Why ESG Portfolios have Proven to be More Resilient in the Context of COVID-19

If a key investment story of 2020 is COVID-19 and the disconnect between manic markets and a traumatized global economy, a less dramatic but financially urgent sequel to that story may focus on heightened market volatility and the search for more resilient investment solutions. Environmental, social, and governance (ESG) investing has emerged as a key method for pursuing such portfolio resilience, particularly in the context of proliferating economic and systemic social risks.

ESG investing and the pandemic

At the onset of this year’s pandemic-driven volatility, signals of ESG-related strength were widely noted, both at the company level and in ESG-focused equity investment strategies. For example, a Harvard Business School working paper released in April documented how companies that the public perceived as behaving more responsibly during the March downturn had less-negative stock returns than their competitors.[1] And in a widely cited U.S. mutual fund industry study, fund rating agency Morningstar remarked that “4 times more sustainable funds finishing in the best quartile than in the worst quartile of their categories” during the first quarter.[2]

Sustainable equity funds performed well during the crisis

Q1 2020 return rank % by Morningstar category quintile

What was the key to this resilience? One reason is a widespread energy sector underweight among ESG investment approaches. As COVID-19 dealt a serious blow to the near-term prospects for global economic growth, that helped trigger an oil price collapse and major volatility across the energy sector. A structural view against the future prospects of traditional energy companies, it appeared, helped the performance of a broad swath of ESG funds versus their traditionally managed peers.[3]

Beyond the cautious sector view, the Wall Street Journal noted in late March that ESG factors, particularly social factors, could become more important at the corporate level as investor interest in companies’ approach to human capital management grew more urgent.[4] And as Morningstar’s Head of Sustainability Research for the Americas John Hale declared, ESG strategies appeared to be notably consistent outperformers because they tended to pursue the “quality companies of the 21st Century,” with a focus on “selecting stocks with better ESG credentials.”[5]

In this moment, ESG factors showed their close alliance—even an identity—with the most operative contemporary definitions of quality. Notably, though, this isn’t quality conceived as a history of profitability, but quality associated with a mix of quantitative and qualitative signals of sustainability, particularly factors that have often been called nonfinancial, intangible, or prefinancial.

In times of crisis, the prefinancial costs can become financial—sometimes, materially so—flipping the script of materiality and displacing other factors that might formerly have been deemed to have a greater impact on a company’s bottom line. One of the questions we face now concerns whether this reshuffling of factors on the basis of their materiality requires a tactical or a more strategic shift in investment approach.

The pandemic and the proliferation of social risks

As the pandemic has progressed, it appears that companies with a stronger ESG proposition seemed better prepared to weather the economic storm that no one projected would happen,[6] not to mention the social unrest that soon followed. Surfacing a range of systemic social risks, the pandemic has underscored the fragility of economic structures in relation to social factors.

According to some observers, ESG strategies have maintained an edge through 2020’s market dislocations because they’ve taken a long view on what counts as a sustainable investment across sectors. Banks and other institutions that formerly downplayed the significance of ESG investing have consequently developed a keen interest in sustainable investment characteristics.[7] We think this set of key characteristics is a dynamic but finite set of interrelated ESG factors.

Some ESG factors that we believe are most relevant to our investments

An ESG strategy’s potential for outperformance, moreover, rests on its practice of modeling different scenarios of deterioration or strength. That can mean anticipating the consequences for corporate health in the context of varying climate scenarios or the degree of positive or negative momentum due to changes in social conditions. While the social factors at issue in the pandemic have varied by region and time frame, the social factors we’ve observed as being the most material for the greatest number of companies include health and safety, labor relations, and respect for the community.

Health and safety: public health structures under pressure

Health and safety are at the center of the pandemic’s swirl of uncertainty. In March, market participants of all levels of sophistication suddenly found themselves grappling with personal and community-focused health questions that could have profound consequences for their lives, livelihoods, and investment portfolios:

  • Is it safe for anyone to go to work or for my children to go to school? How long will my family need to shelter in place?
  • Is our public health system equipped to handle the pandemic or will it be pushed past its breaking point?
  • Would resources aimed at finding a cure be allocated in a way that hastened the development of truly effective treatments for the general population or shareholder-and insider-focused profits?

There were and continue to be no guarantees that the resolution to these health and safety questions will be positive in the short to medium term, neither for the global population nor for the global economy. Faced with such staggering uncertainty, traditional asset managers and asset owners were all equally in the dark about what they could reasonably expect from their portfolios in the way of risk/adjusted returns. But because of their focus on systemic risks, ESG-strategies can be more aware of the materiality of social risks for different companies, industries, and economically interdependent regions exposed to outbreaks.

Labor relations: a major stress test for companies in hard-hit areas

At no time since the Great Depression did so many people lose their jobs or have the safety of their employment put into doubt so quickly. Consequently, labor relations swiftly became a flash point for companies across the capitalization spectrum:

  • How steadfast could companies be in treating employees empathetically—putting their health and safety, not to mention their jobs, above corporate profits? What if the crisis wears on into 2021 and beyond?
  • Would companies be able to create safe workspaces for their employees? At what cost?
  • Were companies fully aware that their behavior during the crisis might define their future ability to retain talent and customer loyalty?

In the early stages of the first wave of the pandemic, charts showing unemployment data registered an implausibly sharp spike. Within a matter of weeks, U.S. unemployment rose above 14%, indicating tens of millions of people had lost their jobs. While data was more mixed in European countries, emerging economies also faced a severe employment shock.[8] What could companies and sovereigns realistically do to protect the unemployed and the still employed but quickly overextended essential workers? How companies treat their employees in the context of once-in-a-generation financial difficulty is perhaps the ultimate stress test measuring the relative strength of the social factor across companies, industries, and sectors.

U.S. Civilian unemployment rate (%)

August 2000-August 2020

Respect for the community: positive catalyst for change?

Respect for the community has become another flash point of risk and opportunity for many companies since the onset of the crisis:

  • Would companies take pains to shift their operations smoothly—for example, by implementing business continuity plans or by putting certain operations on hold until a time of relative safety?
  • If a company operated in the presence of the general public, did it respect pandemic-mitigation measures or treat these in a more cavalier manner?
  • Did companies donate resources to help the broader community? Whether that meant donating PPE gear or converting manufacturing capacity to build ventilators, produce hand sanitizer, and so on.
  • In what ways have companies pledged to change for the long term, particularly with respect to how they see themselves and their operations having an impact on the communities in which they operate?

Many companies have shown a willingness to tread a path toward social change. Nowhere is this more evident than in the United States, where the pandemic has exacerbated tensions in the country’s ongoing reckoning over its history of racial injustice. Where companies stand on the relevant issues has more than occasionally had an impact on their business, and—on the hopeful side—these positions may become catalysts for improved results in U.S. board diversity, gender equality, and equitable compensation structures that favor broad stakeholder interests.

Sustainable investing is resilient investing

For ESG investors, the central focus is on sustainability, a condition of resiliency represented in company fundamentals and management effectiveness at managing material risks, which, in aggregate, gives companies a better chance of thriving in the future. As it was recently put in Responsible Investor, the measure of company’s sustainability comes down to “how resilient and agile [they are] in handling many stakeholders, global uncertainties, shocks and disruptions—regardless of whether these are caused by a pandemic, social unrest, or an environmental emergency.”[9]

Qualitative, prefinancial factors are accepted by ESG strategies as potential drivers of future business strength and weakness. That may be one reason why momentum continues to gather behind ESG strategies, as investors increasingly look to see whether a company has the strategic vision and capabilities to achieve and maintain strong ESG performance—in other words, long-term resiliency and the ability to manage tail risks.


[1] “Corporate Resilience and Response During COVID-19,” Alex Cheema-Fox, Bridget LaPerla, George Serafeim, and Hui (Stacie) Wang, Harvard Business School Accounting & Management Unit Working Paper No. 20-108, April 2020.

[2] “Sustainable Funds Weather the First Quarter Better Than Conventional Funds,” Morningstar, April 3, 2020. The study is cited by interactive investor, “The reason why ESG funds outperformed during the market sell-off,” March 24, 2020, and CNBC.com, “The coronavirus downturn has highlighted a growing investment opportunity —and millennials love it,”April 14, 2020, among others.

[3] Morningstar, April 3, 2020.

[4] “Coronavirus Pandemic Could Elevate ESG Factors,” Wall Street Journal,March 25, 2020.

[5] Morningstar, April 3, 2020.

[6] Of course, numerous well-known public figures have spoken in the past about the likelihood—even the inevitability—of a pandemic wreaking havoc on the global economy. See, for example, Microsoft co-founder and philanthropist Bill Gates’s 2015 Ted Talk.

[7] Wall Street Journal, March 25, 2020.

[8] “Emerging economies in full-blown unemployment crisis,” United Nations, June 4, 2020.

[9] “No Surprise: Sustainability Funds Outperform the Market—Despite COVID-19,” Responsible Investor, April 24, 2020.

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A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange trading suspensions, and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
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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.

Catastrophic Bonds and Insurance-Linked Securities: A Fundamentally ESG-Oriented Investment

As long-time investors in catastrophe bonds (cat bonds) and insurance-linked securities (ILS) portfolios, we are seeing by their nature how these specialized investments can help actively promote environmental, social and governance (ESG) considerations.

ILS are used by insurers and reinsurers as an economically attractive alternative to traditional reinsurance. With these instruments, investors put up collateral through the securitization and share in a portion of reinsurance risk in exchange for the opportunity to earn premium income.

Cat bonds are a specific segment of ILS structured as floating rate 144A bonds to transfer reinsurance risk associated with natural peril events that are remotely occurring but highly costly for insurance markets. These uncorrelated and diversifying investments further support the potential capital required of re/insurers to cover losses so that rebuilding can occur for those impacted.

We believe there are a variety of key investment factors to consider in cat bonds/ILS that speak to an ESG mindset and the asset class can inherently promote ESG.

The cat bond/ILS market is a climate risk price indicator and can serve as a market-enforcement mechanism that encourages better climate risk management.

Large ILS constituents can play a role in how re/insurance addresses climate change impacts because trends such as rising temperatures and sea levels result in increased hazard frequency and severity created by hurricanes, tornados, winter storms, hail, and flooding. Insurance underwritten to help communities and economies deal with these events is priced according to risk level and modeling assumptions from weather and insured loss-based data. The greater the exposure level that a community or property seeking insurance has to these risks, the higher the premiums for their insurance will be, potentially impacting capital levels available to protect these communities.

If a community or property has taken steps to manage or mitigate these hazards – such as better structure engineering or placing buildings and structures in locations with sustainability-based development plans – they will be rewarded with lower premiums. Alternatively, if they have not pursued sustainable development strategies geared toward handling climate change impacts, they will be penalized with higher premiums.

The cat bond/ILS market promotes social and economic welfare.

Twenty-five years ago, global reinsurance firms were the only insurance providers that communities could rely on to address damages incurred beyond the amounts covered by their initial, primary insurance. Hurricanes Katrina and Harvey, as well Japan’s Tohoku earthquake, demonstrated the importance cat bonds/ILS can play in the insurance markets’ ecosystem by providing an additional funding source necessary to help people and communities rebound.

Cat bond/ILS market growth has enabled the creation of public insurance pools, whereby local government entities and sovereign nations – mostly in developing markets – can transfer re/insurance risks to capital markets.

Developing countries such as the Philippines and Columbia issue catastrophe bonds through the World Bank that enable them to get disaster recovery capital and mitigate the setbacks to growth and economic development that a catastrophic event could create. In the case of the Philippines     , catastrophe bonds are helping to lessen typhoons’ impact on economic output.

Similarly, Mexico received a payout from a catastrophe bond issued by the World Bank after an earthquake in 2017. That money helped finance housing and public infrastructure reconstruction and rehabilitation in affected areas. Furthermore, several groups have formed a trust that purchased the first coral reef insurance policy to help support rebuilding coastal ecosystems following hurricanes’ or severe storms’ damage.

In the United States, state-run pools in Florida, Texas, and California, to name a few, have been issuing ILS for as long as 10 years to provide insurance to communities that couldn’t obtain it in private markets.

Many of the cat-bond/ILS instruments offer disaster-risk financing that is transparent and efficient.

One key ILS feature is the quick and efficient mechanism for issuing payouts once an event triggers insurance protection. These triggers are based on fully transparent measures, such as an events’ scale or losses exceeding a specific dollar amount. This design is deliberate and provides timely payouts in the wake of a disaster when money is most critically needed.

The World Bank has implemented these types of triggers successfully when partnering with developing nations to issue cat bond protection against impact from major hurricane, earthquake and pandemic-related events. In the current COVID-19 pandemic, two World Bank-sponsored bonds helped to provide financing to a handful of emerging markets in support of response efforts.

These mechanisms are a vast improvement over traditional governance of payments from private insurance markets, government, and non-governmental organizations, as those payments were not always issued in a sufficient and timely manner. 

These securities are based on insurance designed to provide additional capital sources to aid the broader societal goal of helping countries and communities recover from disastrous events, thereby creating a category of investments with ESG goals as a foundational principle.

Overall, climate change, health funding, food supply issues and compromised infrastructure can all magnify the severity of economic losses suffered by communities and nations. The result can further widen the “protection gap” as economic losses suffered from major events such as hurricanes, droughts, and pandemics cannot be adequately covered by re/insurance capital alone.

Today, the presence of cat bond/ILS investors in this market helps provide critical capital influx to boost re/insurance capacity and increase the speed of access to capital. These beneficial results provide insurers with more flexibility to address protection gaps. Closing these protection gaps is a key component of insurers’ ability to build out more resilient ESG-oriented programs.

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.

Learning from Corporate Diversity Leaders

There is a strong and growing business case for gender, ethnic and cultural diversity in corporate leadership. In terms of profitability, the most diverse companies are now more likely than ever to outperform less diverse peers.

In 2019, top-quartile companies in ethnic and cultural diversity in executive teams outperformed peers in the bottom quartile by 36% in profitability, up from 33% in 2017 and 35% in 2014, as shown in a recent McKinsey analysis.[1]

This is good news, both for society at large and for investors who make understanding corporate diversity practices an integral part of the security selection process. Given there is currently very little disclosure in much of the world by most companies on racial diversity, to scope out innovative practices our analysts have been reaching out to companies in our coverage that we consider best-in-class in sustainability and asking them how they are thinking of diversity as a key component of a strong human capital pipeline.

Our approach has focused on gathering information in the service of three main goals:

  1. Spurring management to think about racial diversity.
  2. Motivating companies to track diversity by candidly assessing their company’s workforce profile and to be transparent about it externally.
  3. Sharing insights, such as the value of informal networks within a company, in which mentorships or other internal structures increase visibility, experience and opportunity for minority groups.

Recruitment and pay equity practices are key parts of human capital management and a frequent topic of discussion with our portfolio companies. We have, for example, discussed with Intel its establishment of the “Rooney Rule”: in the program, hiring managers are required to interview at least one person of color for a job as a way to get talented people in front of managers that may otherwise have been overlooked for systemic or discriminatory reasons. This can be a way of bypassing more subjective (and thus potentially discriminatory) promotions and forcing accountability on managers that systematically overlook qualified minority employees.

Intel has also created a hotline that allows underrepresented minorities to call with questions or concerns about their immediate managers or just to get help with career choices or decisions. People that used the hotline had lower churn than those that didn’t, as it provided a way for employees to discuss more passive forms of discrimination from their immediate management. The hotline also offers something of a centralized form of mentorship; one difficulty with career advancement is that underrepresented minorities tend to have fewer informal mentorship opportunities and networks than others.

Intel also tracks cohort data to ensure that underrepresented minorities progress through the organization. Some companies explain lack of diversity in management by pointing to efforts in their infancy and noting the time it takes for them to become effective, but that ignores the fact that while entry level hiring decisions may increase diversity/inclusion, career progression tends to be more limited. Tracking and providing cohort data highlights progress in real time, rather than just pointing to an indefinite point in the future for progress to be more evident to shareholders.

CVS Health, another ClearBridge portfolio company, approaches racial equality both internally, as it pertains to employees, and externally in the targeted work CVS does for communities that are underrepresented in terms of health access. CVS has, for example, developed Colleague Resource Groups, groups of employees with shared interests or affinities with goals that help the organization. Groups include the Black Colleague Resource Group, which promotes inclusion, networking, community outreach and mentorship, Juntos, a multicultural organization of members of ethnic groups of Latin America , Pride+, focused on inclusion for LGBTQ+ employees, as well as groups focused on recognizing Indigenous peoples of the Americas environmental awareness, women’s leadership development, fitness, faith and more.

CVS highlights an opportunity for diversity and inclusion for a company that is not only one of the few companies to disclose detailed employee diversity data but is also committed to addressing the diverse health needs of the communities in which it operates. CVS has undertaken large-scale efforts to improve the health of underserved communities. Its hallmark program, “Project Health,” offers in-store health screening to large numbers of people, largely ethnic minorities, in underserved communities, then helps connect those people with primary care providers and clinics. CVS works with local health clinics and government-sponsored community health centers to enhance local access to quality care. It     also supports local food banks to address nutritional insecurity, which can have significant health implications. During the COVID-19 pandemic, the company is also making a concerted effort to set up testing sites in underserved communities.

In addition, in what is both good business and social policy, CVS adapts stores to minority community needs, tailoring its store assortment and staff to the ethnic makeup of local communities. The company emphasizes hiring store managers, pharmacists and pharmacist technicians to align with local demographics and languages spoken, particularly Spanish.

The many forms diversity programs can take speaks to the many avenues that exist for bolstering diversity in the workplace, even while overall disclosure of racial data remains a challenge, especially in the U.S. By learning and sharing insights like these from corporate diversity leaders, we hope to publicize practices and thereby help and encourage other companies to find their way toward a more diverse future.


[1] Diversity wins: How inclusion matters, McKinsey 2019.

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.

Investing for Racial Inclusion

In recent months, racial discrimination has become highly visible as citizen journalists share videos of violence and brutality against Black and Indigenous communities, often at the hands of police officers.

But racial injustice extends far beyond violence and law enforcement. Nonviolent forms of racial discrimination and inequity are present in many aspects of society, including the companies in which we invest.

Racial discrimination and Canada’s diversity deficit

In November of 2019, Boston Consulting Group published a report on diversity and inclusion in corporate Canada. The report, which was based on a survey of 5,082 working Canadians at companies with over 1,000 employees, found that 34% of those who identify as people of colour experienced discrimination in the workplace. It also found that 40% of Indigenous respondents had been subjected to workplace discrimination.

In addition, Black, Indigenous and people of colour (BIPOC) are significantly underrepresented in corporate leadership positions.

As I detailed in a previous column, publicly traded companies incorporated under the Canada Business Corporations Act (CBCA) are now required to disclose the proportions of Indigenous peoples and members of visible minority groups on their boards and within senior management. Norton Rose Fulbright, a law firm, recently analyzed the diversity disclosures of 199 corporations as of early July, and the numbers are dismal. While 64.8% of issuers reported no representation of visible minorities in senior executive roles, 75.4% reported having no representation of visible minorities on their boards.

The figures are even starker for Indigenous representation, with 96.5% of issuers reporting that they do not have Indigenous representation on their board of directors and 97.5% having no such representation in senior executive positions.

Overall, Norton Rose Fulbright found that the average representation of visible minorities is 4.7% at the board level and 7.4% at the senior executive level. These numbers stand in stark contrast to the latest available data from Statistics Canada, which show that visible minorities make up 22.3% of the Canadian population while Indigenous people account for an additional 4.9%. There is clearly a large diversity deficit in corporate Canada.

Diversity is good for values and valuation

These severe racial inequities are unjust, and they paint a stark picture of how far we have to go on diversity and inclusion. Racial inequities also mean lost opportunities for companies and investors – there is intrinsic value in having a diverse and inclusive workplace.

While a business case should not be required for society to act, the investment case for diversity and inclusion happens to be quite strong. A global study from McKinsey found that companies with the most ethnically diverse executive teams are 33% more likely to outperform their peers on profitability, while companies with the most ethnically diverse boards worldwide are 43% more likely to see higher profits.

Here in Canada, a report from the Centre for International Governance Innovation, based on an analysis of 7,900 Canadian companies, found that a 1% increase in ethnocultural diversity was associated with an average 2.4% increase in revenue and a 0.5% gain in workplace productivity.

On the risk side, Starbucks lost an estimated US$16.7 million in sales due to an incident of racism in 2018 after it shut down 8,000 of its stores for anti-bias training. The company also suffered reputational damage from negative press during the incident which Apex Marketing Group pegged at nearly US$16 million.

There is clearly a strong case for diversity and inclusion from both the values and valuation-driven perspectives on responsible investment.

Market Developments

The market is moving to help close the diversity deficit. In June, the newly established Canadian Council of Business Leaders Against Anti-Black Systemic Racism announced its formation and launched the BlackNorth Initiative to increase the representation of Black people in boardrooms and executive suites across Canada. As one of its first programs, BlackNorth launched a CEO Pledge for corporate leaders to make a series of commitments to advance racial diversity and inclusion within their organizations

In October, institutional investors managing over $2.3 trillion in assets signed the Canadian Investor Statement on Diversity & Inclusion – a pledge for investors to promote D&I within their portfolios and their institutions, coordinated by the RIA. Signatories to the statement, which include some of the largest institutional investors in the country, acknowledge the existence of systemic racism and its impacts on Black and Indigenous communities and People of Colour, while further acknowledging the existence of inequities and discrimination based on other factors including, but not limited to, gender, sexual orientation, age, disability, religion, culture and socio-economic status. Canada’s investment industry also had its inaugural Diversity & Inclusion Week – a week of thought leadership and insights for investment professionals to promote D&I in their portfolios and their organizations with over 700 virtual attendees.

Also in October, the RIA published its 2020 RIA Investor Opinion Survey based on an Ipsos poll of 1,000 retail investors, with a special focus on investors’ attitudes towards D&I in their portfolios. The survey found that 73% of respondents would like a portion of their portfolio to be invested in organizations providing opportunities for the advancement of women and diverse groups, and 72% want their fund manager to engage with Canadian corporations to encourage more diversity in leadership.

Impact investing for racial justice is also on the rise in Canada. A coalition of Black business leaders launched the Black Opportunity Fund in partnership with the Toronto Foundation. The fund will support Black-led organizations and businesses across the country. The fund’s investments will be wide-ranging, but will have a particular focus on education, health care, community support and housing.

Raven Indigenous Capital Partners, Canada’s first Indigenous-led and -owned social finance intermediary, launched the Raven Indigenous Impact Fund in 2019 to provide patient capital and technical expertise to early stage Indigenous-led enterprises. The Fund focuses on poverty reduction, community resilience and the development of an Indigenous middle class.

Funds like these will play an important role in breaking down systemic racism and advancing Black and Indigenous led businesses in Canada.

There are also opportunities to invest for racial justice in public markets. Impact Shares has developed a nonprofit exchange traded fund called the NAACP Minority Empowerment ETF. The fund tracks the Morningstar Minority Empowerment Index, providing exposure to U.S. companies with strong racial and ethnic diversity policies. As a nonprofit organization, Impact Shares donates all net advisory profits from the fund’s management fee to the National Association for the Advancement of Colored People, which provides investors with an extra layer of social impact.

As stewards of capital, investors can also engage with corporations to promote diversity and inclusion by, for example, encouraging D&I strategies and asking companies to sign BlackNorth’s CEO Pledge.


Responsible investment has deep roots in mobilizing against racism. Going way back to the mid-1700s, Quakers prohibited their members from owning slaves and petitioned the U.S. Congress to abolish slavery. More recently, in the 1970s and ’80s, international investors launched the first modern divestment campaign, diverting capital away from South African companies as a protest against their complicity in the racist apartheid regime. South African businesses lost access to global capital markets and eventually flipped, pressuring the government to end apartheid.

Now is another moment for action. Investors and advisors have an opportunity to help put a bookend on centuries of racial injustice by advancing diversity and inclusion in their portfolios.

This article was originally published in Investment Executive and has been republished with permission.

Investing in the Time of COVID-19: An Analysis of Company Performance & Stakeholder Support

“He found a glimmer of hope in the ruins of disaster” ― Gabriel García Márquez, Love in the Time of Cholera

The COVID-19 pandemic has had a profound impact on people and societies. In the world of investments, we see a silver lining in the opportunity for corporations to distinguish themselves through their support for various stakeholders, going beyond shareholders, to create long-term value. Capital markets have not been immune to the pandemic, with extreme levels of economic activity, unprecedented financial liquidity and divergence of the realities on “Main Street” and “Wall Street”. To better understand corporate responses to the pandemic, we engaged with our portfolio companies in March and April on three topics:

  1. Financial resilience and liquidity
  2. Initiatives to deal with the acute impact of the pandemic
  3. Long-term risks and opportunities

This article highlights our analysis on a sample of our portfolio companies to explore their support of different stakeholders, the potential relationship with short-term price performance and their ability to create longer-term value. Broadly speaking, we have concluded that our portfolio companies that took a focused and substantial approach to supporting key stakeholders have fared better during the pandemic and exhibit a positive bias towards higher long-term historical returns.

Who are the stakeholders?

Our sample of initial efforts by companies from across our portfolios (Exhibit 1) found that the most frequently targeted stakeholder groups were Employees and Communities. There appeared to be a clear performance boost for taking an ambitious approach that targeted more than one stakeholder group, but this diminishes as more stakeholder groups were targeted (Exhibit 2). We believe that this suggests that substantial investments focused on material stakeholders had a more positive financial impact than efforts that defined stakeholders too narrowly or spread resources too broadly. We do recognize that other factors could affect the lack of linear relationship, including industry effects (banks having poor initial performance and some technology companies having extremely positive performance), and the greater impact of outliers in the smaller number of companies in our sample targeting four or more stakeholder groups.

Exhibit 1: Stakeholders targeted with Pandemic initiatives

Exhibit 2: # of Stakeholder groups targeted and average share price performance as of August 28, 2020

What were the initiatives?

Within each stakeholder category, companies took a wide range of approaches. For employees, responses ranged from providing danger pay, telecommuting options, and enhanced hygiene and sick leave practices to committing to pay laid-off employees in full. Support for suppliers included priority payments to small businesses, pausing loan payments and providing early payments to help with liquidity, while companies targeted communities through donations and working with governments, non-profits and hospitals. Most initiatives required investment of increasingly constrained corporate resources. For some companies, this meant decreasing capital targeted at shareholders (buybacks and dividends) or executives (compensation) in order to fund investments in other stakeholders. We assess these decisions similarly to any capital allocation decision and believe that the reductions in shareholder distributions were sound long-term strategies that can decrease both systemic and idiosyncratic risks for investors and create more opportunities for long-term value creation.

Simply put, as economic activity resumes, a business that has supported key employees, customers, suppliers and communities is more likely to emerge from the pandemic with the engaged workforce, loyal customers and resilient supply chains needed to restart their normal business activity and capitalize on emerging opportunities.

Looking Ahead to Resilience and Recovery

Months in, while COVID-19’s negative impact on people and economies has been deep and broad, it has disproportionately affected the disadvantaged. A robust, sustainable recovery will likely require both governments and the private sector to tackle this inequitable distribution of adverse effects. Periods of crisis present both risks and opportunities for investors. Of course, the risk exists that companies are not as resilient as believed or that the future environment is not as supportive of their activities. In cases where the impact is broad-based, there is also the systemic risk it poses to the markets in that functioning capital markets require a properly functioning economy and society.

The biggest opportunity of these rare but impactful events (other than deep dislocations in value) is the ability to observe the resilience and culture of companies as they react to the extreme uncertainty. The observations are part of an ongoing iterative process to refine our selection and research process to improve long-term risk-adjusted returns. Key learnings so far include:

  1. Rise of “S”: Companies and investors have emphasized social factors to address the deeper impact of the pandemic on employees, customers, suppliers and communities.
  2. Stakeholders beyond just shareholders: A healthy ecosystem of core stakeholders and financial prudence will benefit long-term shareholders by preserving the value of the existing business and positioning companies for a successful recovery and emerging opportunities.
  3. Resource/Capital allocation is key: Companies that focus their resources on initiatives more deeply aligned with their long-term value creation model are more likely to produce better results for shareholders. Having the culture, people, policy and capacity to make these difficult decisions and to balance different stakeholders is a key characteristic of successful long-term investments.

Going forward, there is still much uncertainty around the timing and nature of the eventual recovery. However, we continue to expect that companies that take a financially prudent approach to supporting key stakeholders will be the best positioned to create long-term value. As investors that look beyond the next year and even next decade, our job is to observe, learn and adjust course as necessary, while using our voice as active investors to encourage our portfolio companies to do the same.

Acknowledgement: This work would not have been possible without the help of Heather Sharpe, Eira Ong, and the entire JFL Research team.

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.

How Top-Down Portfolio Managers Can Step Up Their ESG Integration

Top-down management of an equity portfolio involves analyzing major market segments, such as regions, countries and sectors.

Security selection plays a decidedly secondary role. Yet, responsible equity investment is based mainly on information specific to individual securities, namely the increasingly mainstream ESG criteria. That being said, there is nothing to prevent managers who use a top-down approach from implementing credible responsible investment. We propose to do so by building investment universes that are consistent with managers’ decision-making levers and ESG-related objectives.

An investment universe adapted to the top-down style

For a top-down strategy to be implemented in an investment universe, this universe must be representative of the reference market. Take the example of managers who want to invest in European banks. Their primary objective is to invest in a representative subset of the European banking industry. Exposure to the subset is more important than selection of individual securities. This principle is generally applicable to all the decision-making levers specific to top-down management. Thus, all the major segments of the reference market (geographical and sectoral) should be well represented in the investment universe.

ESG criteria and the importance of setting objectives

The ESG criteria are numerous and varied: they include carbon footprint, water intensity, board independence, workplace mortality rate and so on. To guide the construction of a responsible investment universe, it is important to set precise and measurable objectives.

The objectives are used to evaluate the selected methodology. Does it truly enable the managers to meet their responsible investment targets? Representativeness of the reference market, referred to above, is a requirement that often leads to application of ESG criteria by market segment, occasionally with undesirable or unexpected effects.

Carbon footprint is a prime example of a criterion whose application by market segment can prove problematic. Managers who remove 200 securities from a global index by targeting the largest emitters by market segment reduce the carbon footprint per billion dollars invested from 94 tons to 55 tons. Even so, four of the world’s 10 largest emitters are still present because, despite their mediocre performance relative to the broad market, they stand out in their sector of activity. What is acceptable to one investor may be unacceptable to another – hence the importance of setting clear objectives.

A methodology that achieves its objectives

While the previous example calls for the development of specific objectives, it also illustrates the importance of ensuring that the selected methodology can achieve them. We think a methodology that combines global divestment filters and market segment filters gives managers sufficient flexibility to construct investment universes that combine the requirements of top-down management with varying degrees of ESG integration intensity.

Eliminating all tobacco industry securities is an example of a global divestment filter. It guarantees the best possible performance in terms of this specific ESG criterion, but at the same time it eliminates the decision-making levers, namely the allocation to this industry and the stock selection within the industry. The use of global divestment filters should therefore be limited to those ESG criteria on which the manager or the client is not willing to compromise.

As for market segment filters, they are designed to select those companies with the best performance relative to their peers. Thus, they do not eliminate segments of the reference market or decision-making levers. They usually offer a good compromise between ESG objectives and management requirements.

A simple example

Let’s take the example of an investment universe applied to the developed country equity market and apply three divestment filters and two criteria per segment.

Table 1

The analysis of the resulting investment universe should answer two questions:

  1. Are the ESG objectives met?
  2. Is the universe sufficiently representative of the reference market for deployment of a top-down strategy?

Table 2 answers the first question in the affirmative. For all the ESG objectives selected, the investment universe gets a much better rating than the broad market.

Table 2

We can conclude from the figures in Table 3 that a top-down strategy could be deployed in this universe. All sectors are well represented, and the number of well-represented countries is even higher than that of the reference market. The relative importance of large caps is sufficient and the estimated volatility is similar to that of the reference market.

Table 3

This simple example shows that top-down managers can achieve ambitious ESG objectives while allowing themselves enough decision-making leeway to implement their investment strategy.

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.

Diversifying Diversity: Going Beyond Representation

The issue of diversity has had some growing up to do. While investors have traditionally focused diversity engagement on gender, which is relatively easy to measure because data is available, recent global anti-racism protests have forced corporations and investors to re-examine diversity priorities.

Public debate about systemic racism is also set against the backdrop of the stark realities of the COVID-19 crisis, which has had a disproportionate effect on vulnerable communities, underscoring the need for companies to prioritize long-overdue issues around racial inclusion, worker protections, pay equity, business ethics and human rights.

Expectations of companies as well as of us as asset managers have changed, and investor engagement on diversity can no longer focus on gender or representation issues alone: the topic of diversity has diversified.

Business Case

A changing global marketplace, evolving stakeholder demands and reputational risks, coupled with more robust research on the value add of diversity in general, has made diversity a corporate differentiator. Research shows that having diversity at all levels of the organization combats tunnel vision, can lead to better identification of risks and opportunities, fosters innovation and correlates with better performance.[1] And, companies proactively addressing discrimination issues tend to have better employee engagement, healthier work cultures, less reputational risk and better brand engagement.[2]

Despite this evidence, progress on gender diversity is still not where investors want it to be, and progress on racial or ethnic diversity in the corporate workforce, especially at corporate leadership levels, is significantly lagging recent progress made on gender diversity. The varying levels of (un)available diversity data globally presents a challenge to investors. This is where engagement comes in. Globally, our engagement focuses on:

  • Strategy-setting at the top
  • Setting targets and measuring progress
  • Hiring practices
  • Equitable pay
  • Employee engagement
  • Education and training

Diversity: different in every context

We consider diversity within an organization to be beneficial regardless of geographical location.* Given the varying regulatory environments, stakeholder groups and cultures that a corporation may operate in, the focus for diversity for one may not be suitable for another. There are obviously regional and market specific areas of focus that all should be aware of, but how they are addressed will often vary and evolve. We discuss some examples below.


Diversity for many investors started with a focus on gender. The 30% Club, founded in 2010, is an example of a group that has helped drive genuine change, particularly in boardrooms around the world.

Local cultural context is key. In Japan, where progress on gender diversity in corporate leadership has been slow, female talent historically was not supported through child caregiving years and the long working hours culture negatively affected opportunities for women to advance their career. Through our engagement on diversity in Japan however, we were able to identify good practices. For example, JPX, in order to promote diversity, has recognized it needs to reform how it views work, improving flexibility and recognizing the productivity that different work styles can bring. It implemented several initiatives including schemes to support child caregiving and career training, specifically aimed at supporting women throughout their career development.

Ethnicity, race and indigeneity

What diversity of ethnicity looks like varies regionally. Ideally, a company’s workforce and leadership reflect the make-up of the society it operates in. Again, understanding context is key: what are regional underrepresented groups and how does historic discrimination still manifest today? In the US, only 3.2% of executives and senior manager-level employees are Black while Black people represent 13.4% of the US population. In Canada, where Indigenous people make up close to 5% of the population, they make up far less than 1% of senior executives and board members. That indicates there are structural barriers to advancement.

Investor engagement on racial diversity is not as well-established as engagement on gender diversity. However, this is changing at an accelerated pace. Several asset managers have publicly announced engagement frameworks around racial diversity on U.S. boards. The U.S. Racial Justice Investing Coalition (RJI) recently released a statement whereby investors commit to embedding racial justice into investment decision-making and stewardship strategies.[3] In Canada, the RIA’s recently released Investor Statement on Diversity & Inclusion, calling on investee companies to enhance diversity and inclusion efforts of underrepresented groups, including Black, People of Colour and Indigenous people, represents another significant step forward.

In our engagements with North American companies on racial diversity this year, we’re encouraged to learn that boards are already feeling the investor pressure and are prioritizing the search for diverse director candidates.

Experience and background

Companies with global operations benefit from having an experienced mix of directors as well as leadership with backgrounds and experiences reflecting the regional customer and employee base. We see this as a particular issue in Japan and Korea where an organization may have a large global operational footprint that is not represented in any way on the board.

ESG context is also key: in order for companies to be prepared to address increasingly complex material ESG risks and opportunities, having senior leadership and board members with ESG-related expertise can be a particular advantage. For example, the number of directors sought with cyber security expertise has accelerated in recent years.[4] We have also seen (and advocate for) an increase of directors with climate change-related expertise, specifically for companies operating in sectors for which climate change poses a material risk. Lastly, the COVID-19 crisis has shone a bright spotlight on the need for worker protections and human capital management risks; as such, it is no surprise more policy makers and investors are considering the benefits of having employee representation on boards.

Which types of diversity should investors focus on?

The following questions can help investors determine what types of diversity to encourage at investee boards, senior leadership and other levels of the organization:

  • What is the cultural or socio-economic context a company operates in and how are related challenges addressed?
  • What is the company’s geographic footprint and customer base, and is this reflected in its workforce and leadership?
  • Does the company’s workforce and leadership reflect the diverse make-up of society in the region it operates?
  • Are there sector-related material ESG challenges that a specific mix of diverse talent can better help address?
  • How does the company report on its diversity performance across the workforce, and on diversity and inclusion efforts?

Beyond representation

We note that a company’s social licence to operate could be threatened if it does not address the expectations of its stakeholders, which can include expectations on diversity within the organization. However, diversity and inclusion efforts are only one part on the path towards solving systemic inequality. Beyond addressing representation issues in the workforce and C-suite, companies must reform business models and actions that profit from perpetuating inequities. This spans from companies benefitting from prison labour, to surveillance software with inherent racial biases, or marketing strategies that target vulnerable communities. Investor engagement can help companies align with the UN Guiding Principles for Business and Human Rights to enhance their social license to operate and be better prepared to address social inequities and related issues such as human rights, indigenous rights, living wages and worker protections.

Key takeaways

  • Diversifying investor engagement on diversity is crucial to understanding the risks and opportunities companies are facing as well as to meeting wider societal and client expectations;
  • Assessing how diverse a company and its leadership is requires understanding cultural, regional, historical and ESG contexts;
  • To address matters of equality we have to look beyond diversity and inclusion to business models profiting from perpetuating inequality.

Further reading

  • Racial Justice: The imperative for investor action – August 2020 BMO GAM ESG Viewpoint
  • A focus on gender diversity – March 2020 BMO GAM ESG Viewpoint
  • BMO GAM’s Expectations on Social Practices statement – March 2020


[1] McKinsey & Company: Delivering Through Diversity

[2] https://www.weforum.org/agenda/2020/07/racism-bad-for-business-equality-diversity/

[3] https://www.racialjusticeinvesting.org/our-statement

[4] https://www.forbes.com/sites/chenxiwang/2019/08/30/corporate-boards-are-snatching-up-cybersecurity-talents/#47b755e3479f

* We consider diversity to include gender, ethnicity or race, Indigenous status, sexual orientation, age, disability, background, experience, religion, culture and socio-economic status.

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.

Anti-Microbial Resistance: An Underestimated Threat to Global Health

Very often the greatest challenges we face as a society are recognized in their infancy by specialists whose warnings go unheeded, allowing difficult but solvable problems to escalate into full-blown crises. The most salient case in point is climate change, which today would likely not be the existential threat that it is had we taken bolder action decades ago.

An emerging danger to humanity with potential for harm as great as climate change, anti-microbial resistance (AMR) threatens the stability of health care systems worldwide and creates the very real possibility of returning us to a world in which a simple cut to the finger can lead to severe illness or death. Fortunately, we have time to contain or even eliminate this threat, but to do so we must redouble our efforts to improve awareness and take meaningful action that strikes at the root of the problem.

Understanding Anti-Microbial Resistance (AMR)

AMR occurs when bacteria and other disease-causing microbes develop resistance to previously effective drugs. In the U.S., the Centers for Disease Control (CDC) estimates that AMR causes at least 2.8 million illnesses and over 35,000 deaths annually. As a result of AMR, antibiotics may no longer work to treat even common infections.

A wide range of medical procedures rely on effective antibiotic treatments, including organ transplants, chemotherapy, and dialysis for end-stage renal disease. Antibiotic, antifungal, antiviral and anti-parasitic medications form the backbone of modern medicine, highlighting the urgency facing the health care community in addressing AMR. The need for action is recognized by the United Nations (UN), World Health Organization (WHO), and national authorities such as the CDC.

The development of AMR occurs across multiple avenues. The use of antibiotics for growth promotion and disease prevention in livestock is of particular concern to regulators and consumers. According to the U.S. Food and Drug Administration, 70% of antibiotics prescribed in the U.S. are used in animals. The sub-therapeutic doses used for disease prevention and growth promotion are more likely to result in the development of resistance than a shorter, high-dose therapeutic course. In addition, increased presence of AMR in the food supply directly threatens human health as diseases caused by resistant bacteria tend to be more severe and have fewer treatment options.

Regulations covering antibiotic use for animals have been increasing. For example, in California, farmers must obtain a prescription to use medically important antibiotics in animals. The EU banned the use of antibiotics in animals for growth promotion and the WHO published guidelines strongly recommending a complete restriction on the use of these antibiotics for growth promotion and disease prevention, absent a diagnosis.

These encouraging first steps are partly a result of increased public awareness and concern. Surveys consistently show that a majority of consumers prefer meats raised without antibiotics. This has been reflected in the growth of antibiotic-free meat sales, estimated by data analytics firm Nielsen to have increased 28.7% each year between 2011 and 2015, compared to 4.6% for conventional meat.

But AMR has a far more insidious and less widely understood avenue for development. A landmark 2017 study showed that wastewater runoff from major overseas pharmaceutical manufacturing plants has created a virtual breeding ground for AMR. The study found that “[t]he presence of drug residues in the natural environment allows the microbes living there to build up resistance to the ingredients in the medicines that are supposed to kill them, turning them into what we call superbugs. The resistant microbes travel easily and have multiplied in huge numbers all over the world, creating a grave public health emergency that is already thought to kill hundreds of thousands of people a year.”

Weak environmental standards for overseas manufacturers make meaningful change a daunting task. A key pillar of a potential solution will be to exert pressure on domestic firms that outsource their manufacturing operations. Governments can also leverage trade and other agreements to persuade problem countries to adopt and abide by waste management best practices.

Investing in a solution

Vancity Investment Management Ltd. (VCIM), sub-advisor to the IA Clarington Inhance SRI Funds, has a robust shareholder engagement program that includes a deep commitment to finding real solutions to the problem of AMR.

Over the last decade, VCIM has engaged with companies over 200 times, with more than 30 companies engaged in 2019 alone. Our work in the area of AMR includes an active role in the Farm Animal Investment Risk and Return (FAIRR) initiative. This involves engagement with 20 global food companies to encourage the adoption of antibiotics policies and the phasing out of routine, prophylactic antibiotic use across all supply chains, with clear targets and timelines for implementation.

We believe that through these and similar actions, we can reduce the suffering caused by AMR and ensure that the benefits of over a century of medical advancements can continue to result in longer, happier lives.

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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 the portfolio manager or sub-advisor responsible for the management of the fund’s investment portfolio, as specified in the applicable fund’s prospectus (“portfolio manager”) 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. Specific securities discussed are for illustrative purposes only. Mutual funds may purchase and sell securities at any time and securities held by a fund may increase or decrease in value. Past investment performance of a security may not be repeated. 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, brokerage fees and expenses all may be associated with mutual fund investments, including investments in exchange-traded series of mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Trademarks displayed herein that are not owned by Industrial Alliance Insurance and Financial Services Inc. are the property of and trademarked by the corresponding company and are used for illustrative purposes only. The iA Clarington Funds are managed by IA Clarington Investments Inc. iA Clarington and the iA Clarington logo, and iA Wealth and the iA Wealth logo, are trademarks of Industrial Alliance Insurance and Financial Services Inc. and are used under license.

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.

The “COVID Cut” is Not Enough: Addressing the Negative Social Impacts of Excessive Executive Compensation

Since the onset of the pandemic, we have seen an extraordinary display of corporate solidarity aimed at protecting employees and supporting customers and community. One such display has been the significant number of voluntary pay cuts taken at the executive level at hundreds of publicly-traded corporations in Canada and the U.S.

Though commendable at first glance, these pay cuts – most of which are temporary – are largely symbolic. Why? Because the cuts have been taken at the base salary level,[1] and base salary tends to make up only a tiny fraction of total executive compensation. The bulk of CEO pay, for example, is in the form of equity-based awards, which typically make up 80%to 100% of total compensation in North America, as shown in the chart below.

Figure 1: Distribution of Equity-based awards as a percent of 2019 CEO pay packages

In reviewing executive compensation in 2019, NEI found base salaries in Canada did not exceed $2.5 million;[2] and in the U.S, they did not exceed US$5 million. And some CEOs, such as those at Facebook, Akamai Technologies Inc. and Prologis (all company founders) earned just one dollar in base salary.

However, factoring in equity-based awards increased CEO pay exponentially. Total CEO compensation reached as high as $24 million in Canada for the CEO of Restaurant Brands International; and in the U.S. the high was a whopping US$280 million for the CEO of Alphabet.[3]

Based on this evidence, it’s safe to say that when it comes to executive compensation a cut to base salary is really no cut at all.

Equity-based compensation is the monster we created

These findings are a stark reminder that the exceptionally wide (and growing) compensation gap between top executives and their employees is structural in nature – and it’s a structure we as investors helped create. Equity-based compensation was introduced by investors in the 1990s to help incent executives to lead their companies to increasingly higher valuations. And it worked well – too well. Executive compensation has skyrocketed and equity-based compensation is now viewed as a key contributor to income inequality, having helped concentrate wealth in the hands of the top 1% and widening the gap between executives and their employees.[4]

To rectify this situation – and it’s high time we did – we need to return to structural origins of executive compensation, and acknowledge that investors have been complicit in perpetuating this inequity. That means putting a stop to effectively turning a blind eye to excessive compensation in proxy voting and paying much closer attention to the evident negative societal impacts associated with excessive compensation. And it also means recognizing that while company values have climbed under this structure, there is a growing body of evidence that suggests excessive pay does not necessarily add value, and worse, that the opposite may be true.[5][6]

How much is too much?

Putting a dollar figure on the word ‘excessive’ is of course fraught with challenges. However, at NEI we believe it’s a necessary step that allows us to systematically vote the proxies of companies in our funds when it comes to compensation issues. We attempt to quantify ‘excessive’ from a societal perspective by setting a cap on total executive compensation when comparing it to the median household income in Canada and the U.S.

Today that means total compensation between $12.7 to $17 million at Canadian companies, and between US$22 million to US$25 million in the U.S. is considered excessive. We also recognize these thresholds will need to evolve in light of the growing societal impact of income inequality exacerbated by excessive executive compensation.

North American CEOs are amongst the highest-paid globally. Reflecting our longstanding concerns about the negative social and economic impact of income inequality, NEI sets a cap on the level of pay for CEOs or other executives that we can support in the U.S. and Canadian markets. Our test for defining very high quantum relates CEO total compensation to median household income, an indicator of the financial well-being of typical families. In the absence of any precedent to follow, we set our range of concern as follows:

  • U.S. companies: 350 to 400 times the amount of the U.S. median household income – approximately U.S. $22 million to $25 million in 2020
  • Canadian companies: 150 to 200 times the amount of Canadian median household income – approximately C$12.7 to C$17 million in 2020.

Different thresholds are used to reflect the reality of higher CEO pay and greater income inequality in the U.S. Examining the level of CEO pay in the broader societal context is one of the factors we use to assess executive compensation. We continue to apply our pay-for-performance voting guidelines to all compensation plans, whether or not the CEO pay falls in the range of concern that triggers additional scrutiny. For more details, please see our Proxy Voting Guidelines.

And you need to look beyond the topline numbers to really see that impact. Based on 2019 compensation levels, NEI’s cap identified excessive levels – some extremely excessive – for CEOs and/or executives at 12 companies listed on the S&P/TSX Composite Index and 67 companies on the S&P 500 Index. While relatively small in number, these companies significantly influence our economy and society, employing nearly 8.5 million people and representing about 21% of total S&P/TSX market capitalization and more than a third (US$10 trillion) of the S&P 500.

The problem is clearly bigger than it looks at first glance. The question is, where do we go from here?

The road to compensation reform starts with investors

We believe there is merit to de-emphasizing financial incentives for executives in favour of a more balanced structure to compensation –one that includes purpose–and sustainability-driven incentives tied to the successful improvement of working and living conditions for all stakeholders. This approach is, after all, the primary objective of the revised “Statement of the Purpose of a Corporation” backed by the Business Roundtable in 2019. The 181 CEOs who comprise the Roundtable committed to “lead their companies for the benefit of all stakeholders –customers, employees, suppliers, communities and shareholders”. Fixing executive compensation would be a great place to start.

And to reiterate, that start needs to focus on changing the structure of executive pay. While it’s tempting to reduce the inequality challenges posed by executive compensation to a simple equation – less pay for executives and more for the workforce – such actions would not likely impact stakeholders in any meaningful way, especially at the largest companies. For example, if the total pay package paid to Walmart’s five highest paid executives was reduced by 15%, that US$15.5 million distributed equally among the company’s 2.5 million workers would add up to only six dollars per year extra in the pockets of Walmart employees.

There are more effective and sustainable ways to use and re-allocate the capital. Creative solutions include enhancements to employee benefits, funding of employee trust funds, workforce education and training, paid internships and scholarships, and financing community initiatives with clear benefits to everyone.

Whatever the solution, it needs to start with investors demanding change. An initial step would be to shift the language investors use to vote on executive compensation packages by emphasizing more on a broader stakeholder alignment and incorporating societal impacts in pay level analysis. The status quo which narrowly focuses on shareholder value will only continue to negatively impact long-term investment performance, hinder economic growth and destabilize society, is no longer acceptable.

NEI will continue to report on the many challenges posed by executive compensation in a post-COVID world throughout 2020 and 2021.


[1] From March to August 2020, over 600 companies in the Russell 3000 announced voluntary pay cuts for their executives and/or board members. In more than 70% of the cases, CEOs and top executives committed to cut their base salary by at least 20%, and 17% of the CEOs said they would give up or defer their total base salary for 2020. https://conferenceboard.esgauge.org/covid-19/payreductions, accessed September 9, 2020.

[2] Data source: Bloomberg

[3] Data source: Bloomberg

[4] PRI (2018). Why and how investors can respond to income inequality (p.33)

[5] Marshall and Lee, 2016 cited in Economic Policy Institute

[6] A study on the most overpaid CEOs in the S&P 500 found that the average annual total shareholder returns in the three years before a high pay package were essentially the same as those in companies without excessive pay. Then, in the nearly four years after the high payout, the group of companies with the most overpaid CEOs underperformed against the S&P 500. Retrieved from: As You Sow (2019). The 100 most overpaid CEOs: Are Fund managers asleep at the wheel? https://corpgov.law.harvard.edu/wp-content/uploads/2019/03/100MostOverpaidCEOs_2019-1.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.

Corporate Diversity: A Key Ingredient for Innovation and Addressing Emerging Challenges at Companies

In a rapidly changing world, companies that are able to anticipate and adapt to new conditions and environments are likely to be more resilient and better positioned to navigate the emerging challenges these new conditions create.

Companies’ adaptability is rooted in their innovation, but innovation is a difficult quality to assess.[1] Yet there are proxies that can indicate a companies’ ability to foster innovation.

MSCI ESG Research looked at the role that talent management practices might play in promoting innovation and setting companies apart.[2] We found that global companies recognized as innovators[3] were leaders in specific areas of talent management practices, including diversity. The recognized innovators had more gender diverse boards of directors on average than their industry peers and were almost twice as likely to have had a persistent critical mass of at least three female directors for three years running.[4] According to the report “diversity may reflect a culture that is open minded and comfortable with differences, focused on accessing and retaining the best talent available, and eager to cultivate creativity and diversity of ideas.”[5]

The problem is not enough companies seem to be taking advantage of the existing, diverse talent pools in their regions. MSCI ESG Research examined ZIP-code-level demographic data to better assess the talent pool available in US companies’ commutable zones for a report called Racial Diversity & Talent Utilization.[6] The report compared US companies’ voluntary employee racial data against their region’s demographic data. And found that often, companies employed lower rates of minorities than were available to them: only 55% employed Blacks and Latinos at rates proportional to their representation in the communities the companies operated.[7] The percentage of companies that proportionally promoted Blacks and Latinos to management positions was even lower: only 14.3%.[8] This underutilization of talent could prevent companies from unlocking innovation capabilities and increasing the overall qualification of their workforce, senior managers and board of directors.

While our research on racial diversity was limited by companies’ disclosures[9], we have conducted extensive research on gender diversity and its benefits. For instance, in the Women on Boards 2019 Progress Report we observed that “in emerging markets, female directors and executives were actually more likely than their male counterparts to have financial expertise.”[10]

In Canada, while there have been board gender rebalancing advancements[11], companies have failed to reach gender parity and still fall short with respect to other forms of diversity. Despite Canada’s multiracial and multiethnic population[12], only 34%[13] of Canadian companies in the MSCI ACWI Index (as of Sep. 22, 2020) who are required to disclose diversity statistics and policies under the Canada Business Corporation Act[14] reported having at least one visible minority director. Only 8%[15] of companies disclosed that they had at least one Indigenous director and 8%[16] reported having at least one director with a disability. While 61%[17] reported having at least one visible minority among their senior management, the ratios for Indigenous people and people with a disability in senior management were lower: 8%[18] and 5%[19], respectively.

As companies face complex and unfamiliar challenges ahead – whether caused by a global pandemic or climate change – they will require all the tools at their disposal, including their ability to leverage people’s diversity of expertise, background, experience and perspective to innovate and find new solutions and opportunities. Investors may want to engage with companies to broaden management capabilities and board oversight effectiveness by increasing diversity.


[1] Solomon, Brian. May 12, 2015. You’re doing innovation wrong. Forbes; De Jong, Marc, N. Marston, and E. Roth, April 2015. The eight essentials of innovation. McKinsey Quarterly; Hamel, Gary and N. Tennant. April 27, 2015. The 5 requirements of a truly innovative company. Harvard Business Review; Yu, Larry. July 2007. Measuring the culture of innovation. MIT Sloan Management Review.

[2] Eastman, Meggin. T. 2018. The Right Stuff: Talent Management and Innovation Capacity. MSCI ESG Research

[3] By Fast Company, Forbes, the Boston Consulting Group, and/or the MIT Technology Review

[4], [5] Eastman, Meggin. T. 2018. The Right Stuff: Talent Management and Innovation Capacity. MSCI ESG Research

[6], [7], [8], [9] Frazer, David and Mollod, Gillian. 2019. Racial Diversity & Talent Utilization. MSCI ESG Research

[10] Emelianova, Olga. and Milhomem, Christina. 2019. Women on boards 2019 Progress Report.

[11] Ibid. Between 2016 and 2019 there was an increase in the percentage of total director seats held by women among the Canadian constituents of the MSCI ACWI Index (moving from 22.8% in 2016 to 29.1% in 2019).

[12] Canada 2016 Census

[13] In accordance with information available at the companies’ 2020 management proxy form. It includes two REITs, which are not subject to the Canada Business Corporation Act (CBCA) but have reported trustees’ diversity statistics mirroring the CBCA requirements.

[14] An Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act and the Competition Act (S.C. 2018, c. 8)

[15], [16], [17], [18], [19] In accordance with information available at the companies’ 2020 management proxy form. It includes two REITs, which are not subject to the CBCA but have reported trustees’ diversity statistics mirroring the CBCA requirements.

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