Three Key ESG Trends Advisors Need to be Aware Of

As responsible investment (RI) continues to grow and evolve at a rapid pace, it is important for investment advisors to stay abreast of key trends and leading practices in the field. Of course, that is easier said than done in a pandemic world that has been characterized by chronic stress and nonstop Zoom meetings — especially when the RI market is evolving so quickly.

To help you stay informed in this fast-moving market, this article provides a quick overview of three big issues in RI that every advisor should know about: stewardship, impact measurement and net zero.

Investment stewardship

The concept of stewardship is gaining prominence among investors in Canada and globally, but what exactly does it mean in practice? While some market participants use the terms “stewardship” and “engagement” interchangeably, leading researchers and practitioners point out that good stewardship is much broader than shareholder engagement alone.

A 2020 report from KKS Advisors, a consultancy led by Harvard professor George Serafeim, stated that “stewardship reflects the role of investors as ‘stewards’ of the assets entrusted to them by their clients and the responsibility of investment professionals to carefully protect and enhance the value of those assets. It embodies the notion that investors are influential market players who have the power to shape markets, enhance governance and address market risks and opportunities affecting the health of the economy.”

Upon analyzing the stewardship practices of 40 of the world’s largest institutional investors, KKS Advisors concluded that stewardship has seven practical components:

  1. Influence – Leveraging investors’ position within the financial system to drive a sustainable economy; for example, by raising ESG standards and promoting effective policies and regulations.
  2. Engagement – Proactive dialogue with companies on ESG issues.
  3. Voting – Communicating and exercising shareholder rights and expectations.
  4. Promoting disclosure – Encouraging high-quality disclosure of ESG information.
  5. Monitoring – Actively monitoring ESG performance and new regulations.
  6. Collaboration – Participating in collective action and coordinating with peers to maximize impact.
  7. Education – A commitment to internal ESG training and development.

Advisors who are interested in stewardship of their clients’ assets can use this list as a point of reference when examining asset management firms.

Impact measurement

Impact investing is also gaining prominence in the asset management industry. The Global Impact Investing Network defines impact investing as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” The key components here are intentionality and measurement. If positive impacts are not intentional and measurable, then we are not talking about an impact investment.

In the context of rising investor demand for positive impact and growing concerns about greenwashing, it is vitally important for fund managers to measure and report on the positive impacts that their clients’ assets are generating. The importance of credible impact measurement is compounded by the fact that we are seeing a growing number of public equity funds marketed as impact investments.

While there are numerous credible impact measurement frameworks on the market, there is no global standard across asset classes. This can make it challenging for investors and advisors to compare impact investments. As a result, the Impact Management Project (IMP) is seeking to build a global consensus on how to measure, manage and report the impacts of an investment. Here in Canada, the IMP has partnered with Rally Assets on their flagship education project called Impact Frontiers, which seeks to build the capacity of investment managers to integrate impact and financial management. These projects will take some time to play out, but given the weight behind IMP, whose advisors include PWC, KPMG, UBS, Bank of America, Ford Foundation and Dutch pension fund PGGM, among others, we can expect to see some level of convergence in the next few years.

In the meantime, fund managers should make use of the most credible tools and methods available to measure and report their positive impacts. Failure to do so could exacerbate concerns about greenwashing in the market. Advisors who want to see impact metrics from fund managers should communicate their expectations to the manager.

Net zero

You have likely seen headlines about “net zero” popping up in your newsfeed. Here’s why it’s a big deal right now in the investment industry.

The Intergovernmental Panel on Climate Change, a United Nations science agency, has reported that in order to avoid catastrophic impacts from climate change, we must limit the average global temperature rise to no more than 1.5°C above the preindustrial era. To achieve this target, global carbon emissions must decline by about 45% relative to 2010 levels by 2030 and reach net-zero by approximately 2050.

Governments around the world, including Canada, are pledging to reduce emissions in alignment with these targets. However, meeting these commitments will require a massive transition of the global energy system, creating risks and opportunities across sectors. These transition-driven risks are compounded by the physical risks flowing from a changing planet.

As a result, many companies and institutional investors are now making pledges to align their business and investment practices with net zero emissions. These commitments send a signal to the market that the business intends to manage the risks and capitalize on the opportunities of a transition to a low-carbon economy.


Stewardship and impact investing are two of the most important strategies available to investors who are interested in achieving net zero emissions. That’s because stewardship can help move companies toward more sustainable outcomes, and impact investing can help move capital toward industries, companies and projects that help drive down emissions. The key is that the positive impacts need to be measurable. If they are not, then it’s not clear that the needle is moving.

A version of this article was originally published in Investment Executive. Read the full article here.

Net Zero Scenarios: An Investor’s Perspective

While climate change is a complex issue often discussed as a source of risks, it also creates a new realm of opportunities for investors. However, if investors are to be successful over the long term, they must have the capability to identify and manage these risks and opportunities efficiently, which requires a deep understanding of the relationship between climate and the financial markets, two highly dynamic and interacting systems.

Carbon foot-printing is one of the tools available to help understand historic exposure to transition risks and when paired with comprehensive knowledge of the business, it provides valuable insights into a company’s ability to manage the impacts of future climate change. The outlook generated by the analysis, however, can sometimes be less useful in evaluating the future resilience of an asset or portfolio. On the other hand, scenario analysis, that includes a range of reasonable climate transition outcomes, can provide better insight into the strengths and weaknesses of a portfolio as well as its level of alignment with desired climate outcomes. In this article, we will discuss the application and assessment of climate scenarios for investment portfolios.

Investors can apply scenarios to investment strategies in the same way companies apply scenarios to their capital planning process to test resiliency under a variety of potential future outcomes. The International Energy Agency (IEA), Intergovernmental Panel on Climate Change (IPCC) and the United Nations-backed Principles for Responsible Investment (PRI) all offer a wide range of scenarios that are calibrated to climate change-related outcomes ranging from “business as usual” to “Net Zero by 2050”. There are three key considerations when applying these types of scenarios to investing:

  • Scenarios ≠ Forecast: Scenarios involve numbers and a view of the future that can lead investors to an assumption that there is a single path to one future outcome. With any scenario, especially multi-decade climate scenarios, there is a great deal of uncertainty associated with factors such as international coordination, consumer behavior, technological innovation and corporate strategies. Therefore, the resilience of portfolios can really only be tested by using a range of scenarios that focus on what “could” reasonably happen rather than what “should” happen. Key outputs are the distribution, magnitude and likelihood of events that can be mapped back to long-term investment value creation and current market expectations.
  • Investment-relevant parameters: Most current scenarios require knowledge of a specific business and expertise in translating factors like warming potential and carbon price into parameters that can influence a financial model. More recently, a joint effort was initiated by central banks and governments to standardize a range of scenarios that will likely further delineate key metrics such as credit and liquidity risk. Even more granular scenarios like the IEA Net Zero by 2050 will also help to bridge the existing gap.
  • Time Frame: Although there is a general sense that the impacts of climate change are more imminent than ever, the larger and more likely impacts on earnings and cash-flows are potentially still outside of the 5.5-month average holding period for assets like U.S. equities. That being said, a more thoughtful approach to the implied long-term growth rates in multiples and terminal assumptions of a valuation model can help to incorporate medium- to long-term changes into even shorter-term investments.

Net Zero(ish)

With the increased momentum in country and corporate transition strategies and the growth in physical changes influenced by climate change, it seems sensible to include a net-zero scenario in the range of options to test the resilience of an investment portfolio. However, the term “net zero” is used in different ways by different groups. The IEA’s recent Net Zero by 2050 provides a detailed and economically relevant example of a scenario that defines “a” path and applies additional analysis looking at the sensitivity of their scenario to key areas of uncertainty such as changes in consumer behavior, technological innovation, energy security and use of nuclear and carbon capture. Regardless of the label, investors need to critically assess a number of parameters to understand the commitments made by companies and the commitments they may consider for their own portfolio:

  1. Accountability: Who has the mandate to achieve the goal and how are they incentivized to reach it?   For industries with high levels of exposure, it could involve the implementation of a specific board committee and climate-related linkages to executive compensation.
  2. Alignment: Alignment with the capabilities and value creation of the business (or investor) and the relevant commitments of peers and local governments. The path to net zero can have varying meanings across different industries and regions.
  3. Base Year: The reference year for emissions is usually not the current year and needs to be assessed based on the quality of the data available and the percentage of reductions that are expected to come in the future.
  4. Scope: The decision to commit to intensity or total emissions reductions will depend on the growth trajectory of the business or the portfolio. However, there is often an expectation for businesses to be focused on total emissions over time. According to the GHG Protocol Corporate Standard, a company’s emissions can be classified in three scopes. Scope 1 and 2 reductions should be seen as standard disclosures. Scope 3 emissions should be critically assessed for coverage, available data and reasonableness, as they are voluntary and the hardest to monitor.
  5. Milestones: At a minimum, there needs to be high-level targets and milestones for 2030 and 2050, but some indication of an iterative process with 3- to 5-year windows for reassessment would be positive.
  6. Offsets and Innovation: It is difficult to imagine achieving Net Zero by 2050, without the use of carbon offsets and new technology. Offsets should be evaluated on transparency, total contribution, whether they avoid or reduce emissions and the relative risk of reversal. Innovation’s contribution should be transparent about uncertainties and the amount of reductions coming from earlier-stage technology.


Despite the challenges related to the kind of analysis required, there is likely to be value for investors and other stakeholders in trying to integrate the analysis of the risks and opportunities associated with climate change across their portfolios. Ultimately, successful investors are ones that have greater or faster access to information and find inefficiencies enabling them to better manage risk and capture return. Building portfolios that can be resilient through a variety of different climate futures can be beneficial to asset owners and society as a whole.

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 Investors Can Drive Change in Canadian Nursing Homes

Before the outbreak of the Covid-19 pandemic, healthcare issues at nursing homes were often overlooked. The past year starkly demonstrated that inadequate working conditions and inadequate elderly care are important human rights issues that urgently need to be addressed. As investors, we must contribute to driving positive change in this sector.

Many nursing home staff work in stressful environments. They often earn low wages on part-time hours or through precarious arrangements – in some countries without sick pay or union representation. Most staff are women, and often they are minorities or from marginalized backgrounds. Nursing homes struggle to attract and retain enough workers to meet current demands, let alone the need for more caregivers to match demographic shifts. The staff-to-resident ratio in many homes is inadequate to provide even basic care to residents, let alone the quality required during a pandemic.

The glaring spotlight of Covid-19

During the pandemic, nursing home workers have been caring for those most vulnerable to the virus in extremely high-risk environments. The sector found itself in the eye of the storm, largely owing to a global unpreparedness for a pandemic of this scale and failures by governments to support and regulate nursing homes and their residents. This exacerbated the inherent vulnerabilities of aged care, and led to some very sobering numbers:

  • According to this report, an average of 41% of all deaths across 22 countries happened in nursing homes.
  • Hundreds of thousands of nursing home staff became infected during the pandemic – many of whom either died or are now facing long-lasting aftereffects.

Throughout the pandemic, scandals relating to nursing homes were prevalent. In Canada, this report by the International Longevity Centre declared the diminishing recognition of the human rights of older people as the most severe impact of the Covid-19 pandemic; a statement that speaks volumes and is backed up by plenty of alarming information relating to rising elder abuse and ageism, among other violations of health care regulations, within nursing homes.

Meanwhile, healthcare workers at Responsive Group’s Rykka Care Centres filed a human rights complaint for gender and skin colour discrimination, calling for better working conditions and the replacement of management at the centres. The provincial government was also named a Respondent for its failure to properly regulate and oversee operations at long-term care homes.

In the UK, Amnesty International reported that a series of “shockingly irresponsible” decisions taken by Government – including the decision to discharge infected hospital patients to nursing homes – risked the lives of tens of thousands of elderly people and led to multiple violations of their human rights. One year into the pandemic, research by UNI found that most care workers still do not earn a liveable wage, and nearly a third are without adequate access to personal protective equipment.

Why does this matter to investors?

As nursing homes recover from the virus, we must use this opportunity to improve the sector permanently by developing a more resilient and humane working model. Doing so will address fundamental human rights issues and contribute to a fairer and more sustainable society for us all.

If human rights weren’t reason enough to demonstrate why improving this sector is so important, there are also important business reasons to consider. Better working standards will promote better care, ultimately helping to mitigate legal, reputational and operational risks for companies within this sector. For example, this Bloomberg Canada news story from May 2020 reports on plunging shares in long-term care home companies in the aftermath of the Ontario care scandal, whereby a Canadian Armed Forces report detailed “horrific” treatment of residents.

Practical takeaways and actionable steps for investors

Companies must raise standards for working conditions and quality of care, but the weight doesn’t fall solely on their shoulders: governments and regulators must ensure that regulatory environments and funding provisions enable nursing homes to meet higher standards. As investors in this sector, our role is to set clear expectations of companies for improving these standards.

Along with 99 other financial institutions and representing $3.5trn in combined assets under management and assets under advice, we developed and signed the UNI Global Union investor statement on expectations for the nursing home sector. The statement is still open to be signed and supported by investors. We’re asking investee companies:

  • To develop and implement standards that not only adapt to, but go beyond local regulatory requirements for understaffing, health & safety, wages, collective bargaining and quality of care.
  • That own real estate used for nursing homes – such as Real Estate Investment Trusts – to support operators in meeting these expectations by overseeing their properties and monitoring processes to ensure our standards are met.

At BMO GAM we have contacted 13 nursing home companies and trusts to urge appropriate staffing levels, improved health and safety standards, proper use of PPE, fair wages, pandemic hazard pay, and freedom to unionize. At the time of writing, three of these have responded, with dialogues due to take place soon.

We have also supported AGM questions at Fresenius SE around labour standards , and shareholder proposals filed by fellow investors at companies such as Chartwell Retirement Residences, requesting more information on human capital management and paying a living wage to staff.

Final thoughts

We believe these expectations have come at a crucial time: the bar for working conditions and quality of care in nursing homes clearly needs to be raised, and we look forward to working with companies and other investors to create change for good. We believe that addressing these issues will improve confidence across investors, regulators, workers, residents and their families in the nursing home industry – in this period of grave concern and beyond.

Contributor Disclaimer
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.

Did We Consent to This? Holding Tech Players Accountable for Mitigating Human Rights Risks

If you were looking for a single statement to sum up the state of technology in the late stages of the COVID-19 pandemic, you’d be hard pressed to do better than this quote from the information hub ESG Investor:

“A highly-profitable, innovative and far-reaching sector operating in a morally grey area, practising behaviours that aren’t technically illegal, but are arguably unethical.”

So, what, exactly, does ‘arguably unethical’ mean? For some it is the way technology companies use the data of their users, where an unclear or hidden ‘consent’ can open up all manner of possibilities for the use and sharing of personal user data. For others, it is the unfettered use of technology platforms to spread hate. And for some it is the use of digital technologies to plan and execute disruptive activities in the physical world.

Big tech is well aware of these concerns, as digital rights are squarely on the agenda of human rights focused investors and activist-led activities in the tech space. Yet Google and Facebook, among others, have a reputation of dragging their feet when it comes to being transparent on their approaches to following the rules related to human rights concerns within their business models.

In a paper titled The ESG Imperative for Technology Companies, KPMG discovered that though 57% of technology CEOs acknowledge they “must look beyond purely financial growth to achieve long-term sustainable growth”, most identify climate change – not human rights – as the biggest sustainability risk to their businesses. The response from technology companies to the breadth of their ESG risks is at best, inconsistent and too often it is absent altogether. KPMG sums it up this way: “Heightened awareness and appreciation of ESG issues has not fully translated into business practices yet.” If we pit this realization against the fact that addressing human rights risks in business models is a key focus area of the B-Tech Project (a feature of the UN Office of the High Commissioner of Human Rights which focuses on implementing the UN Guiding Principles on Business and Human Rights in technology) we see that there is a resounding disconnect.

The business model risks: we need inside-out solutions for inside-out problems

Ranking Digital Rights (RDR), which works to promote freedom of expression and privacy on the internet, noted in the release of their most recent 2020 Corporate Accountability Index that none of the companies they rank “which collectively provide information and communications services to billions of people around the world – came even close to earning a passing grade on [the RDR’s] international human rights-based standards of transparency and accountability.”

For responsible investors, this indictment is doubly troubling. Technology companies are prominent holdings in many responsible funds, largely owing to their favourable response to environmental risks. And, over the last year of COVID-19 in particular, those holdings have delivered exceptional returns. But what of the human rights-centred risks inherent in the business models of big tech? Unmanaged, these risks threaten company sustainability efforts by potentially undercutting the very principles of civil liberties, freedom and democracy from which technology companies benefit.

We are at a juncture. If we are to remain committed to seeing our investees in the technology space work towards sustainable value creation, it is incumbent on us as investors to hold tech players accountable on how they manage the very real human rights and digital rights risks they face. We must now grapple with the reality that these risks are central to – and deeply embedded in – the very business models that technology companies rely on for the success that has financially benefited investors. It is not acceptable to simply turn a blind eye to the negative social implications of this vast wealth creation.

With great influence comes great responsibility

The unique challenge and opportunity for investors is that we innately approach technological products and services from different vantage points. Because we are all users of technology, we are all also vulnerable to the very risks we are seeking to address – not just as investors, but as consumers, too. That means acknowledging the investment benefits of technology, and the positive uses and applications stemming from increased access to the internet and digital platforms, while at the same time understanding the price we’re paying for that access. We need only look to the past year alone to see how human rights risks are materializing and having real implications for society. Instances like the January 6 attack in the US, the #stophateforprofit campaign initiated against Facebook, concerns about the use of tech to facilitate mass surveillance, and the ethical issues around artificial intelligence, are but a few examples.

The point is, notwithstanding the noble intentions upon which today’s technology leaders were founded, or the undeniable social benefits of technology, the good does not negate the bad.

We are in a strong position to leverage our knowledge as users and our influence as investors to have conversations with tech players about mitigating the negative social impacts of their businesses. It is incumbent on us to push companies for the disclosure and transparency needed for all stakeholders to better understand if and how companies are managing these risks.

We believe an important starting point as investors is making clear our expectation for more robust human rights oversight mechanisms at technology and telecommunication companies. At NEI, we are advocating for robust human rights governance structures that are adaptable to meet the ever-evolving state of play in the industry. We encourage other investors to consider what steps they can take in advancing these dialogues. Investors may seek to do this through solo engagements, group collaborations, coalitions like the Investor Alliance for Human Rights, proxy voting processes or filing proposals. Divestment may be an option if it enhances the leverage of remaining investors, but for us at NEI, we are not ready to give up our seat at the table to push for progress. We believe our voice, and the voices of as many investors as possible, need to be heard in the boardrooms of big tech. As investors we have a responsibility to hold technology companies accountable, and we should be leaning into our ability to push for needed transparency on human rights risks, which can no longer be seen as optional.

We can’t afford to sleep on this. The stakes are too high. The risks are too great. And the impacts too broad.

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.

Could Job Flexibility Be a Turning Point for Working Women?

After Years of Gains, Women Bore Brunt of Pandemic-Related Layoffs

In the fourth quarter of 2019, the female share of total employment hit 50% for only the second time in history (the first being in 2009-10). From this peak, women accounted for nearly 55% of total job losses during the initial wave of COVID-19 pandemic layoffs and the female share of total employment fell to 49.1% by May 2020. Women recovered jobs at a faster pace than men in the subsequent months and today female employment has rebounded to 49.7% of the total.

One less-explored potential reason for this dynamic is the large share of female workers in industries most-impacted by the pandemic. Leveraging academic research, we classified industries as having high or low COVID-19 exposure based on 1) ability to work remotely, 2) essentialness, and 3) impact of supply and/or demand shocks from COVID-19. Unsurprisingly, the vast majority of layoffs were concentrated in high exposure industries such as leisure/hospitality and retail. Those industries have also seen a greater subsequent recovery.

Exhibit 1: A Tale of Two Labor Markets

High and low COVID-19 exposure is based on industry-level data measuring data including the ability to work remotely, essential vs. non-essential status, and supply/demand shocks resulting from the COVID-19 pandemic. Aggregate net change in payroll employment in these industries is measured relative to February 2020 peak employment levels. High COVID-19 exposure industries account for ~60% of pre-pandemic total non-farm payroll employment; Low COVID-19 exposure industries account for ~40% of pre-pandemic total non-farm payroll employment. Data as of April 30, 2021. Source: Bloomberg, BLS, INET Oxford

What is surprising, however, is before COVID-19 hit, females accounted for 58% of employment across high-exposure industries and just 38% of the workforce in low-exposure industries (such as manufacturing and technology). Put differently, women accounted for a greater share of jobs in the industries that were harder hit by the pandemic, and a smaller share in industries that were more insulated. Interestingly, women actually lost more than their pre-pandemic share of jobs within high-exposure industries but lost fewer than their pre-pandemic share of jobs within low-exposure industries.

There are other reasons why women were more impacted than men by the pandemic within the labour market. Researchers at the Federal Reserve Bank of San Francisco recently publish a paper “Parents in a Pandemic Labor Market” that found a pandemic divergence in labour force participation (those who have jobs plus those actively seeking jobs) between fathers and mothers. Specifically, labour force participation had shrunk by 1.1% for fathers during the pandemic compared to a 3.4% decline for mothers. While many mothers were returning to the labour force during the spring and summer of 2020, a large drop off occurred in the fall when school resumed (virtually for many) as shown in Exhibit 2. Approximately one-third of K-12 students are still attending hybrid or virtual-only school today, according to data aggregator Burbio.

Exhibit 2: Labor Force Participation During COVID-19 by Parental Status

Data as of March 31, 2021. Source: Federal Reserve Bank of San Francisco.

This would support the notion that childcare responsibilities (including remote-learning supervision) have been falling to women more than men. Some women have had to make the difficult choice between a job and taking care of their children due to the pandemic, and this has weighed on female employment levels. In fact, 33% of non-working women between the ages of 25 and 44 cited childcare demands as the primary reason for their departure from the labour force, compared with just 12% of men according to the Census Bureau. The aforementioned research paper also finds a strong correlation between female employment trends and flexible working hours. Specifically, industries with a higher share of jobs with flexible hours saw fewer female job losses, while industries with a lower share of flexible hour jobs saw greater female job losses. This dynamic was less pronounced for men.

Pandemic Silver Lining – Remote Work Gaining Acceptance

We believe this finding is encouraging, given an increasing post-pandemic shift towards greater workplace flexibility. Further, the normalization of these practices should bode well for female employment. Prior to the pandemic, only 7% of the U.S. workforce had access to remote-work policies and related flexibility benefits according to the Bureau of Labor Statistics. During the peak of stay-at-home last spring, it was estimated that nearly 50% of Americans were working remotely, and many companies are planning on keeping partial or even full work-from-home policies once COVID-19 subsides.

With more Americans likely to work remotely part of the time in the future, perceptions around remote work are also likely to change. According to Ellen Ernst Kossek, a Purdue expert on inclusive organizations, “[Pre-COVID] research shows that if you’re using telework and flexibility to finish a project late at night, managers love you; if you’re using it for family or personal reasons, they stigmatize you and think you’re not career-oriented.” With many seeing just how productive they can be, the stigma of remote work is likely to be lessened in the future.

In recent months, ClearBridge has been actively engaging companies on workplace flexibility, encouraging them to make the most of this opportunity for change. While we recognize there is no one-size fits all approach, we ask all companies to think through the many impacts a partial shift to remote work could have on their workforce. Some topics we highlight with management teams are the impact of remote work on newer employees, mentorship and culture, and performance evaluations for remote workers. We believe companies that take a holistic and thoughtful approach to remote work can have a positive impact on their current workforce and attract more talent, particularly women and under-represented groups.

This bodes well for female employment in the future, and for GDP growth more broadly. If more companies offer remote and flexible work and there is less of a negative connotation associated with these benefits, a common reason many mothers leave the workforce will be eliminated. This should allow for more women to participate in the labour force, supporting faster GDP growth over time. Historically, there has been a strong relationship between changes in female labour force participation and trend GDP over the intermediate term (five years).

Exhibit 3: Female Labor Force Participation Correlates with Economic Growth

Data as of March 31, 2021. Source: U.S. Bureau of Economic Analysis, Bureau of Labor Statistics, Bloomberg.

In the near term, female labour force participation trends could also support more accommodative monetary policy. Last summer, the Federal Reserve concluded a review of their monetary policy framework, revising their stated goals to “emphasizes that maximum employment is a broad-based and inclusive goal. This change reflects our appreciation for the benefits of a strong labour market, particularly for many in low- and moderate-income communities.” In effect, this means that the Fed is likely to look beyond the headline unemployment rate when setting monetary policy in the coming years so long as inflation does not run away.

While the unemployment rate has recovered to 6.1%, it would be 7.2% if the female labour force had simply remained constant through the pandemic instead of shrinking by nearly 2 million. When setting policy, the Federal Reserve is likely to consider what a “normalized” unemployment rate looks like. Depending on the rate of women re-entering the workforce, the Fed could maintain easier monetary policy deeper into the economic cycle relative to history.

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.

Social bonds: What Should Canadian Investors Look Out For?

When it issued a 10-year social bond in June 2020, raising $100 million as part of its new Social Debenture Program, the City of Toronto broke new ground. The Program, first of its kind in Canadian municipal circles, attracted considerable attention among ESG investors who were drawn in by the purpose of funding projects in areas such as affordable housing, basic infrastructure and access to essential services. The landscape in social finance now seems like it could enter another phase, this time courtesy of the federal government. Is the worldwide boom in social bonds coming to Canada?

As the country emerged from a pandemic that reframed priorities for a number of investors, the Government of Canada used its April 2021 budget to announce a consultation that will be sure to turn heads. “Social bonds are an opportunity to connect socially conscious investors with Government of Canada bonds that support social objectives such as reducing homelessness and improving access to high-quality early learning and child care,” the Department of Finance wrote in the budget documents. Therefore, it proposed “to explore the potential for social bonds to complement the government’s existing debt program,” committing to look into the topic “as part of the Debt Management Strategy consultations this fall.”

Social bonds have burst onto the scene like few asset classes in the past. According to one estimate by Linklaters, a British-based law firm, they raised $163 billion worldwide in 2020, increasing ten-fold from 2019. The increase was in large part due to vast needs brought on by the COVID-19 pandemic and its socio-economic impacts.

Here are a few examples:

What do social bonds look like?

The social bond market aims to finance or re-finance “social projects”, which “directly aim to address or mitigate a specific social issue and/or seek to achieve positive social outcomes,” the International Capital Market Association explained in its 2021 edition of the Social Bond Principles (SBP). The framework was designed to provide promote transparency and integrity for market participants. The SBP essentially provide a list of social needs that can be financed with bond proceeds while stating four “core components”:

  • Use of proceeds
  • Process for project evaluation and selection
  • Management of proceeds
  • Reporting

In addition, the Social Bond Principles recommend the appointment of an external reviewer to ensure the alignment of the core components and the bond, a step that can involve obtaining a specific certification or a rating. (The SBP point out that bonds that integrate social and green projects should be referred to as Sustainability Bonds and are covered by a different set of principles.)

At this point in the article, readers might ask themselves about prices and returns. How would social bonds stack up against run-of-the mill bonds should the federal government take this route? In the absence of a track record in the Canadian market, we feel that an attempt at answering this question might lead us to speculate. However, investing in fixed income is, ultimately, part of a larger portfolio strategy where return differentials within other asset classes can be much wider.

Navigating definitions

The fall consultation on social bonds won’t be the first time that Ottawa has asked for input on social finance. In 2018, a steering committee issued 12 recommendations to “unleash the potential of social innovation to address Canada’s most pressing social and environmental challenges”. While not specifically mentioning social bonds, the 2018 report did allude to “social impact bonds” (SIB), a different bond-like instrument that links the structure of payouts to the realization of certain outcomes.

As is sometimes the case with financial products that are constantly evolving, this is where things can get tricky. There are no clear-cut definitions or standards, but SIBs are generally understood to be based on a model where investors provide capital upfront for a social program or initiative. If the outcome meets or exceeds certain predetermined targets — audited by a third party — the issuer, often a government or other public entity, reimburses investors a prearranged sum.

According to the Brookings Institution, 194 social impact bonds were issued worldwide between 2010 and 2020, representing upfront investment of US$421 million. Countries with the most bonds created were the United Kingdom, the United States, the Netherlands, Portugal and Australia. So far, Canada has only seen a handful of SIBs, and the capital being raised is relatively tiny compared with the amounts observed in the wider “social bond” market seen in other parts of the world.

Anticipating the level of demand

All this raises a question: what would investor demand look like should the federal government move forward with social bonds? Time will tell. In the first quarter of 2021 alone, social bonds issued worldwide raised US$90 billion, according to recent data from Moody’s. One trying to predict the appetite in Canada might look at last year’s social bond issued by the City of Toronto. For the $100 million bond – sold at $99.98 for a 10-year yield of 1.602 % -, the City recently mentioned that « expressions of interest were in excess of $400 million, with strong interest from the environmental, social and governance (ESG) community.” In a world where COVID has made many investors keen to explore social-themed opportunities, line-ups could be just as likely.

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.

Lithium: A Circular Economy Perspective for ESG Investment and Stewardship

The race to achieve net-zero emissions presents a challenge and opportunity for the circular economy, which applies regenerative design thinking to economics and aims for sustainability.

To reach net-zero greenhouse gas (GHG) emissions by 2050, big shifts are underway. While alleviating climate change is paramount, transitioning to a low- or no-carbon economy may include activities with other potentially negative impacts if not adequately managed.

For example, with transportation accounting for 15% in global GHG emissions at the end of 2019, adopting battery-powered electric vehicles (EVs) will help achieve climate objectives. EV sales increased by 54% year-over-year in 2020 despite the COVID-19 pandemic, and demand for lithium-ion batteries is expected to grow 1030% by 2030, as per Bloomberg estimates. This isn’t surprising given existing and upcoming regulations across different regions, such as China’s 13th Five- Year Plan and the emissions reduction schemes of California and the European Union.

Source: Bloomberg Finance LP, as of March 13, 2021

However, investors in battery manufacturers and car makers, as well as direct investors in renewable projects, should consider the environmental and social impacts of lithium to ensure companies in their value chain address these challenges sufficiently.

Lithium production, water consumption and contamination

One car battery requires 6,000 gallons of water. The South American triangle which covers parts of Argentina, Bolivia and Chile holds more than half of the world’s lithium supply. South America is also one of the Earth’s drier places. In Chile’s Salar de Atacama, mining activities consume 65% of the region’s water, compromising the water requirements of farmers and other activities.[1] This could cause community opposition and companies can lose their operating license.

Lithium extraction also uses harmful chemicals. According to the International Chemical Secretariat, lithium mining produces 17 chemicals, including brominated flame retardants [2]; these are cited on the list of hazardous chemicals, raising the possibility of restricting their usage. These chemicals harm aquatic life and water quality, affecting communities and their water supplies as they cause air and soil pollution.

The emission intensities of nitrogen oxide (NOx) and sulfur oxide (SOx) of the specialty chemicals company Albemarle, for example, are significantly higher than other specialty chemical companies in the MSCI ACWI index.[2] Companies can incur liabilities if they don’t manage contamination risk.

In addition, if not properly recycled, rechargeable batteries create environmental damage. Once in the landfill, these substances contaminate groundwater, soil and air.

Recycling opportunities

With strong tailwinds in battery demand and contamination risks, recycling offers an opportunity. Reports indicate the market for battery recycling will reach $137 million by 2027 in North America. Most of the current recycling occurs in the consumer sector; however, given the electrification trends in numerous sectors, this growth number can be higher.

GHG emissions of EVs

From mining and transportation to battery manufacturing, shipping and car manufacturing, EVs have their own carbon footprint. Many companies are working with their suppliers to reduce Scope 3* emissions by adopting renewable energy in their operations. Scope 3 emissions constitute over 90% of the GHG inventory of an automotive equipment manufacturer. However, progress on Scope 3 emissions remains preliminary.

A circular economy approach

Shareholders, direct investors and creditors of companies involved in the EV supply chain can help adopt a circular economy approach to sustainability by taking into account these considerations:

Public market investors (shareholders and creditors):

  • Establish best practices in lithium supply chains through ESG analysis of operating companies.
  • Encourage research and development to spur innovations in reusing, recycling and disposal.
  • Adopt best practices in product stewardship programs and plans to phase out hazardous chemicals.
  • Encourage target setting for reducing harmful emissions. Key metrics to track can include GHG, NOx, Sox emissions and other effluents.
  • Understand the political and governance risks of the regions battery minerals are sourced from.
  • Integrate companies’ ESG performance into investment analysis and financial models (through a discount rate for ESG laggards to account for potential higher operational costs or litigation costs caused by negative environmental and community impacts).
  • Engage with companies to better understand their practices, targets, performance metrics, plans about minimizing environmental and social impacts, and research and development plans about sustainable technologies.

Direct/real asset investors:

  • Integrate ESG factors into project planning and development – e.g. initial impact assessments as well as free and prior informed consent.
  • Conduct regular environmental and social impact assessments, including effects on biodiversity and community resources.
  • Establish operational best practices and performance reporting on sector-relevant ESG issues, such as waste management, air emissions, health and safety practices and performance, ESG accountabilities in executive compensation, and skills diversity at board level.
  • Understand ESG risks in their supply chains.

By engaging with companies on issues and metrics that ensure a holistic view of their ESG performance, investors can help mitigate ESG bubbles created by specific themes and facilitate a just transition towards a net-zero economy.


[1] Juan Ignacio Guzmán, Patricio Faúndez, José Joaquín Jara, Candelaria Retamal (2021), Role of Lithium mining on the water stress of the Salar De Atacama Basin.

[2] MSCI ESG Ratings report for Albemarle Corporation as of March, 2021

* Scope 1: Company direct emissions
Scope 2: Emissions from energy purchased by the company
Scope 3: Emissions throughout supply chain and final use of product/services

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.

Enabling Social Investment Opportunities Outside of Affordable Housing

There are seemingly not enough social impact investment opportunities to quench investor appetite in Canada.

If we remove the opportunities to invest in green energy, and instead analyze opportunities to invest in communities, we see very little by way of investment. Considering this state of the social impact investment landscape, how can investors intent on having an impact, fund opportunities that create lasting social change while generating a fair return?

The first step is becoming aware of the opportunities that currently exist across Canada. The fact is, social purpose organizations are lagging in creating social enterprises, programs and projects that can be funded through social impact investment. However, there are several organizations that have leveraged funding from Foundations and the Government to create viable investment opportunities:

Social Impact Funds

Organizations like Windmill Microlending and Access Community Capital have leveraged private debt to create micro-loan programs targeted to communities facing barriers.

Windmill Microlending provides microloans to help skilled immigrants and refugees continue their careers in Canada. This includes supporting clients to obtain the Canadian licensing requirements to work in their field, pay for exams, relocation costs and professional association fees. These financial supports are complimented by career advisory services that help clients choose the right path to achieve their professional goals, support navigating the Canadian financial system and ongoing mentorship.

Access Community Capital focusses on supporting emerging entrepreneurs with low-interest loans. These programs target marginalized communities that may not qualify for traditional financing and are supplemented by accelerators and coaching supports.

The wrap-around programs that organizations like this coordinate to support lenders, help to maintain high repayment rates. As organizations seek to broaden their community impact and create investment opportunities, targeted loan programs and funds will become more common.

Community Bonds

Organizations like Solar Share, the Centre for Social Innovation and more recently, Sketch Working Arts, demonstrate how community bonds are a form of debt financing that can activate individual community supporters and turn them into investors.

SolarShare is Canada’s leading renewable energy co-operative, developing commercial scale solar energy installations across Ontario. By leveraging community bonds, SolarShare enables retail investors to invest in these projects through a 5 -year “Solar Bond” that earns a 5% annual interest rate. The Ontario Government purchases energy from these installations on a 20-year contract, creating a stable revenue stream for the repayment of the bonds.

The Centre for Social Innovation (CSI) is a social innovation hub, providing a coworking space and incubator for social purpose organizations. In 2010, the organization raised $2 Million through community bonds to purchase their first building, CSI Annex. In 2014, the organization raised another $4.3 Million through community bonds to buy their second building, CSI Spadina.

Through early engagement with institutional investors, when structuring the bond, organizations have ensured that their offering can appeal to the investment goals of a wide range of stakeholders.

Online Investment Platforms

While still limited by the availability of investment opportunities, SVX has created an investment platform that promises to provide a single point of access raising capital and making investments for investors seeking social/environmental impact. As the number of charities, non-profit organizations, and social entrepreneurs creating investible opportunities increases, platforms like SVX will play an important part in highlighting investible opportunities.

While there are organizations that have stepped up to the plate as trailblazers in social enterprise, there are still challenges in bringing attention to viable opportunities. Beyond the social good that is generated, there is little incentive for investors to accept the below-market rate returns that many impact investment opportunities offer. In addition, the perceived risk of investing in social purpose organizations, can be a deterrent.

Federal, provincial and municipal governments have several tools at their disposal to make social impact investment opportunities more attractive and hold a key secondary role in creating a more active impact investment environment in Canada. Much like the incentive programs that spurred innovation in the green energy industry, and has resulted in more favourable investment opportunities, the government needs to take proactive steps in encouraging investors to support innovation and financial investment in the social sector. In Canada, this could include:

The creation of Opportunity Zones and Qualified Opportunity Funds

As highlighted by the Ontario Realtor Party, Opportunity Zones create a financial incentive to invest in economically distressed communities. In the United States, it was the 2017 Tax Cuts and Job Act that served to establish the Qualified Opportunity Zones program. Through the program, communities are nominated by a State and certified by the Treasury Department as qualifying for the program. The program then allows Investors to defer a capital gain and invest those dollars into Qualified Opportunity Zone Funds.

As the program is relatively young, it is too early to tell what the true impact these funds will have on under resourced communities. However, money from this program is being used in the United States to support investments across the country, including new housing, grocery stores, medical clinics, broadband infrastructure, and the creation of local innovation districts. Opportunity Zones have the potential to ensure that the communities most in need of support are being provided with equitable investment.

Guaranteeing Community-led initiatives and projects

To help lessen the perceived risk of investing in social impact opportunities, government agencies and non-government granting agencies could support organizations by becoming guarantors. A guarantor agrees to assume the obligation of some or all the debt if the borrower defaults. This would provide a level of protection against losses for investors wishing to invest in community-led initiatives and projects that have the potential to generate revenue. For agencies that routinely provide grant funding to organizations, becoming guarantors could be used to both encourage organizations to pursue investible opportunities and motivate investors to fund opportunities.

Incentivize Foundations to Increase their Social Impact Investment Portfolio

This year, there have been increasing calls for government to increase the disbursement quota (DQ) of charitable foundations to 10%. In recognition of both the increased pressure on non-profit organizations due to COVID-19, and the average annual rate of asset appreciation seen by foundations, calls for more support are justified. However, as discussed in the report released by the Task Force for Social Finance there is also an opportunity for foundations to increase the portions of their capital in Mission Related Investments (MRI). This can translate into social impact investment and can help translate into the greater social impact that advocates for an increased DQ would like to see.

While the opportunities to invest in real community impact are limited, they do exist. With a greater willingness from investors to explore unique opportunities, more proactive involvement from governments in making the opportunities more viable, and increased activity by the social purpose sector in creating opportunities, the ecosystem can expand rapidly.

It will take all parties thinking creatively and stepping a little outside of their comfort zone to create the impact that is possible.

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 to Apply an ESG Lens to Manager Selection & Oversight

Applying an environmental, social and governance (ESG) lens to an investment can turn up many things. It could, for example, reveal that a company’s approach to environmental sustainability is effective, or perhaps there are embedded risks that could challenge its business model. That’s why it’s worth asking the question, what would happen if you turned that same lens on an investment manager’s own approach to ESG?

Determining the extent of an investment manager’s commitment to ESG is increasingly important as it transforms from aspirations, to policies and ultimately systematic implementation. Today, an important proportion of investment managers have stated ESG commitments and are committed to raising the bar. Bloomberg estimates that based on a 15% growth rate (half the pace of the past five years), ESG managed assets in 2025 could represent more than a third of the projected US$140.5 trillion in total financial assets.

To start with, an analysis of an investment manager’s ESG approach may reflect how deeply the manager believes in meeting ESG targets, or implementing its ESG policy. Certainly, so-called ESG fundamentalists (investment managers that have thoroughly embedded sustainably as the only path towards financial security and wellbeing) are likely to follow a robust approach to including ESG factors in their analysis. Moreover, their ESG objectives would likely be supported by a clearly defined governance model. They may also enjoy strong backing of executive leaders with board-level accountability.

What should we look for to determine just how ESG-engaged an investment manager is? A track record of regular and ongoing ESG analysis of portfolios, as well as dedicated ESG resources, internal and external collaboration, formalized training programs and more.

It should also be evident that the values of the investment manager as a whole support ESG integration, which helps provide an enabling culture. Such a culture could further empower managers by encouraging them to integrate ESG considerations into all aspects of their investment decisions. And such staunch support can foster greater awareness and deliberation, and may lead to creation of portfolios with a greater degree of ESG integration.

However, even when supported at the corporate level, approaches to investing under an ESG umbrella can become blurred. For example, an increasing number of managers (public and private) are moving to broaden their offerings of lower carbon or decarbonized portfolios. For others, investments in areas like the energy sector may be viewed differently, depending on who is looking through the ESG lens.

This is because on one side, there are those who believe energy companies can contribute to the transition to a lower-carbon economy, given the scale of the industry and technology employed in it. For instance, development of carbon capture technology and the use of natural gas as a cleaner transition fuel as renewables are built out.

So on one side of the ESG equation, you could have managers who pursue carbon reduction or exclusion, while others take a nuanced view. From an investor’s point of view then, it’s important to understand why and how a manager factors in a multitude of intrinsically linked ESG considerations.

Assessing a manager’s philosophy around active stewardship can also be revealing. Indeed, exercising effective stewardship among the companies represented in a portfolio on behalf of investors, not only shines a light on investment culture, it also reveals the degree of ESG awareness that the manager has. A proactive approach to active stewardship may ultimately foster greater long-term resilience in a portfolio, benefitting both the investment firm and investor.

Ongoing Monitoring and Communications

ESG integration is a journey. Assessments thus necessitate ongoing monitoring of an investment manager’s actions towards systematically integrating ESG factors into its investment strategy.

This can include quantitative analysis of the portfolio. As well, third parties could be engaged to measure each portfolio’s ESG characteristics. This includes tracking how fund characteristics change, both over time and versus peers, to identify areas in which a fund appears to be departing from its stated ESG promise.

Transparency around how a manager reports on its ESG investment outcomes is also key to understanding both the company’s (as a whole) and individual manager’s approach. Determining if an investment firm has signed on to the United Nations-supported Principles of Responsible Investing (PRI) is a good place to start. Doing so requires a firm to clearly report their progress annually. In turn, the UN PRI will deliver another level of transparency by auditing and measuring their progress.

Finally, ask whether a company is contributing towards sustainable investment practices by sharing best practices with the broader investment community by taking part in various public task forces and participating in sustainable-oriented investing initiatives. Engaging more broadly on policy and regulatory issues on various systemic issues can move the dial, creating meaningful change and benefiting a multitude of stakeholders.

Investment manager checklist

In-depth analysis drives ongoing engagement activities

Investment manager checklist – assessing managers on their firm commitment to ESG, their strategy implementation and active stewardship.

Sun Life Global Investments, as a fund of fund manager, is in a unique position to observe and assess ESG practices and ESG evolution among managers. The ESG journey continues to unfold at an increasingly accelerated pace and collaborations are highly likely to become the new norm.

Contributor Disclaimer
Views expressed are those of the author and views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by SLGI Asset Management Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell securities. This article is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy.
Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada and Sun Life Financial Trust Inc.
© SLGI Asset Management Inc., and their licensors, 2021. SLGI Asset Management Inc. is a member of the Sun Life group of companies. All rights reserved.
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.

Need and Opportunity: What COVID-19 Revealed About Social Infrastructure

The global pandemic highlighted that many communities around the world lack the necessary facilities—things like accessible health care facilities and affordable housing—to combat threats like COVID-19 effectively.

Vibrant health care and education facilities, social housing, and buildings for civic services are often the bedrock of healthy and resilient communities. These social-purpose structures can contribute to economic growth and social cohesion, while providing essential services. Unfortunately, such facilities are underfunded in many countries. Better social infrastructure is needed to prepare for future global emergencies.

Public funding shortfall

Public investments in social infrastructure dropped sharply after the 2008-2009 Global Financial Crisis, when austerity policies stifled capital flows, as seen in Exhibit 1.

Austerity’s Global Impact on Public Investments in Social Sectors

Exhibit 1: Social expenditure as percent of GDP in OECD countries, year-over-year change (USD)* (2009–2018)

Sources: Franklin Templeton, OECD, Macrobond. As of November 2020.
*Note: Australia did not report numbers 2017–2018; Japan did not report numbers 2016–2018.

A 2018 report from the High-Level Task Force on Investing in Social Infrastructure in Europe found the annual investment gap in this space is estimated to be at least €142 billion (US$167.7 billion).

Demographic changes such as aging populations also present a headwind for social infrastructure. In Europe, the share of people aged 65+ is projected to increase from 18.9% in 2015 to 29% in 2060. In Japan, where 28% of the population was 65+ in 2019, there are significant shortfalls in social infrastructure investments. The Asian Development Bank estimated in 2016 that Japan needs to invest ¥10.3 trillion–13.5 trillion to meet demand through 2030 for social infrastructure construction, rehabilitation, replacement and operations.

As countries move past COVID-19, the lack of government investment in social infrastructure is likely to worsen. Debt-to-gross domestic product (GDP) ratios for governments across the world are enormous. The International Monetary Fund reports gross government debt in “wealthy countries” will rise by US$6 trillion to US$66 trillion at the end of 2020 (from 105% of GDP to 122%). In developing economies, the World Bank estimated debt hit a record US$55 trillion in 2018.

Need for private capital

Public spending shortfalls plus a magnified need post-pandemic are creating opportunities for private capital investments into social infrastructure. Fortunately, institutional investor interest in impact-focused investment in real estate was growing prior to COVID-19. Most impact investors expect to maintain or boost their commitments to impact investing this year, according to a survey by the Global Impact Investing Network (GIIN). Also, a 2020 Preqin survey showed 61% of investors expected impact investing to become more integral in the next three years. With US$8 trillion in assets managed by private capital firms as of September 2019, there’s ample opportunity for private investors to play a leading role in the wake of COVID-19.

Do well by doing good

Social infrastructure is an important, institutional-scale opportunity for private investors to align portfolios with societal benefits and achieve competitive financial performance. In our experience, social infrastructure investments in real estate typically offer predictable returns and tend to be less exposed to market and systemic risks.

These investments may also be less correlated to broader market indexes and other commercial real estate investments. The lower correlation is driven by security of income. Services provided by social infrastructure tenants are often essential, making them less exposed to market volatility. Therefore, they’re less dependent on day-to-day economic activities in the immediate vicinity.

This can underpin rental income certainty in times of distress. For example, immediately after the pandemic started, real estate valuers placed an uncertainty clause on all valuations. This was eventually lifted for real estate sectors with steady income, such as social infrastructure, while more traditional commercial sectors retained these caveats due to higher uncertainty.

In the U.S., investor demand fell significantly for brick-and-mortar retail (see Exhibit 2). On the contrary, essential assets like health care facilities and education did relatively well. For example, by the end of 2020 in Europe, our strategy saw a near 100% rent collection from tenants in our social infrastructure properties.

COVID-19 Headwinds Weighed on U.S. Retail Real Estate Performance in 2020

Exhibit 2: National Council of Real Estate Investment Fiduciaries (NCREIF) Index annualized total returns by sector (USD)

Sources: Franklin Templeton, NCREIF, Macrobond. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Past performance is not an indicator or guarantee of future performance.

The GIIN’s most recent annual survey of impact investors reports the average internal gross rate of return on realized impact investments in real assets (not only real estate) is 13% in developed markets and 8% in emerging markets for market rate investors.

The same survey found that asset allocations to real assets increased 21% between 2015 and 2019. Also, there are data about the resilience of social infrastructure versus commercial real estate assets. Again, focusing on Europe, if we consider real estate investment trusts’ (REITs)** share prices during the very volatile market period of January – July 2020 as a proxy, we can see in Exhibit 3 that social infrastructure sectors increased, while mainstream commercial sectors dropped as much as 50%.

Social Infrastructure Investments Showed Resiliency Against Pandemic Headwinds

Exhibit 3: European REITs: A proxy for social infrastructure performance (January 1 – July 30, 2020)

Source: BNP Research. Past performance is not an indicator or guarantee of future performance.

A bright future

Investing in social infrastructure with a focus on impact can yield not only market rate returns, it can also create financial resiliency that improves financial results. Fluctuations in other sectors during the pandemic will likely increase institutional investor interest in income-producing real estate whose tenants’ ability to pay rent is less correlated to economic activity. Depending on the severity of COVID-19’s economic fallout, there may be increased sale and leaseback opportunities, as cash-strapped municipalities look to raise funds by selling properties on their balance sheets.

The pandemic emphasized the importance of resilient social infrastructure as well as sustainable communities; it also created more demand for impact-focused capital. The need for better and sufficiently funded social infrastructure is a global phenomenon that now has worldwide attention.

** REITs are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies must meet a number of requirements to qualify as REITs. Most REITs trade on major stock exchanges and offer a number of potential benefits to investors.
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.