Case Study: Getting to a 100% Impact Portfolio
May 13th, 2019 | Jory Cohen
2020 feels different. Year over year responsible investing (RI) has gained momentum, but 2020 feels like a tipping point. It feels like the notion of “tipping point” has been used countless times to describe the state of the market, but 2020 feels different than other years.
The COVID-19 pandemic has devastated society and the economy as we know it, creating the “perfect storm” of environmental, social and governance (ESG) issues. This has accelerated both the need and importance for investors to take action. As we look forward to an economic recovery, we need to not only think about how to rebuild, but how to rebuild better.
Resilience Rules
The COVID-19 pandemic has provided the world with an opportunity to pause and an opportunity for investors to reflect on RI’s path forward. Undoubtedly, the stakes have changed over the past 6 months. The term “resilience” comes to mind when describing what investors should look for as they assess the ESG factors associated with investee companies – the capacity to recover quickly following difficulties and the ability to adapt – a fitting term for the current times.
The examination of ESG factors (particularly “E”) has historically focused on compliance and efficiency. While these are in their own right important concepts, there is a sense now that it isn’t good enough for companies to reduce costs through maximizing efficiency or to simply operate within the confines of their legal license to operate. Instead, the narrative of “building back better” will drive a shift in thinking towards resiliency and purpose. Take the oil and gas industry as an example.
There is little doubt of the impact that companies in this industry are facing and will continue to face going forward. Growth in renewable energy technologies continues to be strong, leading to a decline in prices. At the same time, the pandemic has very likely had a permanent impact on the demand for fossil fuels, meaning we may have seen peak demand for fossil fuels come and go in 2019.[1] The result is an altered supply and demand dynamic for oil and gas companies to grapple with. Mix in a commitment by the Canadian government to legislate net zero emissions by 2050 and to set more ambitious 2030 emissions targets (with a touch of more stringent regulation of course), and you get a scenario where the oil and gas industry needs to step up.[2] The good news is that this is already happening. However, while some of the largest players have made significant progress in improving their efficiency, they are now focused on positioning themselves at the forefront of the transition to a low carbon economy, including ambitious targets to cut oil and gas production and major organizational restructuring – a clear shift from efficiency to resiliency.[3]
Continuing with this train of thought, the most significant issues that we are facing today, including the climate crisis, systemic racism and the COVID-19 recovery process will not only require companies to become more resilient, but that they operate in a manner that is positively impacting the environment and society. For investors, it will be imperative to invest in companies who are on the right side of change, and not on the wrong side of it. These companies are not only resilient but will also be well positioned to meet changing consumer expectations and preferences. If investors do this, they can achieve the popular goal of “doing well by doing good”.
The Importance of Impact Investing – the “New” Kid on the Block?
Change, by definition, is difficult. As outlined in a recent report published by the Future Fit Foundation, our economy is not currently built to accommodate the concept of “purpose”.[4] Perhaps this is best captured in a quote by environmentalist Paul Hawken:
“We have an economy where we steal the future, sell it in the present, and call it GDP.” – Paul Hawken
Enter impact investing. As investors, we have the opportunity to allocate capital towards businesses that are demonstrating resilience and purpose; who are positioned to do well by doing good through achieving strong financial returns while positively impacting the environment and society. Investing with impact in mind will be a key concept for ensuring that the environment, society, businesses and our economy flourish. While impact investing isn’t without its challenges, such as defining and measuring impact, this is no reason to avoid it. Fortunately, the United Nations Sustainable Development Goals (UN SDGs) provide a holistic framework that can be leveraged by companies and investors to map their activities to areas that address global systemic challenges including climate change, inequality and poverty. These goals may have never been more important than they are today.
As an asset manager, we have been thinking quite a bit about impact investing and the SDGs, leading to the development and launch of the CI MSCI World ESG Impact ETF and the CI MSCI World ESG Impact Fund last year. Investing in companies that are contributing to positive environmental and social impact is increasingly becoming commonplace for investors that incorporate ESG factors into their investment decision-making process. This trend is likely to continue (and accelerate) as we enter a COVID-19 recovery process and continue to feel the impacts of systemic issues like racism and climate change. The transformation of RI into just “investing” has been a topic of debate in recent memory. With current events sparking a change in the way in which investors think about and approach RI, 2020 could be remembered as a year where we take a big step forward in the evolution of RI. While impact investing is certainly not a new concept, it’s positioned now to be the “new” kid on the block – the “new” RI.
Sources:
[1] https://carbontracker.org/peak-fossil-fuels-new-grounds-for-hope/
[2] https://www.canada.ca/en/privy-council/campaigns/speech-throne/2020/stronger-resilient-canada.html
[3] https://www.responsible-investor.com/articles/what-can-investors-learn-from-the-covid-19-pandemic
[4] https://futurefitbusiness.org/wp-content/uploads/2020/07/Future-Fit-Business-Beyond-COVID-19.pdf
RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.
Author
Jeffrey Chan
Director, ESG
CI Global Asset Management
