An Exciting Year Ahead for the RIA

Last year was full of accomplishments for the RIA, from the success of our first in-person Conference since 2019, to our global and local industry research, and convening with members in major cities across Canada. None of this would have been possible without the commitment and engagement of our members, which is why we conducted a comprehensive Member Survey to inform our strategic direction and set us up for an extraordinary 2024.

We’ve started the year with a focus on the RIA’s evolved strategy and plans to enhance our member experience. We will also be offering redesigned approaches to optimize online learning and look forward to increasing our voice in policy and advocacy work.

On February 26th, we will be in Montreal hosting an afternoon of French language discussions on economic reconciliation and responsible investment, followed by an evening cocktail reception. Later that week we will launch the 2023 RIA Investor Opinion Survey, examining Canadian investors’ attitudes toward responsible investing. This will be the RIA’s eighth annual survey of individual investors and it is based on data from over 1000 respondents across Canada. A presentation of the results will be available in both French and English.

In May, we will convene for the first RIA Conference in Vancouver since 2017 and are excited to meet members from across the country. The conference serves both institutional and retail markets, offering opportunities to network with industry leaders, hear from ESG specialists, and learn about the latest issues, trends and developments in the field. Previous RIA event speakers include industry change-makers, visionaries, policy makers, sustainability leaders, and practitioners, and we are excited to share this year’s lineup in the coming weeks.

Moving into the fall, we will welcome the global sustainable investment community for PRI In Person in Toronto, and look forward to hosting our Global Sustainable Investment Alliance (GSIA) colleagues in person. We will also deliver the third consecutive annual RI Trends Report, an important milestone in tracking the evolution and maturity of our industry.

We look forward to engaging with you and sharing exciting developments as the year progresses.

The Building Blocks of the Energy Transition and the Important Role of Institutional Capital

There will be no global net zero unless the energy transition in emerging markets is accelerated rapidly. That requires urgent action by the financial community.

Among developing nations, which now account for more than half of total emissions and rising, China alone has available resources to fund its energy transition. The rest of the developing world requires a massive increase in overseas investment. According to the International Energy Agency, roughly US$1 trillion of annual funding is required to decarbonize emerging economies (not including China). As of 2021, less than one-sixth of that sum was being spent.

Less than 1% of the institutional asset pool would be required to meet all of the developing world’s net zero financing needs. The problem is not a shortage of capital per se. Global institutional assets, most of which are managed by pension and sovereign-wealth funds, add up to about US$120 trillion.

Many allocators we speak to understand the ‘why’ but ask how assets can be mobilized to support the energy transition in emerging markets, while also contributing to their return targets. The first step is for asset owners to recognize that in order to meaningfully contribute to the lowering of global emissions, they must shift their allocations – and hence their influence – toward high-emitting companies, industries, and countries. This means allocating to the developing world especially. To date, too many have sought to clean up their portfolios by doing the opposite.

13 of the 20 biggest carbon emitters are emerging economies. Large emitters among them include a diverse group classified by the OECD as middle-income countries, such as Brazil, China, Colombia, India, South Africa, Thailand, and Turkey. Together, they account for 56% of the greenhouse gases put into the atmosphere each year. Ex-China, they still represent about one-quarter of global emissions. Most of them have fairly sophisticated private sectors and financial systems, offering  broad opportunities and multiple access points for international capital.

The second step, and perhaps the most important, is to dispel the myth that transition investing in emerging markets is a charitable undertaking. The ‘emerging transition’ investment universe is large and robust enough – and, crucially, generating sufficient economic value within individual nations – that it offers commercial returns. By sector, most of the transition investment in emerging countries needs to be directed toward building out renewable-energy generation capacity and upgrading the electricity grid. In our view, these and other transition-linked areas of emerging economies can be extremely competitive from a risk-return perspective.

The third step is for pension funds and other large asset owners in advanced economies to become more familiar with the most effective channels for transition investing in emerging markets: corporate debt and project financing. While many developed-world pension funds currently have an allocation to emerging markets via equities and sovereign debt, very few invest in emerging credit. Yet this is a deep market, offering a highly efficient pathway to connect institutional asset pools with the businesses and projects at the heart of the emerging world’s energy transition. Moreover, by advancing climate-oriented covenants and embedding meaningful carrots and sticks in bond and loan documentation, investors can incentivize progress toward net zero in a targeted and effective way.

Ninety One’s emerging markets corporate debt team alone manages investments in more than 40 countries – there are many private- and public-sector entities with serious net-zero intent seeking transition financing. The latter are often running well ahead of the former. In India, for example, whose national climate targets are generally seen as lagging, almost 100 companies have now adopted science-based emissions-reduction targets. In South Africa, Anglo American plans to install up to 4GW of renewable-energy capacity by 2040, which could see the mining giant generate about 7% of its home nation’s electricity needs. In short, the building blocks exist to accelerate the emerging world’s energy transition: the capital, via institutional asset pools; the ambition, not least via emerging market companies’ transition plans; and the mechanisms, of which the credit markets are arguably the most important. The urgent task now is to connect and action them.

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This communication is for professional investors and financial advisors only.   
The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Ninety One’s judgement as at the date shown and are subject to change without notice. There is no guarantee that views and opinions expressed will be correct and may not reflect those of Ninety One as a whole, different views may be expressed based on different investment objectives. Although we believe any information obtained from external sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness (ESG-related data is still at an early stage with considerable variation in estimates and disclosure across companies. Double counting is inherent in all aggregate carbon data). Ninety One’s internal data may not be audited. Ninety One does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions. 
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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.

Challenges and Risks in Generative AI: Considerations for Investors

Since OpenAI’s ChatGPT went viral in late 2022 for its unprecedented ability to engage in human-like conversations and provide articulate responses in wide-ranging domains of knowledge, several competitors have begun introducing their own iterations of the technology. This type of AI technology, known as generative AI, is based on large language models that are trained on massive amounts of data, which could include text, images or other media. The models identify the patterns and structures of the training data and then generate new content that has similar characteristics based on user prompts.

There are various benefits to incorporating generative AI in a business – process improvements, cost reduction and value creation, to name a few. Leveraging these opportunities, companies across different sectors have already begun testing and implementing generative AI tools. Examples range from financial institutions deploying chatbots trained on internal databases to provide financial advice to customers, to healthcare institutions automating the generation of medical documentation based on conversations between patients and physicians. Across industries, companies are also incorporating generative AI tools in marketing, customer service and product development.

As such, investors have to pay attention not only to large tech companies that are building the foundational models, but also to companies that are starting to incorporate generative AI tools into their business. As with most new technologies, there are potential risks that should be adequately considered and safeguarded against before widespread deployment. Regulation will be important in helping reduce these risks. But because the development of regulation occurs at a much slower pace than the development and application of AI, investors should actively consider its risks and seek stewardship opportunities in companies involved in generative AI to address these risks.

Challenges and Risks in Generative AI

Generative AI models have various known issues. These models have the tendency to “hallucinate,” generating false outputs that are not justified by the training data and presenting them as a fact. These errors can be caused by various factors, such as improper model architecture or noise and divergences in the training data. Opaqueness about the generation of model outcomes is also an issue. With billions to trillions of model parameters that determine the probabilities of each part of its response, it is exceedingly difficult to map model outputs to the source data, including in cases of hallucination.

In addition, if the training data contains societal prejudices or if the algorithm design is influenced by human biases, the model may learn and propagate these biases in its outputs. Enterprise applications could also be vulnerable to data privacy issues and cybersecurity threats. This includes leakage of sensitive information within the training data if the model is customer/public-facing, usage of personal or sensitive data in model training that may have needed explicit consent to use, as well as malicious attacks from hackers that aim to manipulate model outputs.

These issues give rise to various legal and reputational risks, the scale of which depends on the criticality of the use case and the company’s industry. For example, the financial and healthcare industries may be subject to severe consequences if problems do arise, due to the high-stakes nature of these industries.

Sample Use Cases in the Financial Industry

In financial advisory use cases, model hallucinations could give inappropriate advice or offer the wrong product to undiscerning clients, which could undermine public trust in AI systems and the financial institutions using them. Lack of transparency about the generation of model outcomes is also a key issue for financial institutions, as these institutions are required to be able to explain their decisions internally and to external stakeholders. Considering all this, it is best practice to implement a degree of separation between direct model outputs and the customer, where internal staff could be trained to recognize potential errors and inconsistencies in model outputs and assume ultimate responsibility for the decision-making process.

Generative AI could also offer a quick and low-cost way for financial institutions to profile their clients for marketing campaigns, risk management and identification of suspicious transactions. However, overreliance on generative AI profiling could violate anti-discrimination laws due to potential bias embedded within the models. Appropriate human judgment will need to complement generative AI models that perform client profiling. Financial institutions will also need to have strong data privacy policies and robust cybersecurity measures to address generative AI’s risks to their sensitive client information and proprietary data.

Questions for Investors to Consider

In view of all these issues and risks, below are questions investors should consider when assessing companies employing generative AI tools:

  • What are the risk-mitigating mechanisms and/or circumstances? Solutions include having trained internal staff act as an intermediary between direct model outputs and the customer; working to understand potential biases in the training data and address them in model design; regular and proactive monitoring of model output to promptly identify and address any signs of hallucinations; implementing robust cybersecurity measures; etc.
  • What is being done to enhance model performance? Solutions include ensuring that training data is of high quality, accurate and up to date; implementing iterative feedback loops to refine and improve model performance; etc.
  • Is there any transparency and oversight of ethical AI principles? This pertains to providing transparency on data sourcing and data privacy concerns; defining clear policies and procedures to ensure compliance with ethical standards and emerging regulations; outlining the roles and responsibilities of individuals involved in the development, operation and oversight of the generative AI model; etc.

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The information contained herein is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance.
This document may contain forward-looking statements (“FLS”). FLS reflect current expectations and projections about future events and/or outcomes based on data currently available. Such expectations and projections may be incorrect in the future as events which were not anticipated or considered in their formulation may occur and lead to results that differ materially from those expressed or implied. FLS are not guarantees of future performance and reliance on FLS should be avoided.
The statements and opinions contained herein are those of Kate Tong and do not necessarily reflect the opinions of, and are not specifically endorsed by, TD Asset Management Inc.
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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.

Nuclear Power’s Role in Reaching Net Zero and the Investment Opportunities it Brings

Nuclear power has been a somewhat neglected energy source for some years now. It provides only around 10% of the world’s electricity (and around 15% of Canada’s), and currently comes far behind oil and natural gas in terms of overall global energy supply. 

However, there are big changes coming in how the world will consume energy. To mitigate the impacts of global warming, most countries have made significant commitments to move away from fossil-fuel use and replace it with net-zero energy. To achieve this within the fairly short timeframes required (2050 for many countries), nuclear power is likely to become a much bigger player in the electricity-generating field.

Let’s take a look at the scope of change as the world moves from fossil fuels to net-zero energy sources; nuclear power’s probable role; and the investment opportunities that it brings.

Net-zero targets and the move away from fossil fuels

Extreme weather, exacerbated by global warming, has had devastating impacts on the planet, causing billions of dollars’ worth of damage along the way. In a bid to minimize these impacts, most of the world’s countries have agreed to cut human-made greenhouse gas emissions to restrict global warming to no more than 1.5 degrees Celsius above pre-industrial levels. The world is currently around 1.1 degrees Celsius warmer than it was in the late 1800s.

According to the Paris Agreement (a legally binding international treaty on climate change), greenhouse gas emissions need to be reduced by 45% by 2030 and reach net zero by 2050. To achieve this, we’ll need to make a huge shift regarding the type of energy we use in every aspect of our lives: for light, heat, cooling, transportation and industry. The world will gradually have less dependency on fossil fuel energy — such as coal, gas and oil — and replace it with renewable energy sources.

This will be a mammoth task, and while it won’t happen overnight, it does need to happen in just a few decades, which will bring with it considerable challenges.

Nuclear power’s role in reaching net-zero targets

Currently, with almost 85% of global energy consumption coming from fossil fuels, we clearly have a long way to go to greatly reduce that consumption and diversify the energy grid.

The good news is that the journey has already begun, and renewable energy sources, such as hydro-electric, solar and wind power are not only growing at a fast pace, they’re also less expensive to set up when compared to new gas or coal generating plants.  

Much of current fossil fuel energy will have to be replaced by electricity in one form or another (either directly from the power grid or in batteries). One of the key issues of renewable energy is storage. The technology to store excess energy from wind and solar farms when the sun is shining and the wind is blowing, is currently insufficient. When it’s dark and still outside, we’ll need an energy source that can continue to feed our power needs. While hydroelectric power (using the power of moving water to generate electricity) is highly efficient at providing energy at the push of a button, wind and solar are not.

This is where nuclear power comes in. While it’s not renewable energy as such (uranium, the source of nuclear power, is a finite resource), it does create energy with zero greenhouse gas emissions. And it can deliver energy around the clock, regardless of the weather or time of day.

There is substantial potential for increased growth of nuclear energy over the short term, to help replace the huge amounts of fossil fuel energy we currently consume. It can be a quick and fairly cost-efficient option to extend the life of nuclear reactors so they can continue to generate power. Also, the development of small modular reactors (SMRs) could provide a more affordable option that is much faster to build than large reactors.

In recent years, there seems to have been concerted political will for nuclear power to play a key role in the transition to net-zero emissions. In 2020, then Minister of Natural Resources, Seamus O’Regan said, “We have not seen a model where we can get to net-zero emissions by 2050 without nuclear.” Nuclear currently accounts for 15% of Canada’s electrical production capacity.

The challenges facing nuclear power

Nuclear power has some hurdles to overcome when it comes to being a key player in the move away from fossil fuels. Some of these issues are contentious, but they’re all worth mentioning, and include:

  • New nuclear power plants are expensive to build and take years to complete.
  • It’s perceived to be dangerous: disasters like those that happened in Fukushima in 2011 and Chernobyl in 1986 have given nuclear power a reputation for being unstable.
  • Uranium mining can have negative environmental impacts.
  • Nuclear power generation uses large amounts of water.
  • Radioactive waste from nuclear power stations can remain dangerous for thousands of years, and storing it safely can be a challenge.

The nuclear power industry has been working to overcome these challenges. For example, small modular reactors have the potential to produce energy quicker and cheaper than large power plants. And when compared to other means of power generation, nuclear is fairly safe, especially when you consider there have been two major disasters in 37 years among the world’s 440 nuclear power stations.

And, given nuclear power’s ability to produce large amounts of electricity efficiently and continuously, without being beholden to the weather or sunlight, along with political will, it looks set to play a key role in the transition away from fossil fuels.

Investment opportunities in nuclear power

Nuclear power’s main attraction for investors is that it’s a zero-emission energy source that can easily adjust its output to match demand, unlike the current challenges facing renewable energy sources such as wind and solar. As the world moves away from oil, gas and coal, huge amounts of carbon-free energy will be needed. Nuclear power is well positioned to help the world reach net-zero energy consumption.

Governments are committed to transitioning to zero-emission energy by the end of the century, and many are providing tax incentives for nuclear power generation. For example, Canada has a tax credit of up to 30% for clean energy technologies, which include small modular reactors, and the US introduced a tax credit in 2022 for the production of new nuclear power.

Here are some of the key ways that nuclear power can offer investment opportunities:   

  • The development of small modular reactors could be extremely attractive. They can be built in a factory and then shipped to the site, meaning that they could be used to provide power to many remote or small communities.
  • Traditional nuclear power will only grow in importance as more countries upgrade existing (or build new) nuclear reactors to meet aggressive net-zero targets.
  • Many businesses are built around the maintenance and upgrading of traditional nuclear reactors, a sector that is likely to grow enormously over the next few decades.

To find out more about the role that nuclear power will play in the move away from fossil fuels, and the investment opportunities it will bring, read the Mackenzie Betterworld Team’s Pathway to net zero.

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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.