it's growing much faster, albeit from a small base, but when you look at the Responsible Investment Association did another good study on this in the UNPRI tracks the amount of money under management from signatories, I think in both cases, in Canada and by UNPRI signatories globally, it's now crossed 50%. Now, there's obviously a range of is this full impact investing or is there just some consideration of ESG, but I really think it is growing and it's growing fast, and it's getting to a critical mass, absolutely.

Clare O'Hara: And Andrew, what are your thoughts when we're talking about the flow of assets into responsible investments?

Andrew Simpson: So I think that on the individual investor side, they are growing. When you factor in the institutional assets in that, we get some pretty big numbers, especially in Europe and moving more in Canada as well. So it's moving in the right direction and from an individual investor basis, we think there's a lot more opportunity to grow here.

Clare O'Hara: And Rosa, your final thoughts on that challenge?

Rosa van den Beemt: Yeah I agree with both of them. I think that we will see a very fast acceleration in the flow of assets sometime soon. Be it because of the intergenerational wealth transfer, be it because of the awareness that consumers have developed and investors just demanding more from their investments. And also just the proliferation of different products and choices that consumers have or investors have. So I think it won't take as long as it did. It won't take another 30 years before we get there.

Clare O'Hara: Right. So just on your note about the number of products coming out, any other asset class that's starting to see a lot of growth in it as an advisor and an investor, how do they sift through all that and who do they look to, to know who is really in the ESG space?

Rosa van den Beemt: Right. It's a tricky question. There's so many products coming on to the market, so how do you define what is a good choice? I think there are a couple ways you can look at this. What is going to be meeting the values of my client of course, first of all. Then there's a difference between whether a firm's really committed to ESG, or whether it's more of an opportunistic approach, both are fine, I think. But if you're looking to really grow your practice as a responsible investment advisor, then you might be better off looking at partnering with a firm that's really more committed to the space in ways in which you can define whether or not an investment firm is committed to the space is there's now multiple standards that have come out.

So I do think you can look at is the firm a member of the responsible investment association of Canada? Are they a UNPRI?  That's United Nations Principles for Responsible Investing signatory. A lot of the reporting that signatories to the UNPRI have to do is made public, so you can look at the reporting on performance and what investment philosophies are of the different investment firms and funds.

The RIA marketplace I think has a really handy website where you can look at different products in the retail space and what type of strategies those products have. And then I think what we think is really important is transparency and accountability. You can ask questions, do you have reporting that can help me talk about this topic to my clients? Do you have any examples that you can give me where you have not invested in a company because of ESG reasons? Do you have an example of your engagement with a company and can I share that with my client? These types of simple questions I think can already make a big difference.

One other way to look at whether a firm is really committed to responsible investing is for example, asking for their proxy voting methodology. Do they generally support shareholder proposals that ask companies to perform better when it comes to climate change? Do they tend to vote with management or do they also tend to vote against management some of the time to create change?

Clare O'Hara: So Andrew, you've been in this space for a really long time, so anything to add when we're talking about where an investor can sift through all this?

Andrew Simpson: So I think from differentiating a firm, one of the things I would suggest is does the firm have it in their prospectus that they're a socially responsive investment firm and what are the key issues that they look at. It's in the prospectus, the portfolio managers need to follow that. The other aspect to look at is are you committing resources to shareholder engagement? There's a big difference between a passive investment and an active investment. My experience has been when you have an active shareholder engagement strategy in place, there's a lot of time and resources that go into that and there's a lot of good results that come out that you can share with your clients. And that's a differentiator in my view.

Clare O'Hara: Great. And Hugh, from the data, how do you sift through of what's an actual true ESG fund versus maybe something mimicking from a marketing standpoint?

Hugh Smith: With the granularity and the quality of the date you can measure your overall portfolio on certain metrics. So if the portfolio is supposed to be one that's geared towards the new green economy, but the carbon intensity is higher than the index then that would be a sign. It's difficult to just say black and white with the data, because it's going to be very nuanced, and it's going to depend on the investment mandate, and it's going to depend on the individual client. But I like Rosa's point on how transparent the management company is and the tools or the research that they provide to back things up. It doesn't need to be exhaustive research. It's not something that advisors need to spend a lot of time being on top of.

But if you're managing, or you have your client in an environmentally friendly fund, and they see a utility in there, they might be like, "Well wait a minute, this doesn't feel ESG to me," and if you don't have anything to back that up then that might be an uncomfortable conversation with your client. But if you had something saying well actually this utility is now getting more than 50% of their power from renewable sources and that's been trending up over the years, and they're actually investing heavily in environmental R and D, then maybe that utility, that on the surface seemed like this shouldn't be in my responsible investment fund, now you feel really good about it. So again, you need obviously the data to back up those decisions, but a firm that provided those talking points, that justification, I think would go a long way because as we've all said, this is nuanced. It's not lawyers immediately obvious that a company isn't good, or a bad ESG company.

Clare O'Hara: Right. So with that in mind, I want to throw out one question to the panel. Rosa, I'll start with you. One of the big conversations today is around cannabis. Every investor talks about it. It falls into a few different sectors but it's also proved to be very volatile. So what's NEI's view when it comes to cannabis and ESG?

Rosa van den Beemt: Yeah. This is a great question, and I know everyone is thinking about cannabis and investing in. Unfortunately, the industry isn't doing very well at the moment. We are currently not invested in any cannabis companies. But we decided not to blanketly screen out the industry. That's because I think we've identified some really positive ways in which cannabis can contribute both as a medicine and as a recreational product. I do think that the market is too volatile at the moment for us to be investing in it. We're long-term investors. So that isn't necessarily a good fit at the moment.

But one thing that cannabis companies need to get right is really having that social license to operate, and having that support, which means that the industry, even though it's quite young, is already looking at how they can address the ESG risks that they're facing such as product safety, reputational risks, even carbon footprint, because of the way that cannabis is grown, plastic packaging, all of those things the industry is already thinking about how to address and they're doing so quite collaboratively. So we're seeing some really positive ways in which cannabis companies are trying to address ESG risks. But I would say for now, it's really imperative that cannabis companies get their governance right so they can be sure to grow responsibility just because the growth of these companies, because of MNAs is just so rapid you need good governance and risk management framework in place.

Clare O'Hara: Right. And Andrew, your firm's thoughts around the cannabis sector.

Andrew Simpson: Yeah. Regarding cannabis, we do exclude it from our portfolios, and one of the issues that we see right now is that there is a lack of regulation especially on the recreational side. So there are some medicinal aspects, and you actually have some blue chip companies in Canada offering a retail option for those things. So the way that we approach this is we look at a percentage of revenue threshold on these companies you say this is not a cannabis company, but they may have a drugstore chain that is involved in the process, so for us we put a revenue threshold on those things. And something that down the road when Health Canada does more work, they've got more work to do here, we'll continue to review the issue.

Clare O'Hara: Great. And Hugh, is there anything to add on the data side when we're talking about cannabis?

Hugh Smith: Yeah. And Rosa mentioned a long list of issues particular to cannabis, but one of them that was really surprising in terms of why there wasn't a stronger uptake with millennials for legal cannabis was the plastic packaging issue. And I think that even really surprised a lot of the issuers, because they thought a lot about the CSR issues, or the ethical issues around mental health and product safety, but because it's Health Canada regulated, a lot of these products, even very small amounts of it have to come in a very large package that's big enough to have all of the warnings in different languages and it can't be reused because technically it is a health product and millennials look at that and well, what am I going to do with this big plastic container that I can't recycle that's going to go in the ocean? I might rather go to a dealer on the corner who's going to give it to me in a tiny little bag that I can reuse and these are the things that they're thinking about.

And another one that the issuers are starting to think about which I would absolutely commend them for is looking at what they can do for those that we are disproportionately affected by criminalization. There are a lot of people still serving jail sentences for selling cannabis and now there are companies that are worth billions of dollars who are doing essentially the same thing. So they're starting to become a little more active on lobbying on their behalf, which I think is something that society in general would value. But that's to be seen I guess.

Clare O'Hara: Great. So just before we end things, I want to give everyone an opportunity to maybe give some final thoughts and Hugh, I'll start down there with you. Some advice on investors or even advisors when they're performing due diligence on these type of products, what they should be thinking about.

Hugh Smith: In terms of specific products, I think it's tough to give advice on how to look for specific products without the client being at the table. I alluded to this earlier, but I think there's a misconception that I have to be an expert in ESG if I'm going to start doing it. There are some advisors who have really made that the brand of their practice, but I think all advisors should just be asking their clients how do you feel about these issues. I think there's a growing understanding that we're facing an existential crisis as a planet talking specifically around climate change, we don't really need to sit around and wait until we have all the perfect answers to start doing this.

Clare O'Hara: Yeah. Just start to gage with the client's perception is.

Hugh Smith: Start to gage with clients. Go on that journey with the client, and start to integrate things that resonate with your clients values and that could only make that relationship stronger.

Clare O'Hara: Great. Andrew?

Andrew Simpson: I think the one thing I wanted to say was that when you integrate ESG into your investment process, we talked earlier it manages risk. I think that shareholder expectations, concerns that are out there for the environment, all these aspects can be taken into consideration for a portfolio that you're going to invest for the long-term. Every firm has different strategies. I think that advisors can be comfortable saying you can have an ESG process that is a quarter of your portfolio, it's a niche product anymore. And that's really important. So these are assets that can go into your RSP for the long-term.

Clare O'Hara: And Rosa, final word.

Rosa van den Beemt: Yeah I would agree. I think that really responsible investing is the big next opportunity for advisors. If you have any questions or difficulty , perhaps having conversations with your clients, ask your investment funds if they can help you have those conversations with clients. Like Hugh mentioned, you don't have to be an expert. I think we're all here to help, and I think lastly to get back to that point of giving consumers and investors a voice. It's a really powerful way of engaging your client to say that with your money you have a voice.

Clare O'Hara: I couldn't agree more Rosa. That's a very good place to end it, that investors do have a voice with their money and this is an area they can certainly start to make an impact with, I want to thank you all for joining me and for really digging into a space that seems to be very quickly evolving. And thank you for giving all of your thoughts and feedback on that. And I'm your host, Clare O'Hara with The Globe and Mail and this has been Asset TV's ESG Masterclass.

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NEI Investments is a leading provider of responsible investment solutions to Canadians for over 30 years. NEI is a subsidiary of Aviso Wealth, a national, integrated financial services company serving the wealth management needs of virtually all of Canada’s credit unions as well as a range of independent financial organizations, with over $60 billion of assets under administration and management as of September 30, 2019. Aviso was formed in April 2018, uniting the talents and resources of three successful, industry-leading firms to provide Canadians with a comprehensive range of integrated wealth management services and solutions.