There’s More to ESG Than the Environment: Advisors Going Beyond Emissions

November 17th, 2022 | Jennifer So, Elgin Chau

Over the past decade, interest in environmental, social and governance (ESG) has soared – with responsible investments (RI) accounting for more than 62% of all professionally-managed assets in Canada, according to the Responsible Investment Association (RIA) of Canada¹. Yet, many advisors are hesitant to bring up ESG with their clients. An RIA-led investor opinion survey found that 77% of investors want their advisors to talk to them about responsible investing, yet only 27% reported having had those discussions with their financial professionals².

If ESG is becoming a bigger part of the investing conversation overall, why aren’t more advisors bringing sustainability up to their clients? The problem is that ESG is still largely misunderstood, with many in the investment industry struggling to see beyond the E. 

Emissions are only one piece of the puzzle

To many, ESG is thematic, often seen exclusively through the lens of climate change. Journalists and experts have criticized ESG for having unclear goals, inconsistent measurement and too many objectives to be meaningful. One story goes so far as to say that ESG should be distilled into one simple measure: emissions.

While defaulting to the environment and even emissions is understandable – emissions are the most easily quantifiable ESG factor – that’s an extremely narrow view. If emissions were the only consideration, portfolios would be heavily weighted toward clean tech, alternative energy, and other climate-focused concerns. This also assumes investors only care about the environment, but social and governance issues, such as gender balance in the boardroom or fair labour practices, are also top of mind for many Canadians. 

Unlock value with ESG

ESG has long evolved from being a vehicle solely used to align investments with investor values. It’s now far more holistic. A large focus in ESG is on reducing risk and identifying emerging opportunities, which is one of the central reasons institutional investors have integrated it into their investment processes. 

Boston Consulting Group (BCG) notes that ESG appeals to sophisticated investors because it blends financial accounting requirements with non-financial performance metrics, which can not only help the planet and the greater good, but also help investors achieve their financial goals. 

Does ESG hurt returns?

Some investors may be concerned about whether ESG metrics hurt returns amid heightened market volatility, but the data doesn’t justify those fears. According to RIA, the MSCI Canada ESG Leaders Index has outperformed the MSCI Canada Index over the long term. 

We believe this is because ESG, which is a lens under which all companies can be viewed, enhances the investment process by providing an additional filter to screen out bad actors, assess risks and identify opportunities. ESG integration does not need to be considered an investment style in and of itself. 

Investors increasingly recognize that governments and regulators will continue to impose stricter rules, particularly around harmonizing climate-related disclosures. As those regulations come into focus, companies that haven’t taken issues like climate change seriously risk exposing themselves to stiff penalties and potential lawsuits that can cut into their bottom line. 

Companies take note: ESG continues growth in Canada

Canadian companies are taking this seriously. According to a 2021 report by Montreal-based ESG consulting firm Millani, more than 70% of companies on the S&P/TSX Composite Index now have dedicated ESG reporting, up from 36% in 2016 – including some energy companies. 

The increased interest shouldn’t come as a surprise. According to an Ipsos survey conducted between August 27 and 30, 2021, two-thirds of Canadians consider ESG factors important when deciding on investments³. The desire for RI is even more pronounced among up-and-coming investors, with 71% of people aged 18 to 34 taking ESG factors into account. 

If companies are going to succeed – both from a revenue and share price increase perspective – they will likely need to prove to their customers that they care about ESG issues. 

More education and discussion needed

If these misconceptions are going to change, more education is needed. A study by the Ontario Securities Commission found that a third of investors say access to ESG information helps them make better investment decisions. Many investors are still unfamiliar with ESG, so advisors who can educate have an opportunity to improve their value to their clients.

Perhaps a good place to start is to underscore that there is more to ESG than climate change. 

As values shift around environmental and social issues, it will open new industries like electric vehicles, new markets such as carbon credits and create opportunities for overdue themes to thrive, such as welcoming more women into leadership roles.

For advisors who want to continue to deliver value to their clients, it is important to think beyond the “E.” As BGC notes, the innovations and investments being made by companies looking to improve in all three ESG categories could inject trillions into the global economy by 2050. By applying an ESG lens, investors will be in a better position to identify these companies and participate in potential investment returns. 

It’s time for the investment industry to look at the wider implications and potential of ESG to identify opportunities for how it can help manage risk. Not every investor will share the same values, so it’s up to the advisor to bring up ESG with their clients and determine where they are on the ESG spectrum. As an advisor, you don’t have to pick sides, you just need to focus on the big picture.

[1] As of December 21, 2019
[2] As of September 2021
[3] As of November 2021

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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.


author's photo

Jennifer So

Portfolio Manager, Fundamental Equities
BMO Global Asset Management

Jennifer joined BMO Asset Management Inc. in September 2015. Jennifer is a Portfolio Manager and is a specialist in Responsible Investing with a focus on diversity and inclusion and sustainable opportunities. Jennifer spent a decade at a Canadian Bank with experience in Investment Banking, Research and Institutional Sales. In addition she has a further 7 years’ experience as a Chartered Accountant at one of the big four accounting firms and teaching undergraduate finance at a Canadian University. Jennifer has a Bachelor of Commerce from the University of Toronto and is a CFA Charterholder, CA and CPA.

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Elgin Chau

ESG Integration Manager, Responsible Investment

Elgin supports ESG integration across the different investment teams and asset classes at BMO GAM. Elgin joined BMO GAM from Act Analytics, an ESG analytics company he co-founded, which recently exited to a large financial data provider. Prior to that, he has worked at Connor, Clark & Lunn Investment Management where he was the quantitative equity product specialist, and at Guardian Capital as a quantitative analyst where he was responsible for the design and implementation of systematic investment strategies. Elgin holds a BSc in Computer Science from the University of Toronto.