Solving for Sustainability – One Opportunity at a Time

For the last decade, environmental social and governance (ESG) investing has grown swiftly. Overall, it was an impressive year for sustainable funds: in 2020, 3 out of 4 beat their Morningstar Category average, and far more (42%) ranked in the top quartile than the bottom (6%).

The COVID pandemic has shone a spotlight on the inextricable link between sustainability and high quality, growing businesses that can circumnavigate market disruption. In fact, proactively finding companies that are addressing sustainability challenges in the world is an opportunity waiting to be uncovered: it’s these enterprises that will benefit from long-term, structural growth tailwinds, and performance upside. From renewables and climate change to urbanization and supply chain management, sustainability spans a multitude of megatrend themes (some more obvious than others), and holding these investments means positioning portfolios for future growth.

Identifying the status quo disruptors

At BMO Global Asset Management, we start by defining these sustainability challenges, and we use the UN Sustainable Development Goals (SDGs) as a qualitative guide, looking for companies that actively align their solutions with these targets. It’s moving beyond how they conduct themselves and the ESG factors they consider. How do their products and services contribute to a more sustainable world? Next, we assess whether we can tie the company’s current or future revenue to this theme, and if there is an opportunity to reduce costs. For example, can a company use less water or fuel and therefore improve its environmental footprint? If one or both answers to these questions is yes, then we know – over the medium and longer term – that there is a direct ESG-linked path to increase revenue and improve operations, which translates into higher earnings per share.

Our approach is to fully recognize risks and to identify the trailblazers that are capable of disruption through rigorous analysis – the companies that harness the intellectual property, technology, skill, scale and expertise to address these sustainability challenges and create long-term value in the process. We look for businesses with strong moats, that are led by visionary management teams who are asking what the future is going to look like, and how can I position my company to benefit?

Embracing change: from renewables to affordable housing


Consider Brookfield Renewable Partners (BEP), which is a global leader of renewable power assets that’s accelerating decarbonization worldwide, with an attractive growth profile in a sector with a long runway for expansion. Competitive cost structure, regulatory support and corporate carbon emission targets are driving investment – and innovation – into renewables. In Europe and North America alone, 45% of power today is derived from either coal or gas, and if that capacity falls by half in 10 years, that equates to $500 billion of new investment required. The company is poised to prosper as a result: currently, its annual generation of 57 terawatt-hours avoids 27 million metric tons of CO2 per year, which equates to all of London’s annual carbon dioxide emissions. Its development pipeline has similar prospects, and BEP has the size, scale, capital and operational expertise required to execute on its growth plans.

Supply chain

The greening of the supply chain is another focus. 2020 has seen sweeping changes in consumers’ purchasing and consumption patterns. Lockdowns have driven a parabolic use of e-commerce, pulling industry adoption forward by several years – products are being delivered to a higher number of destinations and at a higher frequency than ever before. With increased logistics, a growing number of companies are now looking to streamline their supply chain – from fleet efficiency and fuel costs to carbon emissions. How can corporations minimize environmental impact and boost profitability at the same time?

Descartes Systems is a company that holds the solution in its hands – providing software for global logistics and supply chain management that helps a wide range of customers from American Airlines to FedEx to CVS Pharmacy. Descartes’ software is used to optimize routes and ensure that trucks and planes have full loads resulting in reduced fuel use and number of trips. Thousands of trucks are removed from the road every year because of Descartes’ software. For example, one customer, Home Depot, cut 10% of its fleet in 2019. It’s the ideal example of a company deploying innovative technology to help others transition to greener practices, while benefiting its own bottom line.


Another example is CN Rail, Canada’s largest railway company, with a solid track record for creating shareholder value and reducing carbon footprint. Railroads are 4-5 times more fuel efficient than trucks for moving goods across long distances: one train can replace 300 trucks on the road and can move 1 tonne of freight 220 kilometres, with one litre of fuel. While still early days, the company is also well positioned for a paradigm shift to hydrogen fuel. Once this technology is built at scale, railroads will be one of the biggest beneficiaries from this transformation.

Real Estate

Many don’t realize that real estate is also a major emitter of carbon and it’s one of the most basic and essential services as everyone needs somewhere to live; during the pandemic, many of us also now work and attend school from our homes. This makes housing a sustainable opportunity, as a sector that’s supported by structural positives such as long-term population growth, rising home prices and supply restraints. Within our portfolio, we invest in a few companies seeking to address these challenges, including Canadian Apartment REIT, one of the country’s largest multi-family property owners that provides reasonably-priced, quality rental units in high growth, expensive markets. The business has made continued energy-efficient building upgrades to minimize resource consumption and simultaneously cut its operating costs, while it continues to bolster growth through accretive acquisitions.

Tricon Residential, whose portfolio is largely U.S.-based, has significant scale in single family housing, and is dedicated to ensuring new and future developments are built to green LEED® standards. Both companies, which have a long history of value creation, have also committed to supporting residents that have been negatively impacted by the pandemic through compassionate care programs and rental payment plans.

If 2020 has taught us anything, it is that our status quo was unsustainable – whether it’s from a health, environmental or a social perspective – and that we’re capable of change, with companies and individuals alike adjusting to a new normal characterized by the unfolding pandemic. As asset managers, the task is actively engaging with businesses to understand whether solving for sustainability is truly part of their DNA, and how they’re embracing the opportunity to help create a brighter future for the world – and their investors.

Contributor Disclaimer
This communication is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance. BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp., BMO Asset Management Limited and BMO’s specialized investment management firms.
®/™Registered trade-marks/trade-mark of Bank of Montreal, used under licence.
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.

Building ESG into the Alternative Protein Terrain

The growth engine of 21st century food

The alternative proteins sector currently represents around 1% of the protein market – but is predicted to eat up 60% of the total meat market share by 2040.

This growth is driven by nutritional insecurity, health and climate risks and shifting consumer demands. The environmental case for alternative proteins as a sustainable solution to soaring protein demand is compelling. Livestock accounts for 14.5% of global GHG emissions – but Beyond Meat says its burger generates 90% less emissions than its beef equivalent.

Three technologies are driving the future of proteins: plant-based replaces animal proteins with plant species, fermentation utilises microorganisms to produce plant proteins and cultured meat uses stem-cells to create lab-grown animal protein.


Alternative proteins are being positioned as the sustainable growth engine of the 21st century food industry. According to FAIRR analysis, over $3.1 billion was invested in plant-based and cell culture in 2020.


This positioning dovetails with growing investor interest in standardising ESG risk analysis across sectors. For alternative proteins, this standardisation is complicated by the diversity of technologies and company types in the market (start-ups, multi-national meat companies and public listed companies).


FAIRR is building a standardised ESG framework to help investors navigate this landscape. Alternative proteins can and should play a role in mitigating environmental impacts of growing global protein demand. But with growth comes the inevitable question: what ESG challenges do alternative proteins firms face?


Material ESG risks for alternative proteins

1. Emissions

Crop cultivation is likely to be the main driver of value chain GHG emissions for plant-based companies. For cell-based technology, emissions will be highest at processing facilities. Studies speculate industrial-scale cellular meat could have climate emissions comparable to pork or poultry production.[1, 2] Securing contracts with renewable energy providers is vital to mitigate climate risks.

2. Sourcing

A key risk for plant-based companies is monoculture farming, whereby same species are grown each year, leading to soil degradation and biodiversity loss. As companies expand they should incorporate regenerative agricultural practices. Natural winners here will use legumes and lentils as ingredients, which support carbon sequestration.

3. Circular Economy

Innovative firms have an opportunity to step up the food industry’s contribution to the circular economy. For instance, to eliminate waste, Impossible Foods is piloting a reverse osmosis system, re-using wastewater from its heme manufacturing. Oatly is leading on circular brand packaging with sustainable packaging made from renewable sugarcane materials.

4. Labour

Farm labour has material risks with safety issues connected to crop production, from exposure to toxic pesticides to extensive use of migrant labour. Structural labour issues could arise from the displacement of workers in carbon-intensive meat industries if cell-cultured meat reaches commercialisation.

5. Food Safety

Since alternative proteins use new technologies and ingredients, the risk of scandal and litigation is high: the FDA is currently facing litigation over its approval of Impossible Foods’ soy leghaemoglobin, heme. Engagement with regulators, rigorous food safety and consumer transparency are essential to allay concerns and build resilience.

6. Nutrition

Nutritional development is a core component of competitive advantage – given consumer concerns about processed plant-based products, which can be high in sodium and saturated fats. Firms should be careful of unsubstantiated health claims and constantly improve the nutritional composition of products. For instance, Beyond Meat is launching two burgers with better nutritional profiles in 2021. 

7. Governance

Traditional governance issues are material even for food disruptors like alternative protein companies. Beyond Meat has already minimised conflicts of interest.  Companies should conduct materiality assessments and adopt board-level oversight on sustainability issues.

Navigating the new food frontier

To navigate this ever-changing sector, investors must adopt an ESG lens. The early integration of ESG risks ensures investors avoid the pitfalls of conventional proteins. Key questions to prioritise are:

  • Have they disclosed Scope 1, 2 and 3 emissions and set targets to reduce them?
  • Is there visibility on types and origins of crop sources?
  • Is sustainable sourcing in supply contracts incorporated?
  • What food safety measures does the company have?  
  • Is the company responding to nutritional concerns?
  • Has it conducted a publicly available materiality assessment?


[1] Warner, R.D. (2019). Review: Analysis of the process and drivers for cellular meat production. animal, [online] pp.1–18. Available at:

[2] Odegard, I. (2021). LCA of cultivated meat. Future projections for different scenarios. [online] CE Delft. Available at:

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.

To Maximize Your Energy Transition Exposure, Think Thematic

Asset owners have for years known and understood the risks associated with climate change – the threat it poses to companies, countries and people. And they’ve taken action. We’ve seen the signing of the UN Principles for Responsible Investing by scores of asset owners and managers and large-scale divestment from fossil fuels by individuals and institutions representing over US$14 trillion.[1]

But while signatures and divestment can help, they won’t power the future. Facing us on the road ahead is a giant economic and societal leap from old ways of producing and consuming energy to a new energy economy that is sustainable, effective and looks nothing like what’s in place today.

Dubbed the “Great Energy Transition”, this jump from old to new is happening now and it’s being driven by powerful themes that are fundamentally changing how we produce and consume energy.

Fueling this transition is a large and growing set of industries, sectors, and companies that are doing and making what’s needed to support the transformation. We believe this represents an unprecedented opportunity for asset owners to invest early on and make a meaningful contribution to a sustainable future. But getting exposure to these opportunities can be a challenge – especially if asset owners take too narrow an investment approach.

Environmental, social and governance (ESG) managers saw tremendous inflows in 2020 even amid the COVID-19 pandemic. On the surface at least, an ESG integrated approach sounds like it’s checking all the right boxes for asset owners when it comes to investing sustainably. Look under the hood, however, and some limits become evident.

A side by side comparison of sector exposure in the MSCI and MSCI ESG indices (focused primarily on companies with positive ESG behaviours) shows the two are barely distinguishable from one another (Figure 1).

Figure 1: Sector exposure – MSCI World vs MSCI World ESG

Contrast that to the sector exposure of our Mackenzie Global Environmental Equity Fund and FTSE Environmental Opportunities – where industrials and utilities are leading the way, two sectors in which companies are actually doing the work needed to transition to new forms of energy (Figure 2).

Figure 2: Sector exposure – MSCI World vs FTSE EO vs Mackenzie Global Environmental Equity Fund

Focusing only on ESG integrated strategies can limit investors’ potential to benefit from the growth that is going to come with the energy transition. On the other hand, we believe companies that make the “stuff” for the low carbon, sustainable economy represent a massive opportunity for investors, provided they start looking in the right place.

Environmental thematic strategies identify industries and companies based on themes driving climate change as well as the solutions to facilitate the leap from old to new forms of energy. Those opportunities revolve to a great extent around how we create and use energy – and they are vast.

Today, the world consumes about 14 billion tons of oil equivalent energy (160,000TWh) each year to power our $88 trillion global economy.[2] A stunning 84% of this energy comes from fossil fuels.[3] In addition, much of our current power infrastructure will exceed its operating lifespan and need to be replaced, at a time when global electricity demand has been growing at 2.8% a year.[4]

Many of the solutions to this problem are right in front of us. Since 2012, solar and wind power have been gaining market share. And, although solar is about two to three per cent and wind about five to six per cent of current global generation, the cost of building new plants is half that of building new gas or coal generating plants.[5] Last year alone, 90% of new electricity generating investment went to renewables.[6]

But it’s still not enough. Back in 2009, the International Energy Agency (IEA) predicted the world would need $37 trillion in investment by the year 2030 to stabilize greenhouse gas emissions at sustainable levels and to avert the worst of climate change.[7] According to the OECD and the Mackenzie Greenchip team’s own analysis, $2.5 trillion in annual investment is required to deliver on its climate change goals. In each of the past four years, however, investment has only been about $800 billion leaving a $1.7 trillion gap.[8]

To understand where the Great Energy Transition is already having a profound impact, you need only look at how some major sectors are changing and the investment that will be needed in the coming years:

  • Transportation: Cars and buses increasingly will be powered by electricity.
  • Construction: LED lights are replacing incandescent and fluorescent bulbs while gas and oil furnaces are being replaced with electrified heat pumps optimized with computerized building energy management software systems.
  • Manufacturing: Specialized engineering firms are redesigning factories, replacing old blowers, stampers, conveyor belts with energy efficient ones driven by variable speed motors, power management semiconductors and computer systems.
  • Agriculture: New precision technologies will change how we fertilize and irrigate agriculture.

It’s also worth noting that, while thematic strategies offer exposure to some big names like Siemens, Hitachi or Johnson Controls, the vast majority of holdings are companies that are probably unfamiliar to most people. Instead, thematic investors can tap into an opportunity that includes manufacturers of power infrastructure and companies that produce and sell the equipment needed to make the economy more resilient for the future. While they aren’t big brand names, these companies have vitally needed products and services.

Given the spectrum of opportunities, we believe asset owners can’t get enough exposure to this transition through typical ESG integrated strategies alone. They must also consider allocating to investments more directly involved in the Great Energy Transition and through an environmental thematic lens. ESG should be viewed as one tool in the kit – but it likely isn’t the entire solution. A thematic approach can help investors to zero in on themes that matter.

The energy leap has created myriad new ways of thinking about and addressing climate change – and it truly is the path forward to a sustainable future.


[1] Source: Go Fossil Free

[2] BP Statistical Review of World Energy 2020 & Our World in Data 2019

[3] BP Statistical Review of World Energy 2020 & IEA April 2020

[4] Global Energy Statistical Yearbook 2020

[5] Lazard Levelized Cost of Energy Analysis 2020

[6] Tech Crunch November 2020 & Renewable energy defies Covid-19 to hit record growth in 2020 The Guardian November 2020

[7] “World needs $48 trillion in investment to meet its energy needs to 2035.” International Energy Agency, 2014.

[8] Private Finance for Sustainable Development. Remarks by Angela Gurria, OECD, January 29, 2020.

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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.
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.

Why Climate Change Is a Vital Input for Building Portfolios

Climate change and efforts to curb it will have major economic outcomes, not just far into the future but even over the next five years. Yet climate change is completely ignored in most economic projections or long-term return expectations. As a result, many investors are making asset allocation decisions that are based on unrealistic future scenarios.

Since climate change is real, we believe the two scenarios to compare are: one, a transition to a low-carbon economy and; two, a no-climate-action scenario with no mitigation of damages. This comparison turns on its head the commonly held view that tackling climate change has to come at a net cost to the economy. On the contrary, it should drive significant improvements relative to no mitigation measures being taken.

As our base case, we assume an orderly “green” transition takes place, in line with the IMF’s recommendations, including subsidies for renewable energy. Without those actions, we estimate physical and other climate-related damages could lead to a global cumulative loss in economic output of nearly 25% over the next two decades1. The transition to a more sustainable world has only just started, and we see it as a historic investment opportunity.

A framework for incorporating climate change

Why is it that climate considerations are rarely included? It is challenging to do so. No one knows yet what a low-carbon world will look like and climate change projections are highly uncertain. This is due to the complexity of modelling the dynamics and myriad dependencies between climate and carbon emissions, economic variables and mitigation policies. But the difficulty involved in modelling climate change is no excuse to ignore it altogether.

At the BlackRock Investment Institute, we recently updated our capital market assumptions (CMAs)– our long-run estimates of returns across asset classes – to account for the effects of climate change. While this represents our best assessment, we acknowledge this is an uncertain endeavour and we will work to refine it as we learn more.

The framework we use contemplates the macroeconomic impact of climate change, the repricing of assets to reflect climate risks and exposures, and the effect on corporate fundamentals.

Consider each of these three channels in turn. First, macroeconomic variables will almost certainly be different in a world that is transitioning to a sustainable future. We see changes in so-called risk premia for all asset classes – the compensation investors require for holding them.

Second, the price investors are willing to pay for sustainable assets is changing. A BlackRock survey in September 2020 found 425 institutional investors planned to double their sustainable assets under management in the following five years to 37%. We see changing investor preferences spurring a climate change-led repricing due to the falling cost of capital for sustainable assets. Once this repricing phase has passed, we believe this channel will eventually no longer be a boon for “greener” assets’ expected returns.

Finally, climate change and policies will affect profitability across sectors. This will have knock-on effects for other variables such as credit default and downgrade assumptions. To arrive at corporate profitability estimates, we first assess the sensitivity of earnings to carbon pricing. We then assess the impact of transition risks and physical risks as well as opportunities.

We focus on climate because we believe a broad consensus around its impact and measurement suggests that climate change is fast becoming a key driver of asset pricing.

Investment implications

The investment implications are significant. Broadly, we see developed market equities best positioned to capture potential opportunities at the expense of high-yield and some emerging market debt. The constituents of developed market equity indexes generally have less vulnerability to transition risks and lower carbon intensity. Equities also can better capture potential upside, as bonds are capped in their capital appreciation.

It’s worth looking under the hood, as the relevant unit of investment analysis is really at the sector level. There will be winners and losers – underpinning why we believe a sectoral approach to sustainable investing is more appropriate than a regional one. Likely beneficiaries include technology and healthcare, we believe, while laggards include energy and utilities. We expect the climate effect to result in an annualized return differential of about 7% between the energy and technology sectors over the next five years2. That’s a significant difference in a world of low expected returns across asset classes.

Chart: Return assumption differentials in green transition vs. no-climate-action

For illustrative purposes only. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise – or even estimate – of future performance. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream and Bloomberg, February 2021. Notes: The chart shows the difference in U.S. dollar expected returns over the next five years from now for four sectors of the MSCI USA Index in our base case of a ‘green’ transition (policies and actions taken to mitigate climate change and damages, and to limit temperature rises to no more than 2 degrees Celsius by 2100) vs. a no-climate-action scenario. The estimated sectoral impact is based on expected differences in economic growth, corporates earnings and asset valuations across the two scenarios. Professional investors can access full details in our Portfolio perspectives and CMAs website.

Our three-channel framework – macroeconomics, pricing and fundamentals – allows us to systematically monitor key metrics as the green transition takes shape. We see this as only the beginning: we will monitor, enhance and add to our framework over time as data improves and our thinking evolves. One thing is clear: to exclude climate considerations from asset return expectations would be to ignore reality. It is a vital input for economic projections, return expectations and portfolio construction.


[1] BlackRock Investment Institute

[2] BlackRock Investment Institute

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This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of March 22, 2021 and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. Asset allocation and diversification does not guarantee investment returns and does not eliminate the risk of loss.
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.

Active Management for Alpha and Impact

Dollars are flooding into investments aligned with the SDGs.[1] More and more investors have come to recognize that aligning their capital with companies that benefit people and the planet is not only “good”, but the way to drive long-term outperformance. And for companies, it just makes good business sense to be well positioned strategically and operationally for a future where social and climate concerns are becoming increasingly important for all stakeholders.

With this good and growing number of impactful investments available, a new problem has arisen for the investor: how to compare possible investments. Not all impact is created equal. For example, not all ETFs or funds have the same mandate, investment thesis or impact. And risk is increasingly complex for investors to unpack, due to things like changing environmental regulations and government intervention in financial markets.

With this absence of consistent disclosure regulations and robust data sets required to assess impact, what happens?[2] Investors must try to figure out impact themselves in order to spot the best investments. Consistency, greater standardization and good measurement tools are needed. Luckily, they are coming.

Using impact management for portfolio management

In an investment context, impact measurement and management is designed to:

  • Evaluate how companies are contributing to their multi-stakeholder universe (comprised of employees, communities, society at large, the environment and shareholder value)
  • Be a mechanism to engage companies and hold them accountable
  • Identify companies that have underappreciated future potential impact
  • Evaluate poor impact organizations that may be subject to greater risk associated with harming society or the environment (such as regulatory risk, shifting customer demands for greater accountability)
  • Evaluate if the impact generated by a portfolio is aligned to investor values

To be valuable at driving great impact and better financial returns, measurement and management needs to be used for portfolio management. Unfortunately, financial decision-making and impact management are usually siloed in many organizations and often have misaligned agendas and as a result, impact, money or both are left on the table.

Emerging global best practice is to simultaneously integrate impact management with financial analysis.[3] Doing so allows investors to pursue the “efficient impact frontier”. While a portfolio that lies on the traditional “efficient frontier” offers the greatest possible return for a given level of risk and for a given set of investment opportunities, a portfolio of investments on the “efficient impact frontier,” which includes the additional dimension of impact, offers the highest level of overall impact, relative to the cumulative financial return of those investments. The three dimensions are not mutually exclusive; for example, businesses with less impact may offer higher risk long term. Investing across all SDGs rather than a few niche areas greatly enhances a portfolio’s ability to diversify risk through the inclusion of different regions, sectors and asset classes.

Hugely beneficial

Relationships between impact and financial risk and return can be analysed empirically and managed proactively by investors. Impact-financial integration enable investors to:

  • Distinguish which types of impact, in which contexts, truly drive excess financial returns and avoid excessive risk, and which may require a financial concession
  • Continuously improve their impact performance while meeting their financial goals
  • Set more comprehensive goals for their portfolio
  • Communicate about impact and financial goals and performance more clearly

Impact-financial integration is relevant for asset managers and asset owners, across the continuum of financial returns.

Towards the efficient impact frontier

When you integrate impact with risk and return you end up with the same clarity and power as people have come to expect on the financial side.

These two scatterplot charts shows portfolio investments plotted by both impact and financial expectations, with expected impact on the x axis, and an expected risk-adjusted financial return on the y axis.[4] These charts help investors pursue the efficient impact frontier by addressing the question, What combination of the transactions on this chart – or others likely to arise in the future – will help me achieve the best portfolio for my financial and impact goals?

The impact rating is a weighted sum of indicators that collectively cover multiple dimensions of impact, such as the number of people reached, how underserved those people are, and how much each individual is affected. Impact ratings can also cover environmental impacts such as reduced carbon emissions or avoided deforestation.

The financial valuation metric is an estimate of which prospective investments offer more or less expected risk-adjusted financial return. It is designed to tell the investor to what extent they should prioritize a transaction on the basis of its expected financial performance.

Integrated charts can help decision making around potential investments but also can be used over time to assess longstanding investments. With them, an investor can see whether there were individual investments they may have overpaid for in terms of the impact achieved; or, conversely, whether they achieved an unusually high degree of impact relative to the financial risk and return – the much-sought ‘impact alpha.’


[1] Several sources provide more information on this, including Sustainable Finance: Ten Trends for 2021, the RIA’s 2020 Canadian Responsible Investment Trends Report and the articles “Seven ESG Trends to Watch in 2021” and “Investors continue to align with SDGs.”

[2] Although they may be coming; see “The EU is moving ahead with mandatory ESG disclosure for asset managers and Financial Advisers – what does it mean for Canadian firms?”

[3] Root Capital wrote about this idea in 2017; see Toward the Efficient Impact Frontier. The idea of the efficient impact frontier has been taken up by the Impact Management Project, which, with partners, has been helping investors globally to reach the efficient impact frontier with its program Impact Frontiers.

[4] For further elaboration, see Impact-Financial Integration: A Handbook for Investors and “How Investors Can Integrate Social Impact With Financial Performance to Improve Both”.

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 Investment Case for Biodiversity

As a society, our dependence on biodiversity is clear, with population growth, urbanization, technological advancements and increasing standards of living continuously growing the demands on the world’s natural capital. The benefits of, and risks to, biodiversity inevitably show up within investment portfolios, with many companies relying on the natural world for production.

Moreover, as we have seen with the COVID-19 pandemic outbreak and the encroachment of wildlife habitats and boundaries, there are risks to global health and the health of financial markets should we fail to turn the tide and be more attentive to the consequences of biodiversity loss. As asset managers, it is imperative that we apply a sharper lens to the reliance of portfolios on biodiversity and understand how companies can better mitigate risks and help safeguard these critical natural assets as well as portfolio performance.

Global dependence on biodiversity & emerging regulatory efforts

Biodiversity loss remains a real, global risk with the potential for significant impacts to both the environment and to global gross domestic product. Despite this global economic reliance on natural assets, currently there is not enough being done to reverse biodiversity loss. Deforestation, loss of plant and animal diversity, as well as the spread of invasive species are all threats to our natural assets; assets critical in not only supporting global growth, but also ongoing environmental resilience.

There is growing acknowledgement that more must be done, with various governing and regulatory bodies seeking to build more transparency and mitigation efforts around those risks. For example, the 15th Conference of the Parties (“COP”) to the UN Convention on Biological Diversity is planned for the second quarter of 2021, with governments convening to consider new policies and regulations to prevent further biodiversity loss.[1] The Task Force on Nature-related Financial Disclosures (“TNFD”) has also emerged and is anticipated to have a similar impact as the Task Force on Climate-related Financial Disclosures (“TCFD”) – the most prominent framework impacting the way companies think through, manage and report on their climate risks. Following suit, the TNFD will set out a framework for companies to adhere to when measuring, mitigating and reporting on their reliance and impact on biodiversity.

Most significant industry reliance on biodiversity

Some industries are more dependent on the natural environment than others. The construction industry is highly reliant on building materials such as iron ore, limestone, gravel and timber; all of which support growing infrastructure such as buildings, bridges, dams and roads. However, extracting these materials has a significant impact on biodiversity as does the expansion of built environments, often increasing pollution and disrupting and fragmenting natural habitats.

For food and agriculture, the dependence lies on the animals, plants and micro-organisms that are essential in activities like food and fuel production. Micro-organisms are particularly important given their contributions to pollination, soil health, and preventing the spread of pests and disease amongst crops and livestock. Yet agriculture itself also has significant impacts to biodiversity, with agriculture now making up roughly 37% of total land area on the planet.[2] Growth in agriculture has led to land degradation, deforestation, loss of natural habitats, and growth in greenhouse gas emissions.

The protection of biodiversity is not only critical for continued sourcing of business operations, it is also important for company growth, innovation and evolution. Industries have put significant investment in research and development around bioprospecting activities, where the natural environment reveals previously untapped solutions that can build company value.

Bioprospecting can lead to natural solutions or spur ideas for novel synthetic developments. Bioprospecting and the discovery of natural remedies or natural revelations that catalyze business ideas have benefited several industries; with manufacturing, pharmaceuticals, personal care and cosmetics companies all beneficiaries. This has led to the discovery of new industrial materials, medicines, new crop varieties as well as solutions for ecological restoration.

Building resilient businesses and portfolios

Given a continued global need for natural assets and systems, an emerging regulatory landscape to protect them, and growing consumer awareness around corporate environmental behavior, it is in the best interest of companies to innovate to help maintain these assets. Green infrastructure, conservation efforts, and regenerative practices are all methods businesses can contribute to themselves to curb depreciation of our natural environment. These efforts are necessary to maintain local ecological balance and natural habitats. Moreover, given the various links of biodiversity loss to climate change, it is important for asset managers to understand how investee companies are managing their biodiversity risks – how these risks are identified, goals for mitigation and strategy towards progress and innovation. Through discussions with company management and active stewardship, we can push forward this conversation, encouraging heightened corporate disclosure and building greater transparency around corporate biodiversity risks and opportunities.


[1] Secretariat of the Convention on Biological Diversity (2020). Global Biodiversity Outlook 5.

[2] Secretariat of the Convention on Biological Diversity (2020).

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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.

Slashing Emissions Will Fuel Green Growth for Decades

The world needs to slash carbon emissions to avoid the worst effects of climate change. Easy to say, hard to do. It means reversing over 150 years of rising greenhouse gas emissions and reaching net zero targets within 30 years.

And it will cost around $144 trillion to achieve, almost seven times the annual U.S. GDP.[1] But the urgent need to decarbonize offers companies producing renewable energy and other low-carbon technologies the potential for decades of growth.

Around 37 billion tonnes of greenhouse gases were emitted in 2019. Then came COVID-19, and global lockdowns that saw factories shuttered, aircrafts grounded and populations confined to their homes. But even the most draconian restrictions on human mobility in modern times only led to an 8–9% decrease in global CO2 emissions in the first half of 2020.

Getting started

Unfortunately, there is no silver bullet that offers a 100% decrease overnight. But there are steps we can take today, such as replacing coal-fired power and oil-based transport with the best low-carbon solutions available. Installing wind turbines cuts emissions by 93% (compared to fossil fuel plants).[2] Switching to electric vehicles will more than halve cradle-to-grave emissions from cars, while green hydrogen fuel cells can decarbonize heavy-duty trucks by 87%.[3] The meatless burger reduces emissions by 90%, and lab-grown meat by 78%. Insulation alone can halve the emissions associated with buildings.[4]

Many technologies, such as wind and solar, are economical even without subsidies. Others require significant amounts of public and private capital to rival cheaper carbon-heavy technologies. All areas need to be scaled up aggressively to meet decarbonization targets set by the Paris Agreement. So even if valuations among wind and solar companies look expensive today, we believe long-term growth expectations for many will prove more than justified.

Carbon prices will rise

The World Bank estimates that carbon prices must be 2.5 to 5 times higher by 2030 to achieve the emissions reduction goals of the Paris Agreement. Carbon cap-and-trade systems have proved controversial in the past, because of carbon “leakage.” This occurs when a carbon price is applied and increases the cost of domestic goods, incentivizing a switch to cheaper imports from countries with no carbon prices. Despite this risk, deeper, broader carbon markets are on the horizon, and as more countries adopt them, the more effective they will become. This could further boost companies in green sectors as “brown” alternatives become more expensive.

As part of its pledge to achieve carbon neutrality, China is set to roll out a national cap-and-trade CO2 scheme that has been running as a pilot since 2014. Its impact has been limited so far due to a low carbon price, but this should change as prices rise. Moreover, a nationwide scheme in China could include sectors that account for an estimated 20% of global emissions by 2030, creating the potential for large-scale decarbonization. The U.S. may follow suit under President Joe Biden. The E.U. cap-and-trade program currently covers emissions from power stations and other industrial plants, but could be extended to other sectors. To deal with carbon leakage, a carbon border adjustment mechanism that would force importers to pay for their emissions has been proposed as part of the European Green Deal.

Decarbonization at scale creates significant opportunities

Existing low-carbon technologies could benefit most from the investment needed to achieve the first 50% of decarbonization – $1 trillion a year, according to Goldman Sachs. These include renewables, industrial and agricultural automation, efficient buildings, the cloud (which has a 50 to 80% lower carbon footprint than onsite data centres), alternatives to meat and milk, lightweight materials and second-hand goods platforms.[5] Once current technologies have been fully adopted, a further investment of around $3.8 trillion per year in new solutions is needed to close the gap.[6] Some, like green hydrogen and carbon capture, are still in the early stages of development; others have yet to be invented. Many will need renewable power.

The average annual investment for solar and wind alone will top $400 billion per year (on a 1.5˚–2.0˚ pathway) for decades.[*] Plus, if solar and wind, backed up by battery and green hydrogen storage, replace all present-day thermal generation, benefit from rising demand from a growing population and an emerging middle class, and power the global electric car fleet, demand for these resources will rise to roughly 17 times current levels.[*]

That is before accounting for electrifying heating in people’s homes, manufacturing green hydrogen to replace natural gas and reducing emissions in hard-to-mitigate sectors such as steel, cement and ammonia. Once these are included, the prospective demand for solar and wind rises to more than 25 times current levels.

Hydrogen has had several false starts. But as the cost of renewables continues to decline and green hydrogen starts to be produced at scale, it could reduce those carbon emissions previously thought impossible to mitigate within the decade. Of the 70 million tonnes of hydrogen produced today, only 1% is green (i.e., produced using renewable power). But if projections that green hydrogen could meet a quarter of global energy demand by 2050 are correct, its production could increase to around 700 million tonnes.[7]

The decarbonization challenge is on a scale unmatched in human history. But it is one that offers the companies meeting it a 30-year period of growth that surpasses even the internet revolution. If a big enough investment is made and current and future technologies are fully adopted, then the transition to a low-carbon economy can become a reality. We might not get all the way to net zero as fast as we hope, but we can get very close.


[1] Carbonomics. Goldman Sachs, October 2020.

[2] Fidelity International estimates using Siemens/Vestas data.

[3] Ben Sharpe, Zero-emission tractor-trailers in Canada (International Council on Clean Transportation, 2019)

[4] Tesla impact report 2019 and VW:; Carbon Brief and EPA:; “Life-Cycle Implications of Hydrogen Fuel Cell Electric Vehicle Technology for Medium and heavy trucks” by Lee, Elgowainy and Kotz, 2018; Meatless burger and Beyond Meat burger:; Beyond Burger Life Cycle Assessment, September 2018.

[5] Microsoft Cloud Carbon Study 2018.

[6] Goldman Sachs, October 2020. This estimated cost of decarbonization prices emerging technologies such as green hydrogen at their current rates, but as they are more widely adopted, costs should fall.

[*] BP estimates, Bernstein analysis

[7] Bloomberg New Energy Finance, October 2020.

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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.

Incorporating ESG Analysis in Infrastructure Investing

The importance of integrating environmental, social and governance (ESG) considerations when investing in real assets such as infrastructure should come as no surprise. The distinct characteristics of infrastructure — the essential services it provides to society, its predictable long-duration cash flows and inflation-linked returns, its low sensitivity to economic cycles — also suggest this integration will have distinct areas of focus.

While many investors rely exclusively on third-party external providers for ESG insight and analysis, we believe leveraging in-depth knowledge of the asset class is the best way to fully capture sustainability in the investment process. We follow a three-pillar framework when analyzing sustainability for infrastructure assets that is an extension of the core characteristics of the asset class:

  • Valuation: To understand both positive and negative risks from ESG factors, it is necessary to model cash flow impacts of sustainability and perform sensitivity analysis.
  • Risk pricing or required return adjustment: ESG factors that cannot be captured in cash flows may be captured through an adjustment to a cost of equity. Focusing on the cost of equity enables a more robust global comparison within subsectors and captures improvements or degradations in a company’s ESG profile going forward.
  • Engagement or active management: Managers of infrastructure portfolios should actively engage not only with company management but also with regulators, policymakers and other key stakeholders. Monitoring ESG controversies and active proxy voting are also key to influencing change.

Here we offer case studies in how ESG factors might influence infrastructure positioning in two different sectors: North American pipelines and U.K. water.

North American Pipelines: Pressure Will Lead to Differentiation

As the world transitions from higher-carbon-emitting forms of energy generation to more renewable-based generation in an attempt to control climate change, some estimates would have natural gas, which has lower carbon emissions than coal and oil, serving as a bridge fuel for several decades. The market, however, is starting to price in a much faster transition to renewables as renewable capacity growth has consistently surprised on the upside.

From an allocation perspective, increasing exposure to renewables allows a manager to benefit from this multidecade thematic. When considering North American midstream and hydrocarbon infrastructure, rather than assuming hydrocarbon infrastructure will be a perpetual asset, we have made conservative assumptions that more effectively reflect a depreciating asset base over time, as renewables gain market share at the expense of hydrocarbons.

However, it is still possible to discover relative value in the North American pipeline space, where hydrocarbon infrastructure will still be used, albeit at a lesser rate, for decades to come. Those asset owners running trunk or mainline pipelines (transmission pipelines) will likely fare better in our view, as they are difficult to replicate, and are the key conduits that connect the supply to demand centers. Those that are running some of the smaller lateral pipelines and systems (gathering and processing pipelines) face a higher risk of disruption as they have a greater sensitivity to oil and gas production volumes.

U.K. Water: Privatization and Regulation So Far a Good Partnership

The U.K. water sector offers an interesting counter-example to North American pipelines. In the U.K., the water regulator, The Water Services Regulation Authority or Ofwat, requires water companies to meet targets of environmental sustainability and service commitments, to which it attaches incentives and penalties. It also sets principles for board leadership, transparency and governance for the sector to ensure board decisions are aligned with customer and stakeholder needs. On the social side, Ofwat assesses the quality of U.K. water companies’ engagement with its customers and their satisfaction, as well as utilities’ relationships with their communities. This regulatory assessment will have an impact on the companies’ investment plans, cost of capital and forward cash flows. Due to Ofwat’s efficiency challenges, customer bills have fallen. Customer satisfaction levels for the value of water and sewerage service have been high: for water, 91% of customers are satisfied with what is provided by companies, while 76% are satisfied it is “value for money.”[1]

Over the longer term, we believe there is significant room for further growth in U.K. water assets. The sector continues to deploy capital to reduce leaking pipes, sewer flooding, supply interruptions and pollution incidents, while performing other necessary maintenance. Importantly, Ofwat continues to incentivize water companies to deliver long-term resilience against climate change, reduce environmental degradation and improve water quality.

Sustainability factors are therefore deeply embedded into U.K. water regulation. Better-run companies with superior governance will benefit from regulation and legislation, earning incentives for delivering their strong environmental and customer engagement commitments as well as growing their underlying asset base.

ESG Analysis: An Integral Part of Any Infrastructure Portfolio

It is imperative to incorporate an ESG and sustainability framework into any process that analyzes infrastructure assets. Such a framework should consider how ESG factors affect cash flows and the required return of an infrastructure asset and should involve a process for engagement with several stakeholders on material sustainability issues. As evidenced when applied to the North American pipeline and U.K. water sectors, such an approach enables active managers of infrastructure portfolios to identify compelling valuation discrepancies among assets.


[1] For sewerage, 86% are satisfied with what is provided by companies, while 77% are satisfied it is “value for money.” CCW Water Matters Annual Tracking Survey (6,310 total customers surveyed). Source: CCW; England and Wales, April 2019 to March 2020.

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.

Climate Change: Investor Attitudes and Shareholder Proposals

Throughout 2020, the novel coronavirus (COVID-19) has been top of mind for investors as it has brought disruption to economies, financial markets, communities, travel, and commerce. At the same time, investor interest and awareness in fully integrating material environmental, social and governance (ESG) factors into the investment process has grown. Climate change is one of those factors.

In the RBC Global Asset Management 2020 Responsible Investment Survey, a global study of attitudes in the institutional investing community, climate change was respondents’ second-highest ESG concern, after anti- corruption. There remains considerable room to grow, however – 60% of respondents to the survey said that their firm’s investment policy did not address climate change. There was significant regional variation here. Only in Europe (65%) did a majority of respondents say their firm incorporated climate change into their investment policy. By contrast, 31% of investors in Asia, 30% of investors in Canada and 17% of investors in the U.S. made the same claim. Globally, another 12% said they were not certain one way or another about this point.

The survey also revealed investor preferences with regard to climate initiatives. Globally, the most popular strategy was to invest in renewables (55%), closely followed by carbon-neutral and low carbon (54%), and seeking out high-carbon companies that are transitioning to low carbon (48%). The survey also gave an indication that concern about climate change continues to grow. Climate risk was cited second only to supply chain risk among respondents who said the pandemic had prompted them to look more closely at ESG factors.

When it comes to addressing climate change, companies are seeing increasing demand for action from their shareholders. The Financial Times reports that in the U.S. and Canada, average investor support for environmental shareholder resolutions rose to 32.7% in the first half of 2020, up from 21.9% in 2019. Support for environmental resolutions remains a minority position but one that looks to be rapidly growing.

One way for asset managers to approach the climate change risks and opportunities faced by their investee companies is through thoughtful proxy voting on climate- related shareholder proposals. Historically, RBC Global Asset Management (RBC GAM) has generally seen climate- related shareholder proposals requesting that companies report on their sustainability initiatives. Although we continued to see these shareholder proposals during the 2020 proxy voting season, we also saw proposals asking that companies consider climate change more holistically throughout the company’s overall strategy.

Another way is by coming together. Climate Action 100+, of which RBC GAM is a signatory, is an investor collaboration seeking to actively engage systemically important carbon emitters, or companies with significant opportunity to drive the transition to a low-carbon economy. Since its launch in 2017, Climate Action 100+ engagements have resulted in 120 companies nominating a board member or board committee for oversight of climate change, 50 companies announcing the goal of achieving net-zero emissions by 2050 or sooner, and 59 companies formally supporting the Task Force on Climate-related Financial Disclosure (TCFD) recommendations. This past proxy voting season, several climate-related shareholder proposals were filed at Climate Action 100+ Focus Companies in the U.S. energy and manufacturing sectors.[2] One particular success resulting from this initiative was a major U.S. energy firm disclosing more information on its lobbying efforts as they relate to the Paris climate agreements.

The impacts of climate change are systemic and unprecedented. They’re also already apparent. As asset managers and investors, and stewards of our clients’ assets, we believe that considering climate-related risks and opportunities in our investment approach can enhance our long-term risk-adjusted results. It is for this reason that in 2020 we formalized our approach to climate change, which focuses on fully integrating climate change into the investment process, conducting active stewardship through thoughtful proxy voting and engagement on climate risk mitigation and adaptation, and providing client-driven solutions and reporting that meet their needs.

This article is part of a new series based on the results of the 2020 RBC Global Asset Management Responsible Investment Survey. The survey, entitled ‘Responsible Investing: Global Adoption – Regional Divide,’ revealed meaningful insights on the considerations of environmental, social and governance (ESG) factors by global institutional investors.


[1] Financial Times, Climate change: asset managers join forces with the eco-warriors, July 26, 2020

[2] Proxy season 2020, Climate Action 100+, 2020.

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.