Federal Government Confirms it is Reviewing the Recommendations of Canada’s Expert Panel on Sustainable Finance

As we begin this decade, the need for action to drive Canada’s transition to a low-carbon economy has become an imperative. While we probably didn’t need reminding of the urgency of the climate crisis, last week the World Economic Forum’s 2020 Global Risks Perception Survey revealed that respondents ranked environment and climate-linked events as the top 5 most likely global risks occurring over the next 10 years. The survey respondents also ranked climate action failure as the risk with the greatest impact on the global economy, if it were to occur.

Responsible investors have long been at the forefront of understanding the systemic nature of climate-related risks, and we believe the opportunity to act is now urgent.

In November 2019, we wrote to the Prime Minister and the newly-appointed Ministers of Finance, Environment and Climate Change, and Natural Resources to re-iterate our support for the recommendations of Canada’s Expert Panel on Sustainable Finance, and noted the broad support those recommendations had within the financial sector. We encouraged the government to prioritize the Expert Panel’s recommendations, which would demonstrate its commitment to driving progress towards Canada’s transition to a climate-smart, resilient and prosperous economy.

In the Minister Mandate letters (issued on December 13, 2019), we can see that addressing climate change is definitely a priority for this federal government. The Honourable Jonathan Wilkinson, Minister of Environment and Climate Change, was tasked with leading the government’s “plan for climate action, a cleaner environment and a sustainable economy. This includes exceeding current 2030 targets and developing a plan to achieve a net-zero emissions economy by 2050.” Priorities include the implementation of the Pan-Canadian Framework on Clean Growth and Climate Change along with aspirations for clean tech, zero-emissions vehicles and other initiatives. However, none of the Mandate letters made direct mention of any Expert Panel recommendations.

Our concern that sustainable finance had been overlooked was allayed on January 14, 2020, when Minister Wilkinson wrote to us acknowledging our letter. The message we received is clear: the government acknowledges that sustainable finance initiatives have a key role to play in achieving Canada’s climate objectives. Further, he is “extremely keen to engage the private sector directly in advancing solutions” and will be working with Finance Minister Morneau to review the Expert Panel recommendations.

On January 24, 2020, we were very pleased to receive a letter from The Honourable Seamus O’Regan, Minister of Natural Resources. Minister O’Regan confirmed that he will be working closely with the Ministers of Environment and Climate Change and Finance to consider the Expert Panel’s recommendations. He also assured the government’s commitment to working towards achieving a low-carbon and climate-smart economy in Canada.

We welcome these very positive signals from the federal government. Sustainable finance is on their agenda, and they are open to engaging with the private sector to address the climate crisis. With climate-related risks looming, we are encouraged by this opportunity for responsible investors to collaborate with the federal government to enable Canada’s transition to a climate-smart economy.

An Investor’s Guide to Diversity & Inclusion: A Data-Driven Approach

With seismic corporate shake-ups like the Google walkout, Starbucks shutdown, and Paul Weiss exposé, diversity & inclusion (D&I) skyrocketed to become a top priority for the private sector in 2018. Attention to D&I has fluctuated in and out of focus for decades but new levels of transparency and accountability, brought on by social media, have firmly secured it as a business must-have.

To reflect this cultural shift, publicly traded Canadian companies will now be required to report on representation of women, Aboriginal persons, visible minorities, and individuals with disabilities in senior management and on boards.

The new regulations are designed to help organizations surface and address bias in their processes and unlock the performance benefits associated with having diverse employees and inclusive culture. This data can also serve as a powerful resource for investors looking to double-down on corporate D&I leaders. While the business case for D&I has been made over and over, new data paints an even more compelling picture:

  1. Talent attraction and retention: 30% of millennials report having already left an employer for a more inclusive one (more than half of millennials say they would take this leap)
  2. Risk management: Inclusion related scandals see an average 7% loss in market capitalization (translating to a total $4 billion USD lost in 2018)
  3. Gender diversity: companies founded and co-founded by women perform better over time, generating 10% more cumulative revenue over a five-year period
  4. Ethnic diversity: a 1% increase in ethnic diversity is associated with an average 4% increase in revenue across Canadian companies

To comply with the new legislation, all Canadian businesses will need to adopt a robust way of collecting and analyzing their employee data. At Diversio, we use technology to streamline this process. We also use machine learning to identify specific problems and tactical solutions.

Diversity and inclusion is a journey – every company has its own strengths and weaknesses. In our experience, progress can be accelerated and sustained through four steps:

  1. Diagnose problems: Step one is to collect data and create a baseline. Privacy and anonymity are key. In our experience, employees are up to three times as likely to identify as part of a minority group if they feel secure and anonymous. They are also more likely to be honest about their day-to-day experience.
  2. Benchmark performance: The next step is to compare a company to its peers. Granularity is critical. Effective companies look at diversity by role (e.g., entry level, director, executive) rather than top-line numbers. They also compare inclusion metrics, such as access to networks, flexible work, and absence of
  3. Identify solutions: The unfortunate reality is that most programs and policies designed to promote diversity simply don’t work. Too many companies waste resources implementing ad hoc programming without evidence to support effectiveness. This is where predictive analytics is changing the game. Diversio’s machine learning technology uses a company’s baseline data to identify solutions that are most likely to succeed in their environment.
  4. Track progress: Diversity and inclusion must be treated as a business priority, including tracking and accountability. Not only does this build momentum, it ensures that resources are wisely spent – especially when progress is tied to bottom-line performance.

To illustrate the types of challenges faced by industries under heaviest public scrutiny, we aggregated data for more than 60 of our banking, asset management, venture capital, and tech-sector clients based in Toronto. While many companies seem diverse from a birds-eye view, a deeper-dive shows that women and minorities are underrepresented in leadership.

Exhibit A: Representation of women, ethnic minorities and persons with a disability in Finance and IT sectors (Toronto)

While there has been a growing focus on gender diversity, there is less attention to ethnic, racial and cultural minorities, persons with a disability, the LGBTQ2+ community and socioeconomic backgrounds. Diversity data of all kinds should be collected and tracked.

It is equally important to collect and track inclusion data. Our team does this by analyzing employee engagement data through six metrics that are demonstrated inclusion drivers. These metrics are aggregated into a company’s Inclusion Score, which our clients track over time.

Exhibit B shows aggregated findings on employee experience from our sample set. It is important to note that these companies are “early adopters” of inclusion technology and may not be representative of the broader industry.

For this particular sample set, we discovered that exclusion from professional networks and low flexibility and biased feedback were the biggest barriers faced by women and minorities. Nearly twice as many women as men score their employers high for harassment. This is an even greater problem for individuals with disabilities, with nearly one-quarter reporting harassment in their organizations.

While harassment may be the most egregious form of bias and discrimination, women and minorities experience other obstacles as well. For example, one-third of LGBTQ2+ employees say they don’t have the flexibility to meet at-home care obligations, a reflection of the growing number of same-sex parents.

The systemic differences in workplace experience are further exacerbated when intersectionality comes into play. Ethnic minorities with a disability are more than twice as likely as white men without a disability to report receiving biased feedback from their managers. And one in three ethnic minorities with a disability feel that their opinions and contributions are not valued in the office.

Exhibit B: Employee experience of inclusion in Finance and IT sectors (Toronto)

What does this mean for investors?

Investors play a critical role in encouraging their portfolio companies to embrace D&I. More and more investors recognize the benefits of this competitive advantage and go as far as setting internal D&I standards and expectations for their companies. The Women in Technology Venture Fund at BDC Capital, for example, has partnered with Diversio to assess D&I across their portfolio companies. They believe this will provide a benchmark for diversity and inclusion and enhance portfolio company performance.

For investors looking to join the growing roster of industry leaders, we recommend working with your portfolio companies to collect and get smart about employee data. Set targets, identify problem areas, implement informed solutions, and track progress over time.

For investors looking to meet industry standard, we recommend integrating D&I into your ESG strategy and due-diligence process. Ask companies for metrics on their D&I performance, and incorporate this information into your investment decisions.

Across the world, governments and enterprises alike are recognizing the growing importance of moving beyond rhetoric when it comes to diversity and inclusion. Data, metrics, and technology can help investors adapt to this new normal and improve returns in the process.

The Purpose Revolution – The Friedman Doctrine Is Out; the Stakeholder Doctrine Is In

A revolution happened today – a revolution in how business leaders define their purpose.

In 1970, the economist Milton Friedman wrote: “There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” Friedman went even further by calling social responsibility a “fundamentally subversive doctrine.”

In short, the Friedman Doctrine stipulated that companies should focus solely on maximizing profits while obeying the law. For decades, this thinking has provided the theoretical foundations of how business gets done.

Until now.

Today, the US-based Business Roundtable of 181 CEOs announced that it has abandoned the Friedman Doctrine and replaced it with a new vision that focuses on a broader set of stakeholders including customers, workers, suppliers and communities in addition to shareholders.

The powerful group – which includes the CEOs of Apple, Amazon , Goldman Sachs, Bank of America, and ExxonMobil among others – now says companies should “protect the environment” and “foster diversity and inclusion, dignity and respect” for employees while also delivering long-term profits for shareholders.

The demise of the Friedman Doctrine marks a fundamental shift in how business leaders understand the purpose of a corporation. No longer is social responsibility a “subversive doctrine” – rather, it is part of the very purpose of a corporation, according to those who run 181 of the largest corporations in America.

Responsible Investors have been incorporating environmental, social and governance (ESG) issues into their investment decisions for years because they recognize that well-governed companies with strong performance and social and environmental metrics are likely to be better long-term investments. The Business Roundtable has redefined the purpose of a corporation in line with this thinking. This announcement provides leverage for responsible investors who engage with companies on ESG issues.

The Friedman Doctrine is out, and the Stakeholder Doctrine is in. We would love to see a similar statement from the Business Council of Canada (BCC). We will be reaching out to the BCC to start a dialogue.

Together We Must: Takeaways from the 2019 RIA Conference

Excitement. Urgency. Responsibility. This is what you felt if you attended the 2019 RIA Conference in Montréal on April 24th and 25th.

Roger Beauchemin, CEO of Addenda Capital and Vice-chair of the RIA’s Board of Directors, put it very simply in his opening address; the growing attendance, with a record 570 registrants and over 100 more on the waiting list, is a testament to how salient responsible investing has become – not only for financial market participants in Canada, but for us all. “I hope that you will leave this conference with a renewed sense of energy and determination to change the world, because together we can, and honestly, together we must.”

From climate change governance and women in leadership to artificial intelligence and cannabis, the two-day bilingual event had something for everyone. If you missed out on the largest ESG event in Canada, here is a look at what took place throughout the plenary sessions.

2019 RIA Conference Day 1

Artificial Intelligence: Responsible Disruption?

It seems as though new applications for artificial intelligence (AI) are rolling out on a daily basis, transforming our work tasks and presenting us with an abundance of questions. How do we ensure that data is used responsibly? How will AI affect our workforce, and what does a socially inclusive transition look like? Chadi Habib, Executive Vice President of Information Technology at Desjardins Group, joined David Beauchemin, Cloud Lead for Eastern Canada at Google, to demystify what AI really means and where it’s headed. Whether we like it or not, the revolution is here: an estimated 75% of business applications will use AI by 2021.

However, Mr. Beauchemin emphasized that just because we can apply it, doesn’t mean we should – Google follows a principled approach that limits AI to socially beneficial applications, and avoids those that cause harm or infringe on international and human rights.

Keynote – The ‘S’ in ESG: The Role of Investors in Driving Respect for Human Rights

Attendees had the privilege of hearing from Professor John Ruggie of Harvard University, architect of the UN Global Compact and the UN Guiding Principles for Business and Human Rights, in a captivating keynote address. Professor Ruggie touched on three main points: how critically important ESG has become in our extraordinarily turbulent world economy, the urgent need to drive ESG further into the mainstream, and how a more scrupulous look at the human dimension of the ‘S’ can strengthen consistency of data and confidence in ESG overall. “You cannot fix a problem with the tools that created it. We need new tools – and ESG is such a tool.”

SDGs In Action: How Are We Going To Achieve The Sustainable Development Goals?

Experts from Unilever, CN Rail, Mercy Investments and Aviso Wealth tackled the question: how can investors and companies work together to achieve the SDGs? Moderator Fred Pinto, Senior Vice President and Head of Asset Management at Aviso Wealth, set the stage with the idea that using the SDGs as a common goal will allow companies to create a framework for building a more sustainable future through new products and services. The benefit is to everyone.

The panel explored the idea that it’s not only about achieving the SDGs but also measuring businesses performance within the framework of the SDGs. If the SDGs are the world map of the future of human prosperity, health and well-being, gender equality, environmental resilience, and financial security, businesses need to unlock ways to succeed within them.

Conscious Capitalism Keynote Address

While capitalism remains the best system we’ve ever known for creating prosperity, the harsh reality is that “capitalism is broken”. Negative externalities are difficult to swallow, but can no longer be ignored. In her afternoon keynote address, Erika Karp, Founder and CEO of Cornerstone Capital, grounded the audience with a well-needed conversation about being uncomfortable.

Karp is undoubtedly one of the few people capable of delivering a speech with the perfect balance of candor and light-heartedness. “There are a lot of things that we are very uncomfortable with,” said Karp, referring to the many environmental and social challenges we face today. “The key is to grab onto those things and do something about it”. Fortunately, we’re already seeing strong momentum from different corners of the sustainable finance world: widespread adoption of ESG disclosure standards, social media driving unprecedented transparency and high-speed information exchange, the emergence of powerful data processing and improved data quality, and the largest wealth transfer into the hands of the most socially conscious and purpose-driven generation there has ever been. And this is just the beginning.

Climate Change Governance

Led by Sophie Lemieux, Vice President of Institutional Markets at Fiera Capital, the last session of the day focused on climate change’s emergence as a major corporate governance issue for companies. The onus, agreed the panel, which included representatives of pension funds CDPQ and Bâtirente, falls onto board members. They pointed to how tools offer only guidelines, not rules, and it is ultimately up to board members to address climate change risks.

Milestones, like COP21, can be used to guide climate change planning for boards, too, though regulation is needed to create mandatory climate change disclosures. Only then can investors and companies conduct proper analysis and move forward systematically.

2019 RIA Conference Day 2

Before diving into another full day of engaging discussions and busy networking breaks, the crowd received some encouraging opening remarks from Luc Fortin, President and CEO of the Montréal Exchange (MX) and Global Head of Trading with TMX Group. Having signed on to the United Nations Sustainable Stock Exchanges (SSE) initiative in February of this year, TMX has shown leadership in promoting sustainability performance and transparency in capital markets.

Education and industry dialogue are top priorities, which is why Mr. Fortin was pleased to announce that TMX had just joined the RIA as its newest Associate Member. “For TMX, collaboration is key and it’s the ultimate enabler of success,” said Mr. Fortin. “Our clients and stakeholders are our trusted partners in making Canada’s markets stronger and more resilient.”

The Future of Sustainable Finance in Canada: A Discussion with the Expert Panel

When the Expert Panel on Sustainable Finance set out to engage a multitude of stakeholders on low carbon, clean economic growth in Canada, they expected that not everyone would want to participate. Turns out, Canadians are even more generous than previously thought. Kim Thomassin, Executive Vice-President of Legal Affairs and Secretariat at la Caisse de dépôt et placement du Québec (CDPQ), and Tiff Macklem, Dean of the University of Toronto’s Rotman School of Management and ex-senior deputy governor of the Bank of Canada, spoke with Roger Beauchemin, CEO of Addenda Capital, about the Panel’s comprehensive consultation and the challenges to Canada’s low-carbon transition.

In general, the Canadian public has a hard time seeing sustainability as a financial opportunity, and nearly all roundtable participants brought up the data issues in assessing climate risks. A public-private partnership focused on collecting climate information and developing analytical tools may be part of the solution. The Panel will release their much anticipated final report and recommendations in May.

Going Long on ESG: What’s the State of Play, and Where are we Heading?

Many see Michael Jantzi, ESG pioneer and CEO of Sustainalytics, as a community leader within the responsible investment industry. In a compelling speech on the current and future state of ESG, he did exactly what a community leader would do: acknowledge the progress and confront the issues. On the positive side, the ESG long game is probably here to stay. A strong foundation, built by others many decades ago, has translated into amazing growth opportunities.

At the same time, with more opportunity comes more responsibility. “ESG, to this point in time, hasn’t been looked at as closely as it’s going to be looked at,” cautioned Jantzi. The more serious issues, however, bubble beneath the surface. “We are seeing a crumbling of civility in discourse,” said Jantzi, referring to increasing politicization and polarization of ESG issues among general populations. “If you believe that [these issues] are important to non-politicize, than we have to get involved.”

Managing Human Capital To Enhance Shareholder Value

A company is only as good as its people. So how can investors and companies work together to effectively manage people and create more value for employees, management and shareholders? Moderator Olivier Gamache, President of Groupe Investissement Responsable (GIR), was joined by panellists Armelle de Vienne, Senior Associate, ESG analysis at Rockefeller Capital Management, Valérie Cecchini, Vice President and Portfolio Manager at Mackenzie Investments, and Erica Coulombe, Associate at Millani, to discuss the many forms of managing human capital, including hiring practices, employee training, employee well-being and employee retention.

The discussion covered how managing human capital is not a singular challenge, especially when you consider differences across industries and regions. These complexities make it difficult for some companies to create a comprehensive strategy and report results precisely. But the conclusion of the discussion was clear: there is a correlation between effective human capital management and financial performance.

Women In Leadership: How Can Companies And Investors Accelerate Progress On Gender Parity?

Gender diversity at the board level has stalled in Canada and elsewhere. It’s an ESG issue that investors and companies are able to address very effectively, improving leadership and diversity at the highest rungs of the corporate ladder as a result. So, how can we accelerate progress? According to panellists Sherazad Adib, Senior Director at Catalyst, Tina Debos, Senior Consultant, Diversity and Inclusion at Bell, Vicki Bakhshi, Director, Governance and Sustainable Investment at BMO GAM, and moderator Milla Craig, President and CEO of Millani, investors have several tools at their disposal, including:

  • Introducing board term limits to encourage change
  • More engagement from investors to encourage company-level diversity goals
  • Creating mutual funds that focus on gender diversity
  • Updating legislation that reflects the perspective of investors and companies today
  • Broadening the qualifications for board positions
  • And better measurement and disclosure of diversity and inclusion

The Alpha And Beta Of ESG Investing

According to Thierry Roncalli, Head of Quantitative Research at Amundi Asset Management, the time for investors to act is now. We’re facing global issues that challenge our economic model, like climate change, and while many investors have welcomed ESG into their investment strategy, others remain hesitant. The most common question for laggards is perhaps the most obvious: what is the link between ESG and performance?

Roncalli suggests the results are mixed. Up until 2014, research showed that ESG may impede performance but more recent data is much more positive, showing a correlation between long term value and positive ESG ratings. Part of the problem is that ESG scores are relative and not absolute, so when comparing them to other indicators, like credit score, they’re less consistent.

When investors consider these additional ESG insights, like extra-financial risk and risk management in the long term, there is a strong connection between ESG and performance. Roncalli’s concluding message to an audience of several hundred investment professionals: “If we move collectively, we can see that we can move the market.”

This is a summary of the 2019 RIA Conference plenary sessions. Conference slide decks and more information on select sessions can be found below:

Next year’s RIA Conference will be held in Toronto on June 8-9th. Subscribe here for updates on registration, speakers and more! Subscribe now.

The views and opinions expressed in this article reflect those of the speakers 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 speakers. This article is intended as general information.


The Biggest Challenge to RI Adoption? It Might Be Us

Better understanding of RI and its benefits starts by changing how we talk about it.

It’s tempting to look at the rapid uptake in Responsible Investing (RI) solutions and conclude we’re doing everything right. RI assets in Canada are growing – now over $2T, up 42% the past two years. RI-focused mutual fund assets are up 34% and have grown to over $11B. And RI now represents just over half of the Canadian investment industry – up from 38% two years ago. This is just some of the exceptionally good news you can find in the latest RI Trends Report.

If we, as RI practitioners, all sat back and did nothing, it seems the RI wave would continue to grow. But sitting passively by is not in our nature or interest. And it’s a good thing, too. Because for all the success we’ve witnessed around the adoption of RI, the persistent challenges to more widespread adoption – the perception of underperformance, for example – remain squarely in our path. Until we find a way to resolve those challenges we will not reach RI’s true potential.

So how do take RI to the next level?

Let’s start by looking at the difference between institutional and retail channels in the adoption of RI. In the institutional space, which typical leads the retail trend, RI is humming along nicely. Institutional investors appear unmoved by the RI performance myth. In fact, the RI Trends Report survey found that the managers of pensions and institutional money favour RI for its risk benefits, return potential and overall fiduciary duty.

In the retail space, the growth trend has also been strong, albeit from a lower base. What’s concerning here though is the apparent disconnect between retail investors (who have made it clear they not only support companies that consider ESG factors in their operations, but also fully expect their advisors to incorporate ESG considerations into their investment portfolios), and their advisors. According Allianz Global Investors, only 14% of advisors proactively introduce RI into their client conversations.

When asked about the reluctance to incorporate RI into their practices, advisors trot out the usual suspects: performance concerns, lack of solution breadth and the assumption that since their clients aren’t asking for RI specifically, there must be a lack of interest.  We know all this to be patently untrue. And though we’ve banged our heads against the wall for years trying to overturn these perceptions with clear, seemingly irrefutable evidence, it doesn’t seem to matter.

There may, however, be another reason for the reticence, one we hear with increasing frequency. Despite the obvious potential for business growth many advisors tell us they don’t introduce RI because they simply don’t know how to talk about it. And why is that? It might be because we, the providers and promoters of RI solutions, aren’t helping them.

It all comes down to how we talk about it. Typically, we position RI one of two ways: we either lead with our values and present RI as the “right thing to do”. Or we lead with facts and argue that RI is a better way to invest. Both approaches have the potential to inhibit rather than enhance adoption.

When we lead with values, we’re asking an advisor or investor to believe in the same things we do. What are the odds of that? Like people everywhere, advisors and investors come to the table with deeply ingrained beliefs. And if those beliefs are not aligned with the values of RI, there is little chance of changing them – at least in the short term.

When we lead with the facts of RI, we run the potential for even greater disassociation. RI performance data may resonate in the institutional world, but if many retail advisors truly believe RI underperforms, hitting them over the head with our facts is unlikely to change their minds.  Advisors who have invested successfully for their clients (and after the bull run we’ve had that’s probably everyone) are unlikely to respond well to the message that they’re doing it all wrong.

So what to do?

The solution to this dilemma lies in how we frame the RI conversation. Instead of talking about what RI is, or how it works, wouldn’t it better to open the conversation with a discussion of what RI can actually do for investors? Talking about RI this way addresses what matters most – meeting investor needs.

A needs-based conversation puts advisors on much more solid ground when discussing RI as well. What advisor hasn’t, for example, talked to investors about the need to manage risk? Or uncover new opportunities for growth? These are universal needs that can be met in very distinct ways through RI solutions. There are also burgeoning investor needs such as the desire to make a positive impact beyond investment returns that only RI solutions can meet.

Framing the conversation in a manner that puts the client’s needs first also sets the advisor up to demonstrate real value, a critical consideration in a post-CRM2 world.

Ultimately, the key to making that big RI breakthrough we all want is about making the right connection with our audience. We’ve achieved a significant degree of success talking about RI the way we always have. Is that enough to keep RI growing? Or could changing the conversation lead to greater adoption?

By reframing our discussions around the spectrum of needs that RI solutions are uniquely structured to meet, we’ll make it easier for advisors to talk about RI and stand a much better chance of having both advisors and investors overcome the perceptions that currently prevent more widespread adoption.

The views expressed are those of the author and not necessarily those of NEI Investments.
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.

Case Study: Getting to a 100% Impact Portfolio

In 2016 Inspirit Foundation – a public foundation working to promote inclusion and pluralism through media and arts, support for young change leaders and impact investing – committed to a 100% impact portfolio to leverage our full asset base for financial returns and positive social and environmental impact.

We formalized this commitment in our Investment Policy Statement (IPS), which states that Inspirit’s investment decisions must be guided by three principles:

  1. Risk-adjusted financial performance
  2. Movement toward a low carbon portfolio
  3. Positive impact through alignment with Inspirit’s organizational vision

By 2020, Inspirit is expected to meet our goals for a 100% impact portfolio. Here is a major chapter of the narrative of how we are getting there:

Conducting the initial audit

When we committed to a 100% impact portfolio, most of Inspirit’s portfolio was in the public market being managed by three investment managers with balanced mandates who were tasked with investing across the asset classes of fixed income, Canadian equities, and global equities. In order to analyze the performance of our investments, we conducted an audit of our portfolio based on our updated IPS.

Measuring performance indicators

Then, we enlisted the support of our investment consultant, Proteus, to assess financial performance using four main indicators: net returns vs. benchmark, information ratio, up-market capture ratio, and down-market capture ratio. We also subscribed to research offered by MSCI to understand the carbon and impact performance of our portfolio. This research allows us to measure our portfolio’s exposure to carbon emissions. Our portfolio’s positive impact is assessed through Environment/Social/Governance (ESG) scores and revenue from products and services that contribute to the United Nation’s Sustainable Development Goals (SDGs).

Benchmarking performance indicators

Next, we benchmarked the financial, carbon, and impact performance of our portfolio against a traditional benchmark, which primarily consisted of the FTSE TMX Universe Bond, S&P/TSX Composite, and MSCI ACWI (CAD). For aspirational purposes, we also benchmarked our portfolio’s performance against the MSCI Sustainable Impact Index, a benchmark with strong financial results, a low carbon footprint, holdings that are top performers along ESG metrics, and a selection methodology that identifies holdings deriving 50%+ of their revenues from products and services contributing to the SDGs.

Finding the right expertise

The analysis indicated our portfolio had room for improvement on financial, carbon, and impact performance. In order to improve portfolio performance, we committed to transitioning from a balanced portfolio approach to a specialized asset class style. Data demonstrated to us clearly that it is rare for investment managers to consistently sustain outperformance across multiple asset classes. We determined we needed to transition Inspirit’s portfolio management from three investment managers with balanced mandates investing across asset classes to investment managers each with specialized mandates to invest in specific asset classes.

In May 2018, Inspirit released a Request for Statement of Interest and Qualifications inviting submissions from investment managers to help us satisfy the goals in our IPS within the fixed income asset class. We started our transition to a specialized asset class investment approach with fixed income due to underperformance of that asset class within our portfolio compared to our benchmark. We received a high number of quality submissions, which we scored based on five main categories:

  1. Investment firm and their commitment to diversity, equity, and inclusion – 20% scoring weight
  2. Proposed product overview, thesis, and fees – 20% scoring weight
  3. Proposed product’s financial performance – 30% scoring weight
  4. Proposed product’s carbon performance – 5% scoring weight
  5. Proposed product’s impact performance – 25% scoring weight

After reviewing and scoring all the submissions, we conducted two rounds of interviews before coming to a final decision. In the end, we were pleased to select Addenda Capital as our new manager and allocate our entire public fixed income portion of our portfolio to their Impact Fixed Income Fund.

With our investment in Addenda’s Impact Fixed Income Fund, we now have over 85% of our portfolio invested in impact investments. These investments are top performers along environmental, social, and governance metrics and ideally also earn at least 50% of their revenue by contributing to the United Nations Sustainable Development Goals.

We plan to continue to transition our portfolio from one with traditional investments to one entirely composed of impact investments, and also one with a balanced investment approach to one with a specialized asset class investment expertise. The next step is a Request for Statement of Interest and Qualifications for a global equities manager, followed by a search for a Canadian equities manager that can satisfy the financial, carbon, and impact goals outlined in our IPS. We expect to fully transition to a 100% impact portfolio in 2020.

Please follow our progress here.

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.

Navigating the Responsible Investment Landscape

Investors are faced with many options when they want to invest responsibly. To ensure they get the results they’re after, investors must first sort through the principles that support each option, starting with what ‘responsibly’ means.

In the following paragraphs, I will outline two very different understandings – first as practiced by investment analysts and second according to investor values or behavior – and then show where these two theoretical poles are beginning to merge.

Investment firms which manage portfolios on behalf of another party (including mutual funds and exchange traded funds [ETFs]) are amongst the largest investors and many are signatories to the United Nations backed Principles for Responsible Investment (PRI), based in London, England. The PRI defines ‘responsible investment’ as the integration of environmental, social and governance (ESG) factors into the analysis and selection of investments, and into ownership activities such as engagement with management and the voting of proxies at shareholder meetings.

Consistent with Modern Portfolio Theory (MPT), which among other things guides investors to broadly diversified portfolios, ESG integration does not limit the types of investments considered. Rather, it mandates consideration of the impact that material ESG issues might have on the risk and return profile of each investment – over and above what may be available from standard financial statements. Determining which ESG issues are material to a company and how to measure those issues is an emerging area of interest that has recently received a lot of high-profile support, including from Mark Carney (Governor, Bank of England, and formerly Bank of Canada) and Michael Bloomberg (former mayor of New York).

The benefit to analysts of integrating ESG factors is the potential discovery of hidden risks that are not apparent on regular financial statements and a better chance at outperformance. The benefit to society (i.e. the reason this is considered ‘responsible’) comes from public companies paying attention to the ESG issues that are important to financial analysts, disclosing and reporting on those issues publicly, and in many cases, changing their corporate behaviour. Measurement and transparency lead to better ESG outcomes.

ESG integration also requires consideration of material ESG factors on the ownership side of investing. By voting on shareholder proposals that seek better ESG outcomes, investors can further improve the ESG practices of public corporations. Large investors may even have a chance to engage directly with a company’s management on environmental, social or governance issues – a ‘behind the scenes’ opportunity which can advance corporate ESG practices considerably. Active ownership leads to better ESG outcomes.

This is only one side of the conversation. Notably, PRI’s definition of ‘responsible investment’ does not involve personal values or the screening of investments for particular trending attributes such as high carbon oil (out); low carbon wind or solar power (in); tobacco (out) and strong diversity policies (in). In contrast, many investors have strong personal views about these and other issues, and want their investment portfolios to reflect their individual values. Fortunately for these investors, there are many mutual funds and ETFs willing to accommodate their principles.

Screening of portfolios for particular attributes has a long history, rooted many decades ago in the exclusion of select stocks by certain religious organizations that were seen as anathema to their values. Eventually, the practice evolved into what is often called ‘socially responsible investing’ (SRI), ‘ethical investing’ or when tilted towards environmental issues, ‘green investing.’ It is based upon personal values and may be different for each investor. Screening may lead to a portfolio that is less diversified than MPT prescribes, but in practice, modest amounts of screening may have little impact, especially over the long term, and could have offsetting or larger benefits.

Behavioral finance theory shows that control over one’s choices instills greater confidence in the outcomes, which may result in a higher likelihood of staying invested during volatile markets. As well, investing according to commonly held values, such as concern about global warming, can send an important social signal. People often chat at social gatherings about their investments, sharing their personal perspective and affirming mutually held values. As our societal values evolve, so do the regulatory and legal frameworks that mandate (hopefully) better ESG practices. Corporations pay attention to their social licence and to the values of their consumers, and tailor their ESG practices accordingly.

Notice that the processes for the analysis-based ESG integration and the behavior-based portfolio screening are quite different. Just as neoclassical finance and behavioral finance co-exist and explain different aspects of the stock market, so to do they explain different aspects of ‘responsible investment.’ With the two different investment approaches outlined, we can now explore where they are starting to overlap in practice.

Some studies show that companies which performed well or showed improving ESG metrics often outperformed or had lower risk than their peers. While past results are not necessarily indicative of future performance, the studies do encourage further consideration and research. For example, another group of researchers is using this type of data to propose inclusion of ESG as a systemic factor within MPT – showing a robust theoretical model that ESG factors are generally underpriced in the market and that they offer higher returns and/or lower risk.

Many mutual funds and ETFs offer broad screens of ESG factors which align with commonly held values – a happy convergence of behaviour and emerging financial theory – and they may use active ESG integration as well.

While this article has focused on investment vehicles such as mutual funds and ETFs, many investors also hold stocks and bonds directly. Investors should discuss with their advisor how to best meet their responsible investment goals. Do they want to invest according to their values or follow MPT and rely on ESG integration, or use a blend of both? If values are part of the mix, it is important to ask if the investment performance of the screen is supported by research or if some diversification being sacrificed? Is there capacity to integrate ESG considerations into the analysis of stocks and voting of proxies, or should they rely on the expertise of a mutual fund or ETF?

Responsible investing is an evolving field, both in practice and in the research that supports those practices. It has a critical part to play in improving corporate transparency and environmental, social and governance (ESG) outcomes, and investors have an important role in ensuring their money contributes to these responsible results.

The information contained herein is for general information purposes only and is not intended to provide financial, legal, accounting or tax advice to be relied on without an individual first consulting with their financial advisor to ensure the information is appropriate for their individual circumstances.
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.

Case Study: 4 Lessons from a Foundation’s (Ongoing) Journey to a 100% Responsible Portfolio

As many other foundations do, the J.W. McConnell Family Foundation acts as prudent steward of its endowment to ensure that we can meet our granting priorities.

Established in 1937, our mission is to support Canadians in building a more inclusive, innovative, sustainable and resilient society. We use the lens of systems transformation — changing policies and institutional culture in order to address the root causes of societal challenges – to guide our strategy and investments. The Foundation has an endowment of $650M managed in perpetuity with current yearly charitable disbursements of about 4%.

In 2007, we also recognized that if we are to contribute meaningfully to pervasive social and environmental challenges, we will need to harness the full range of our unique assets, capabilities, and positioning, and we need to work collaboratively within and across sectors.

Creating an Impact Portfolio

We began our exploration of impact investing, which was an opportunity to attract private capital to scale impact, and complement our philanthropic objectives in the community sector. At the Board of Trustee’s directive, we started with an allocation of 5% to impact investing which subsequently became 10%.

Over the last decade, we have made impact investments across a range of asset classes (including public equities, private equity, debt instruments and guarantees) and sectors (including sustainable food, affordable housing, arts and culture, and indigenous economic development). Our impact investments have helped to advance the Foundation’s mission in at least 3 ways:

1. Target investments that advance our program objectives where debt, equity or hybrid investments can initiate or scale solutions that philanthropic dollars cannot;
2. Increase community effectiveness by enabling new financing mechanisms for charities and non-profits; and
3. Stimulate the development of a social finance marketplace through co-investments in new financial models and with like-minded investors.

Examples of the above include Renewal Funds which invests early stage in social impact companies, Community Forward Fund which provides lending capital to small and medium size Canadian charities and non-profits, and CoPower which enables green bond access for individuals, using the proceeds to invest in clean energy and energy efficiency projects.

 The J.W. McConnell Family Foundation’s Portfolio*
Total AUM: $651M

  • % Portfolio with targeted negative screen: 100%
  • % Portfolio with other RI strategies: 70%
  • Total Impact Investments: $70M
  • 26% with concessionary returns
  • 74% with market-rate returns

* Data from May 31, 2018

Growing our Commitments to Impact

As we grew our impact investing portfolio, we realized that the opportunity to harness the power of capital to advance social change was broader than we initially envisioned. A first expansion of our boundaries took place when we invested in NEI, which gave us a flavour of how you can be intentionally impactful when investing in public equity strategies. Later, we were involved through granting and investing in an Indigenous on-reserve housing project which in its pathway to scale anticipates greater involvement of the “mainstream” capital market actors, and not just foundations and governments.

This and other examples led to the redefinition of our internal practice as Solutions Finance – which we define as an integrated approach to deploying financial capital and adapting financial models to catalyze, sustain and scale systems transformation. This reframing recognizes our role as an asset owner with a diversified portfolio that can be aligned with our impact objectives, our role as a convener to encourage multi-sector collaborations, and our role as a grantmaker to support systems innovation.

A subsequent phase of our work began with a commitment to have 100% of our assets managed responsibly over the coming years. As the Canadian market evolves, with more capital being intentionally directed in this way from institutional and retail investors, and greater availability of products, we are optimistic about the opportunities to engage in this area. As we reflect on our journey, we would like to highlight four lessons from our experience that may be relevant to asset owners that already have, or aspire to, align and deploy their assets for impact.

Lesson 1 – Recognize that all of our investments have impact

An important realization for any asset owner is that all investments in your portfolio can be steered to have social and environmental impact. Although we do not yet have the required suite of tools to fully account for this, including impact measurement standards, acknowledging this reality has changed the way we view our goals and opportunities to transform systems with finance and investments. It encouraged us to use the full range of assets that we bring to the problems we seek to solve, which was important since many of the ‘wicked problems’ that exist require a range of solutions and various forms of capital along the way.

Lesson 2 – Not every investment is an impact investment

Impact investments hold “intentionality” at the core of their strategy. They are meant to direct capital to solve targeted social and environmental challenges. However, it should be obvious that not every investment can lend itself to this approach. That said, we can insist on parameters that ensure all our investments meet a minimum standard of reducing negative impacts while also progressively increasing good environmental, social, governance, corporate and general sustainability practices. For example, we can actively participate in shareholder activism with specific companies that are influential in the sectors in which we have granting programs, or in a less engaged manner require specific disclosures or increased transparency from our managers. In this way, our responsible and sustainable investment practices also contribute to improving broader social and environmental outcomes in complementary ways.

Lesson 3 – Be clear about what you are optimizing for

We deploy a range of complementary approaches across our portfolio, For example, we direct certain impact investment allocations for credit enhancement or risk mitigation for nonprofits and charities, while we direct other parts of the portfolio to scale organizations that have proven approaches and evidence in a specific area. As a foundation, we are unique in our ability to take risk through blended structures that optimize for both impact returns and financial returns; however, as we seek to maximize our impact, we will not sacrifice financial returns where it is not a fit. Evidence from us and others is that trade-off between financial and impact returns is not inherent to every impact investment; it all depends on your goals, preferences, and flexibility.

Lesson 4 – Collective action stimulates innovation and enhances results

Many private and community foundations, as well as institutional and private investors, are also committing significant dollars and time to uncovering and supporting community-based initiatives that can harness these types of capital to deliver positive impact. Our experience has shown that these collaborations are necessary to support product issuers and community initiatives to deliver on their objectives – whether it is sharing information, tools, training, networks or bringing to bear other institutional assets. Collaboration is also important as we think about designing and resourcing interventions at scale if we are to achieve the Sustainable Development Goals (SDGs). We will continue to advance in this way, and hope that many other investors will join as we work collectively towards the wellbeing of our societies and our planet.


  • https://mcconnellfoundation.ca/introducing-solutions-finance-a-new-vision-for-our-work/
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.

Understanding Material Carbon Risks in Portfolios

There is growing recognition within the investment community that climate change poses material risks to investments.

Investors are eager to understand and address material carbon risks in their portfolios not only to achieve better performance of their investments, but also to take advantage of opportunities arising from the shift to a low-carbon economy.

In addition, the Task Force on Climate-related Financial Disclosures (TCFD) and other regulatory bodies have emphasized to investors the importance of disclosing climate-related risk in portfolios and called for a focused approach to manage these risks.

Understanding climate risk in portfolios starts with investors asking two important questions. What climate risks is the portfolio exposed to? And what is the degree to which the companies in the portfolio are exposed to these risks?

Applying a materiality lens to take a closer look at investee companies reveals two types climate risks – transition risks (or carbon risks) and physical climate risks. Depending on the industry and geography, both risks could have a significant impact on a company’s business and therefore, increase portfolio risk or decrease portfolio performance.

The need to reduce man-made greenhouse gas emissions and the shift to a low-carbon economy has the potential to disrupt many established practices, processes, operations and products of companies. These risks, commonly referred to as transition risks, are spurred by regulation, customer preferences and low-carbon technology alternatives.

Physical climate risk such as threats to businesses due to heat stress, extreme rainfall, drought, storms, sea-level rise and wildfires and second-order effects such as ecosystem collapse, hunger, disease and mass migration would have serious impacts on companies depending on the degree to which they are exposed to these risks.

One could conclude that physical climate risk would continue to increase if sweeping measures to reduce atmospheric greenhouse gases are not adopted. Drastic greenhouse gas reduction measures would invariably increase the transition risks on companies as they would have to adopt and survive under these constraints.

The degree to which investee companies are impacted by transition risk requires an understanding of how these companies are exposed to these risks and how they are managing them. Assessing a company’s exposure to transition risks leads to the conclusion that different industries are exposed to transition risks differently. In addition, within an industry, companies have varying degrees of exposure to transition risk. For example, an oil and gas exploration company has significantly higher transition risk than a healthcare service provider.

This has significant implications on how investment portfolios are constructed. A sectoral view of a portfolio reveals a higher portfolio weight in high transition risk industries would inherently make the portfolio risky. This also has implications on portfolio types. An energy sector portfolio will inherently have significantly higher carbon risks than a healthcare sector portfolio. Interestingly, a well-diversified portfolio with exposure to all the sectors would have lower carbon risk as low risk sectors such as healthcare and information technology (IT) would balance out higher carbon risks from energy and utilities sectors. Another notable point would be the impact of portfolio styles, such as value or growth, on carbon risk. Typically, value portfolios tend to invest in energy and utility sectors which have high carbon risk, while growth portfolios tend to have high exposure to low carbon risk sectors such as IT.

In conclusion, both physical climate risks and transition risks will impact portfolio returns through their holdings and a careful and deliberate analysis is needed. Interestingly, these two risks have somewhat of an inverse relationship – an increase in transition risk would result in lower physical climate risk. Understanding the degree to which sectors and companies are exposed to these risks is paramount for addressing climate risks in portfolios. This would determine not only the type of holdings within a portfolio, but also portfolio type and style.

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.

RI 101: Four Ways to Spot a Responsible Investment

More and more investors are recognizing the personal and financial benefits of responsible investing (RI). Globally, RI accounts for over US$20 trillion in assets; in Canada, RI assets are well over $1 trillion.1

With steadily growing demand for responsible investments, the mutual fund industry has answered with a wide array of options. Here are some features to consider when evaluating RI funds.

1. Wide-Ranging ESG Criteria

An investment selection process that places significant emphasis on environmental, social and governance (ESG) factors is the primary feature that distinguishes RI from conventional approaches. ESG factors fall under a wide range of categories, including:

Corporate governance

  • Is there a majority of independent directors?
  • Does the company have a code of conduct and business ethics?

Sustainable products

  • Do the company’s main products or services contribute to, or detract from, quality of life?
  • Is the company developing products that advance or detract from sustainability?

Employee relations

  • Does the company have a history of good or poor employee relations?
  • Does the company contribute to employee health and retirement plans?

Employee diversity

  • Does the company have a commitment to increasing gender and ethnic diversity?
  • How diverse are the board and senior management?

Community relations

  • Are employees compensated for volunteer work?
  • Has the company been involved in disputes with the community?

Human rights practices

  • Does the board have a human rights policy?
  • Does the company monitor working conditions at supplier facilities?

Environmental performance

  • How does the company’s environmental performance compare to competitors?
  • Does the company provide regular information on environmental performance?

Different investment funds will hold companies to different standards when it comes to ESG performance. The stricter the standard, the more responsible the fund.

2. ESG Screens

Screening for ESG factors generally takes two forms: negative and positive. A negative screen eliminates companies that fail to meet the fund manager’s ESG criteria. This often includes companies with major interests in:

  • Tobacco
  • Nuclear power
  • Military weapons
  • Adult entertainment
  • Gambling

A positive screen goes one step further by seeking out companies that actively pursue an ESG agenda, such as clean energy development.

3. Shareholder Engagement

A company with a clean bill of ESG health may make it into an RI fund, but what happens if, over time, it fails to maintain high ESG standards?

This is where shareholder engagement can play a role. This involves using the fund’s leverage and influence as shareholder to call company boards and management to account. To increase its effectiveness, shareholder engagement is often undertaken by a group of likeminded shareholders.

Shareholder engagement can also be used to help ensure companies in the portfolio are dealing with new and emerging ESG risks. For example, two types of risk have recently generated significant concern among investors, communities and environmental regulators:

  1. Environmental risks associated with financing oil pipelines and other infrastructure that may contribute to long-term climate change
  2. Social risks resulting from the negative impact of pipeline construction on the rights of indigenous peoples

Portfolio managers can urge banks and other financial institutions to conduct thorough ESG risk evaluations prior to financing projects with potential adverse environmental or social impacts.

4. Willing to Put it Into Writing

With the growing popularity of RI, the market is now flooded with potential options – but that doesn’t mean they all meet high ESG standards.

If you’re concerned that some funds may only be paying lip service to RI, there is a simple way to root out the pretenders: check the prospectus for an unambiguous statement that identifies RI as a core investment objective. If no such statement is present, the portfolio manager may not have a very strong commitment to RI.

IA Clarington Inhance SRI Funds, managed by sub-advisor Vancity Investment Management Ltd., are an example of a responsible investment option that incorporates all of these features. The Inhance SRI Funds use an active, integrated approach that combines strict ESG criteria with rigorous fundamental financial analysis.


  • Global Sustainable Investment Alliance, 2016 Global Sustainable Investment Review.
The information provided herein does not constitute financial, tax or legal advice. Always consult with a qualified advisor prior to making any investment decision. Statements by Vancity Investment Management Ltd. represent their professional opinion, do not necessarily reflect the views of iA Clarington, and should not be relied upon for any other purpose. Information presented should not be considered a recommendation to buy or sell a particular security. Unless otherwise stated, the source for information provided is the portfolio manager. Statements that pertain to the future represent the portfolio manager’s current view regarding future events. Actual future events may differ. iA Clarington does not undertake any obligation to update the information provided herein. The information presented herein may not encompass all risks associated with mutual funds. Please read the prospectus for a more detailed discussion on specific risks of investing in mutual funds. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
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.