An increasing array of institutional and individual investors are mobilizing around the business case behind considering environmental, social and governance (ESG) factors in investment decisions. According to the 2020 Canadian RI Trends Report, there are currently $3.2 trillion in responsible investment assets under management (AUM) in Canada with a 48 per cent growth over a two-year period. This represents 61.8 per cent of Canada’s investment industry. Canadian investors have become more particular about how they deploy their capital and seek to deliver returns with ESG factors as a key consideration.
Amidst ongoing global uncertainty, institutional investors continue to seek investments that shelter their capital from risks while also generating strong returns. Even before the global crisis caused by the COVID-19 pandemic exposed the importance of public health policies to investments, there were reasons to think about ESG issues when making investment decisions.
Changing Investor Considerations
Some investors believe that healthy markets require stronger economies and stable societies: for them, investing is about ‘doing well’ while also ‘doing good’. This may be particularly relevant in values-driven organizations, for example faith-based organizations or mission-driven foundations who seek to generate investment returns to support the long-term goals of a values-driven organization. Similarly, an increasing array of responsible investment funds are seeing growing popularity – particularly among millennial investors. The implications for pension plan sponsors and pension investors may vary significantly based on their underlying plan member audiences as well as the individual expectations and requirements of their Boards and Trustees.
Just as purpose varies among organizations, the ways in which asset owners, sovereign wealth funds, investment management firms and corporations manifest ESG in their investment habits also varies. One organization might put more emphasis on the “E” as in climate change, while another might be more interested in the “S” such as issues surrounding healthcare or social justice. Others may expressly defer these assessments to their asset managers. The diversity of thinking remains a key hallmark – both for those seeking to make a difference as well as for those awaiting greater clarity, more data or greater standardization.
Across the spectrum, a few consistent themes nonetheless emerge. Notably, institutional investors are demanding transparency on ESG issues and are looking for additional investment options that may lead to positive ESG outcomes. A recent study that BNY Mellon conducted with the Official Monetary and Financial Institutions Forum (OMFIF) showed that three-quarters of the central banks, sovereign wealth funds and public pension funds surveyed consider ESG factors in their investment process. Some investors are pursuing impact investing as a way to drive innovation in alternative technologies that may reduce the environmental impact of more traditional solutions. In addition, as millennials continue to accumulate wealth, financial services firms may see opportunities to shift strategies and create values-based investment options and products.
ESG Investing Challenges and Opportunities
Today’s complex market challenges include the growing need for both greater consistency in, and increased access to, the best practices of ESG investment. Among these best practices is the need for customization to reflect individual preferences, standards to support the ESG investment process, and demonstrability of ESG representation in sustainable investments. Just as asset owners are facing rising demands from Boards and Trustees, asset managers and issuers alike can similarly expect demands for greater transparency around ESG investing in portfolios from internal and external stakeholders.
According to forthcoming research from CIBC Mellon regarding how Canadian pension funds are preparing for a post-Covid-19 environment, 80 per cent of pension funds intend to be more vocal about investment strategies over the next 12 months. CIBC Mellon commissioned a survey of 50 leading Canadian pension managers, half of whom had between $600m and $1.2B under management, and half with more than $1.2B under management. As pension funds work with, allocate to and collaborate with external managers, many intend to be more hands-on than in the past. This not only relates to performance, but to broader issues such as governance and the consideration of nonfinancial or values- driven factors such as ESG. While investors cited areas like transparency and fee reduction as their top priorities for the year ahead, 44 per cent of respondents indicated they plan to focus more on fund managers that take ESG issues into account.
As organizations think about their investment allocations, investment management, performance/compliance monitoring and operational efforts in the years ahead, the opportunity to align their purpose with what they do and how they do it will likely continue to rise – as will pressure from data that increasingly correlates value and values around the incorporation of ESG factors. Investors’ rapidly evolving attitudes and explorations of ESG have set their influence on a macro level. It is driving change not only in the way organizations go about their business, but also in the way it defines itself and thinks about its own role in the world.
While this paradigm shift continues to evolve and investment industry stakeholders reassess their approaches, these trends will likely be a defining challenge not just for the current generation but for generations to come. That significance will drive what stakeholders are expecting of their providers, whether it is citizens wanting more from their sovereign wealth funds; pensioners and retirees setting higher expectations for pension funds; or sovereigns and pensions expecting more of their investment managers.