Inclusive Growth: A Multi-Asset Framework on Indigenous Rights and Reconciliation in Investing

As Canada continues to face hard truths about the past and present experiences of Indigenous Peoples, governments, businesses, and individuals seek to contribute to reconciliation in myriad ways, albeit with varying degrees of success. The investment industry can be a significant lever for progress; recent surveys and academic research join a growing chorus urging capital markets to do more. Multi-asset investment managers can address Indigenous rights and reconciliation in the investment process by using different tools and investment vehicles, unique to each asset class. Below we offer insights on how investors can integrate Indigenous rights via a multi-asset lens.

Managing Risks in Equity Investments

Financial relevance is generally the primary lens through which equity investors view environmental, social and governance (ESG) factors. For many industries, Indigenous relations could impact investment outcomes. Energy, mining, and utilities companies have long faced financial, operational, and reputational risks associated with poor Indigenous relations. Protests and construction delays, legal challenges, and adverse market sentiment can have real financial consequences for companies that mismanage their license to operate in Indigenous communities. The Dakota Access Pipeline and Keystone XL Pipeline are two of many recent examples that illustrate these investment risks. Indeed, in the United States, as of March 2021, the extractives sector faced the highest number of controversies about alleged adverse impacts on Indigenous populations, such as environmental degradation, human rights concerns, and social inequalities.¹

Several tools are available to build an investment process that considers and integrates Indigenous rights and relations. Data, for example, is especially important for asset managers with large equity portfolios – i.e., potentially thousands of companies – in active and passive funds. Such investors need to be able to efficiently, and at scale, identify and monitor on an ongoing basis companies with high-risk exposure or poor historical performance in this area. While the extractives sector overall is commonly known to face risks associated with Indigenous relations, not all companies may operate in Indigenous communities or on or near traditional Indigenous lands. Furthermore, data on which companies have implemented best practice policies and programs – such as those aligned with the UN Declaration on the Rights of Indigenous Peoples (UNDRIP) and free, prior and informed consent (FPIC) – or which companies face related controversies can help narrow the engagement focus. It can also help track progress of portfolio companies over time.

Stewardship activities such as engagement and proxy voting are also effective mechanisms for exercising influence on Indigenous issues amongst investee companies. In addition to advocating commitment to UNDRIP and FPIC, investors could encourage companies to better report the impact of their operations on Indigenous communities. Setting clear proxy voting guidelines and policies on Indigenous relations can enhance investor communication on expectations. Supporting related proposals or voting against directors in situations where controversies are present and/or progressive policies are lacking also emphasizes investor accountability on this topic.

Fixed Income and a Framework for Impact

For debt investors, leveraging data and engagement are also ways to manage downside risks stemming from poor Indigenous relations at both corporate and non-corporate issuers. But there are opportunities to contribute to positive impact more directly in the fixed income space. The green, social and sustainability bond market is quickly growing. In 2021, debt issuances under various sustainability labels surpassed $1.5 trillion USD globally, doubling from $747 billion in 2020. Some analysts expect it to reach $2.5 trillion in 2022. These instruments have the potential to advance reconciliation with Indigenous communities, so long as the bonds are structured in alignment with recognized principles.

Investors seeking to participate in these bonds should have a due diligence process based on established frameworks – such as those set out by the International Capital Market Association. The frameworks should specify acceptable use of proceeds to ensure the investments’ impact serves the needs of Indigenous communities. They can also include use of proceed categories which identify activities that support the socioeconomic advancement and empowerment of Indigenous Peoples, and/or categories like affordable housing and access to healthcare. Bond frameworks should also include quantifiable and measurable metrics to keep issuers accountable to stated goals.

Real Partnership in Real Assets

While consideration of Indigenous rights and issues in equity and fixed income investments may produce socioeconomic benefits for Indigenous communities, an investor’s influence on actual outcomes is tangential at best. However, in alternative investments, specifically in real assets, the ability for investors to contribute to Indigenous Peoples’ economic independence can be much more direct. For example, real estate investors can lease land directly from Indigenous Peoples for new property development – a long-term arrangement that can generate wealth for both investors and the local community. Additionally, real estate strategies can establish manager due diligence frameworks and selection criteria that consider Indigenous rights, especially for managers and properties located within or near Indigenous communities.

Infrastructure projects can also be opportunities for collaboration with Indigenous Peoples. In fact, the ability to win contracts and obtain regulatory approval from governments may depend on Indigenous ownership and participation, via seats on the board, as an example, where they are in a capacity to manage these projects alongside investors. Approaching and structuring projects in this way – particularly projects tied to the energy industry or impacting natural capital – can be critical to an inclusive and just transition to a low-carbon economy.

This is by no means an exhaustive list of the ways multi-asset managers can promote Indigenous rights in the investment process. Investment innovation can play a role in this space. We must also move beyond the common industries given the systemic nature of this issue in Canada and abroad. Furthermore, true reconciliation requires the investment community to meaningfully reflect and act beyond investments – within organizational diversity and inclusion efforts, procurement vendor policies, and engagement with Indigenous organizations. All this to say: there is still much work to be done.

Sources:
[1] Block, Samuel. (April 2021). Native Americans’ Pivotal Role in US Climate Change Agenda. MSCI ESG Research. This report contains information (the “Information”) sourced from MSCI Inc., its affiliates or information providers (the “MSCI Parties”) and may have been used to calculate scores, ratings or other indicators. The Information is for internal use only, and may not be reproduced/redisseminated in any form, or used as a basis for or a component of any financial instruments or products or indices. The MSCI Parties do not warrant or guarantee the originality, accuracy and/or completeness of any data or Information herein and expressly disclaim all express or implied warranties, including of merchantability and fitness for a particular purpose. The Information is not intended to constitute investment advice or a recommendation to make (or refrain from making) any investment decision and may not be relied on as such, nor should it be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. None of the MSCI Parties shall have any liability for any errors or omissions in connection with any data or Information herein, or any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

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Author

Samantha McDonald

Vice President, ESG Research and Engagement

TD Asset Management (TDAM)

Samantha McDonald joined TD Asset Management in June 2021, as Vice President in the ESG Research and Engagement team. She plays a lead role in TDAM's active ownership and stewardship efforts. Samantha has more than 12 years of experience in the ESG investing space. Prior to joining TDAM, she was Executive Director and Global Head of ESG Issuer Communications at MSCI ESG Research, where she was responsible for overseeing all interactions with MSCI-rated issuers worldwide. Samantha has worked as a business developed lead in Canada for ISS Corporate Services, and also spent several years as an ESG analyst, covering primarily the IT and Health Care sectors. She holds a Master of Arts degree in Political Science from Wilfrid Laurier University.

Aidan Jeffrey

Intern

TD Asset Management (TDAM)

Aidan Jeffrey is currently a law student at the Hillary Rodham Clinton School of Law at Swansea University. He has held internship positions with TD Bank in Indigenous Trust Services and TD Asset Management in ESG Engagement and Research. Aidan contributed research to this article.