From Facebook’s data breach to the Vale Dam disaster to Volkswagen’s emissions scandal, we have seen how an environmental, social or governance (ESG) issue, especially when overlooked, can eventually surface and have a tremendous impact on a company’s performance.

It has become clear that the world has less tolerance for bad behaviour and investors are on the hunt for strategies that do well while doing good. While ESG considerations have become applied by some mainstream investors, the alternative fund management industry has been slower to adopt it and the focus has mostly been on SRI and impact funds. But changes in the way hedge funds evaluate companies are underway.

When we originally started our ESG learning journey we thought we could simply buy third party data and incorporate them into our fundamental work; however, we quickly discovered what we believe are the short comings of ESG rating agencies. For example, data providers often use static, backward looking and voluntary company disclosures. This led us to develop our own proprietary scoring framework.

Our 30 factor framework was developed based on SASB materiality research, the U.N. Sustainable Development Goals, third-party studies and our own subjective criteria. The factors are consistent across sectors; however, the “E”, “S”, and “G” are weighted differently across sectors. For example, in energy and mining the “E” is more relevant, whereas in consumer products such as, tobacco producers the “S” is more relevant. There are 11 global industry classification standards (“GICS”) sectors, so we started with 11 different scorecards and continued to refine sub-sector scorecards from there. This allows us to not only identify companies with positive ESG scores and practices, but also effectively short the bad actors.

By examining the case of an International Cruise Line stock (“Company X”), we will demonstrate the following:

• How a failure to comply with ESG will eventually cause a material valuation impact
• How hedge funds can incorporate ESG into their valuations and use a long/short approach to reward the “good” companies and short the “bad actors”.

In the case of Company X, one of the largest players in the global cruising industry, we saw the looming impact on its valuation through operational, reputational, and regulatory disruptions as well as incremental operating costs and capital expenditures.

Company X holds 40% of the global market and is facing rising environmental headwinds, including stricter regulations from organizations such as the International Maritime Organisation (IMO) 2020, which ruled that as of January 1, 2020, marine sector emissions in international waters must be cut. In 2019, a study found that the air on Company X ships has as much air pollution as the city of Beijing, one of the worst offenders in air quality. The regulatory and investment communities are holding companies to higher standards regarding their environmental and social practices, creating new implications for companies like cruise line stocks.

We look at multiple third party scores and normalize them within our framework to arrive at a final third party score. In the case of Company X third parties gave them a -0.05 ESG score whereas at Waratah Capital Advisors Ltd., it received a -2.00 score, and a clear short.

Despite heavy negative scrutiny in 2019, including a Federal judge threatening to ban the company from docking at U.S. ports, Company X kicked off 2020 with yet another negative headline in violation of U.S. regulations finding themselves in the spotlight once again for pollution. The Florida Department of Protection confirmed that they discharged approximately 5,900 gallons of “gray water” into the ocean. Gray water is leftover water containing bacteria (among many other dangerous items) from baths, sinks, showers and laundry facilities. Company X is a repeat offender and has skirted environmental regulations 10 times. Although Company X aspires to be the industry leader in best practices and environmental responsibility from a policy perspective, this event clearly indicates that in reality they are not committed to making improvements, and continues to pose a high ESG risk.

With the global macro uncertainty related to the COVID-19 pandemic, cruises are becoming incrementally more of a discretionary item, resulting in pricing softness coupled with endless new industry capacity. On March 8 the CDC issued a public advisory to “defer all cruise ship travel worldwide” yet Company X still had passengers at sea in early April, nearly a month after. The company’s Chief Medical Officer even made early coronavirus warnings; however, Company X continued operations as usual. This gave rise to new lawsuits filed combined with social issues related to their handling of the coronavirus while stranding thousands of guests and workers at sea. More than 1,500 people on the company’s cruise ships were diagnosed with coronavirus and dozens died. As an active manager, Waratah was well aware of the infractions continuing to take place with Company X, so in response to these events, we were able to re-score the company, ultimately lowering it further from -2.00 to -2.25.

Based on our assessment, we noticed a repetitive pattern of Company X attempting to conceal their environmental breaches under probation. This resulted in one of the largest adjustment factors in our internal scoring database. As we continued to monitor Company X, it was noticed that internal governance within the company was not improving, which was evident through continual breaches and controversies. We downgraded Company X further, which has also been strongly correlated with their negative stock performance.

Waratah’s investment thesis was to short the position on behalf of our clients based on ESG risks: environmental concerns and law suits due to the repetitive breach of large legal settlements and poor industry dynamics, which ultimately impacted fundamentals. The scoring decision for our short position of Company X was extremely advantageous. This is evident through their stock performance as the YTD return for the company is -70.88%, which is underperforming the overall stock market by 71.03%.

Specifically within the cruise line industry, companies are susceptible to environmental risks more than ever. We believe that it is important to identify the bad actors in the space early on. With rising awareness of pollution and evolving environmental regulations, there is undoubtedly a higher potential consequence for fines and risk.

Company X is a great ESG short case study where they have been placed on probation and fined $40MN in late 2016. Company X violated their probation repetitively by attempting to falsify records, dump waste into the ocean, and illegally dump gray water off the ships. Resultantly, the court even threatened to restrict their ships from US ports. This had materially impacted their financials, and ultimately played into the growing theme of environmental risks that affect interest from investors and even customers. This shift of ESG narrative from corporates could hopefully push the company to revamp their operations to ensure complete transparent, honest, and environmentally cleaner operations moving forward.

Thankfully, there is a compelling connection between ESG factors, performance and risk, which makes it evident that ESG, is here to stay. Investment managers can achieve meaningful impact as well as meaningful financial returns over the long-term by integrating ESG considerations into fundamental investment analysis and portfolio construction. It is clear that if ESG factors are not considered in fundamental analysis, opportunities and risks are not addressed. A long short approach allows managers to reward the “good” companies and short the bad actors, increasing their cost of capital and using the capital markets to encourage change.

Contributor Disclaimer
Waratah may change its views in the subject companies discussed in this article at any time for any reason and disclaims any obligation to notify any party of such changes.  The information and opinions contained in this article are not and should not be perceived as investment advice or a solicitation to buy or sell securities.  Waratah makes no representation or warranty, express or implied as to the accuracy or completeness of the statements made in this article nor does it undertake to correct, update or revise those statements.

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.

It is clear that the perfect storm created by the breadth, immediacy and severity of the COVID-19 crisis and the collapse in oil prices has created significant uncertainty for investors going forward. Public equity prices seem disconnected with the economic outlook companies face and cannot be completely explained by asset allocation movements due to extremely low yields for the foreseeable future.

As we look to rebuild our economy, what lessons might we as investment managers and advisors learn from the COVID-19 crisis, or indeed the climate crisis and the societal crisis of systemic racism?

Crisis brings reflection, and reminder of fundamentals

As an advisory and investment management firm working exclusively on responsible and impact investing across all asset classes, we took time to reflect and assess our basic assumptions in light of recent events. COVID-19 had already shone a light on cracks in a market system that left many communities excluded from opportunities for economic prosperity, growing income inequality and the disproportionate burden of the virus. The recent deaths of George Floyd, Breonna Taylor and others highlighted again the systemic racism in our societies that handicaps black, racialized and structurally excluded communities. Calls to ‘build back better’ caused us to reflect on what we do and how we contribute to better outcomes through our focus on responsible and impact investing.

Upon reflection, our belief has held firm that market performance over the long term will ultimately be delivered by investing in companies that can deliver stronger financial performance.

Which companies are they, exactly? Those focused in markets and sectors that have better prospects for growth; those building strong sustainable competitive advantages, often referred to as economic moat; those focused on meeting the United Nations’ Sustainable Development Goals, where $2-4 trillion of capital is needed annually; and those with greater resiliency to withstand and absorb shocks, recover and still carry on. These are companies that have invested in building trust, goodwill and shared value with their many stakeholders – employees, suppliers, customers and communities. They embedded resilience in their systems, their operations and even their capital structure, when times were good.

A key role for advisors

As investment managers and investment advisors, most of us are being called upon to reassure and comfort clients; the value of that trusted professional advice in an uncertain world is heightened. A good starting point is reminding clients that investing for the long term is still a sound strategy, but this is not enough. We need to communicate the benefits of investing for impact as a solution.

Specifically:

• Investing in companies which are helping to create a better world through their products or services, and their operations, will enhance the prospects of sound financial returns and avoid unnecessary risk
• There are companies to invest in but it takes effort, research and diligence to separate out those that are genuine from the pretenders
• How and where you allocate your capital is a tool for expressing the values that are important to you, just like where you give, what you support and where and what you buy

Confirmed by recent momentum

Evidence seems to indicate that this shift is already happening and accelerating. When we look at the data from QI 2020, we see two material trends: more capital is flowing to funds that are ESG focused relative to 2019 and there is growing evidence of a positive association between ESG-focused investing and performance. [1] We believe these are long-term secular trends because they are being driven by many underlying shifts and many players in the global markets.

In fact, we expect that, in their quest for sustainable long-term returns, more investors will deepen their focus and move along the continuum from ESG to responsible and ultimately impact investing. That is why we responded to specific client requests and launched two impact funds in June that provide the market with a multi-asset class and a global equities impact investing option*.

The purpose of wealth creation through investing is to deliver prosperity, enjoyment and well-being to clients. We cannot deliver these benefits to these clients if we ignore how the money we invest is used by the companies we invest in. If we are to deal with the crises we face, be it climate change, COVID-19 or systemic racism, we must rebuild better by shifting more money to responsible investing. Now is not the time to change course but to double down – to make sure we are not driven by a desire to relive the past but instead build a better future.

*This does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or any other product or service offered by Rally Assets. Rally funds are available to accredited investors only. You should consult your investment advisor or other appropriate professional regarding your specific situation.

Sources:
[1] https://www.morningstar.ca/ca/news/202180/canadian-esg-funds-grew-faster.aspx
https://www.blackrock.com/corporate/about-us/sustainability-resilience-research

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.

A storm has come. People have sheltered at home as a pandemic has claimed lives across the planet and ravaged businesses, economies and social norms.

But humanity has weathered severe crises before – and is doing so again. As a species, we are survivors. We adapt. At this stage of the crisis, the short- and long-term consequences for individuals, families, businesses and politics are hard to calculate, and a second wave of infections remains a threat. We are learning to overcome a new enemy. Yet humanity will have to summon all of its adaptive ingenuity to combat the bigger storm coming our way.

The planet breathes

The coronavirus pandemic remains, first and foremost, a human tragedy. Yet the lockdowns briefly had positive environmental side effects. Declining industrial production improved air quality in even the most polluted regions, while grounded aircraft and reduced road traffic lowered levels of noxious fumes and carbon dioxide emissions.

Waterways, rivers and seas in popular tourist areas became clearer – the Venetian canals, for example, were reportedly the cleanest in living memory. In India, the Himalayas became visible from the Jalandhar district of the Punjab. In the absence of people, leatherback sea turtles returned to Florida beaches.

These signs that nature can quickly recover from the rapid pace and high consumption of modern living offers some encouragement that humanity could wind back the clock. But the scale of the tasks before us – to mitigate and adapt to climate change – is vast. Even more overwhelming is the short timeframe in which we must achieve both of these outcomes.

Is there an appetite for change?

Before the coronavirus locked down populations, CO2 emission rates looked set to increase global temperatures by 1.5°C and 2°C over the next 12 and 25 years. These estimates may even be optimistic, given they exclude feedback loops like the melting Arctic permafrost.

Even after accounting for the commitments by governments and companies to cut carbon emissions sufficiently, the accepted paradigm of continuous economic growth runs the risk of sentencing the world to a much warmer – and scarier – future.

Long-term bond yields suggest that we face decades of sub-par growth. In this environment, people are unlikely to support green efforts to drive down emissions that could further depress growth.

Climate calibration

Across the world, it’s getting warmer. If efforts to mitigate climate change prove insufficient or ineffective, rising temperatures could seriously affect sea levels, the food chain, human health and livelihoods. Most at risk are India, Bangladesh, Nigeria, Pakistan, Thailand and Vietnam – countries classified as among the warmest and most humid (already).

Consider India – where 42% of the workforce are employed in the agricultural sector and 3.8% in construction – which stands to lose the most as the number of days with insufferable heat climbs. Among labourers, the effective number of outdoor daylight work hours lost in an average year could increase by 15% in 2030, leading to a 2.5-4.5% drag on GDP.

Already about 10% of Indians, or 120m people, live in areas with a risk of lethal heat waves – defined as three-day surges in temperatures that exceed the threshold of survivability for a healthy human being in the shade – annually, and this proportion is expected to increase. By 2030, between 160m-200m of the Indian population will be exposed to this danger, and among them an estimated 80m-120m don’t have airconditioned homes.

The number of people expected to fall into this lethal danger zone is forecast to range between 310m and 480m by 2050. While it is true that most of the population is expected to live in air-conditioned accommodation by then, absent technological innovations, air conditioning will contribute to further heating up the environment.

Figure 1. The projected number of working hours lost* due to greater heat and humidity in India and South Asia

The next tier of countries impacted by climate change includes Indonesia, The Philippines, Saudi Arabia and Japan. While the latter is not part of the emerging markets benchmark, it remains economically important to the Asian region. China, Brazil and Chile enjoy diverse climates and thus have more varied levels of risk. Some are severe but due to the variance in their geographies (and economies) may cope better with climate change.

Overheating businesses

Emerging-market businesses are particularly vulnerable, given their generally high numbers of outdoor workers and low levels of savings and income relative to developed markets. Not only the productivity of businesses will be impacted, but also the capacity for some to remain operational if their current locations become too heat exposed.

Based on our analysis and engagements, we have determined that the companies in our emerging-market portfolio have not paid adequate attention to the risks that a global average temperature rise of between 2°C-4°C may pose to their businesses.

We recognise that boards and management teams already field plenty of ESG-disclosure requests from investors, in addition their day jobs of providing financial and strategic updates, and thus are feeling stretched as new requests for information and business adjustment come in. Keeping up with an ever-moving target of “sustainability” is difficult and further demands may be seen as inconvenient. But as long-term investors, we believe that adapting to climate change is more than a sustainability challenge: it is set to become one of survival. Through our engagements, we encourage the companies we invest in to prepare for a hotter world and assist where we can.

How can investors respond?

We believe that unfortunately, society’s efforts to prevent the earth from warming are not destined for outright success. Given this, we think that investors should pay as much attention to adaptation as mitigation. Adaptation can be defined as the measures that nations, cities, companies and individuals must take in order to prepare for living in a degraded environment. It may include large-scale capital projects or even the relocation of essential infrastructure and populations, and we need to consider the implications of these now.

Global warming is a vast problem. We can help to dissect the issue, as the McKinsey Global Institute has, by defining five key dimensions:

• Liveability and workability: Outdoor workers and people lacking savings or adequate income will be most impacted. Disease vectors will shift.
• Food systems: Flood and drought can cause breadbasket failures or reduce crop yields.
• Physical assets: Real estate and infrastructure could be damaged by flooding, extreme storms and wildfires.
• Infrastructure services: Heat, wind and flooding can disrupt power, water and transportation services.
• Natural capital: Disruptions to ecosystems can endanger food chains, habitats and economic activity.

Anthropogenic adaptation

Ever since humanity emerged in its current form 300 millennia ago, we have adapted to withstand a wide range of threats – war, disease, famine, natural disasters, economic depression and terrorism – and have often used the experience and knowledge gained in order to improve the lives of future generations.

But the anthropogenic phenomenon of global warming will test our ability to avoid mortal danger more than ever before. Humanity’s ability to adapt, something we have excelled at, must again come to the fore.

We encourage all investors to make climate change a core theme of their interactions with businesses: all companies, not only those we invest in, must begin to focus on adapting for the rougher weather ahead.

To find out more about how global emerging markets can adapt to this new normal, read the full Q2 2020 issue of Gemologist.

Sources:

[1] “Emission budgets and pathways consistent with limiting warming to 1.5 degrees C,” by Ricard J. Millar et al.,published by Nature Geoscience, volume 10, in 2017. Quoted in “Climate risk and response: physical hazards and socioeconomic impacts,” published by McKinsey Global Institute in January 2020, on p.35

[2] “Climate risk and response: physical hazards and socioeconomic impacts,” published by McKinsey Global Institute in January 2020

Contributor Disclaimer
The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other communications. This does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

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.

According to the International Energy Agency, carbon-based electricity generation contributed over 30% of total global greenhouse gas emissions in 2018, by far the largest source of global GHG emission.

To minimize the impact of climate change and meet the Paris Agreement’s goal to limit the increase in global warming to 2°C, Morgan Stanley Research estimates that the world needs to spend US$50 trillion over the next 30 years in clean energy and technology. The International Renewable Energy Agency forecasts that US$750 billion a year is needed in renewables alone over the next decade.

How can green bonds help investors fight climate change?

The question on the minds of many investors is not whether to join in this growth, but how to channel capital into wind, solar, hydro-electric, bioenergy, energy efficiency and geothermal projects to help slow and mitigate climate change. Green bonds represent an exciting opportunity for socially and environmentally conscious investors, who want to make sure their dollars are going towards protecting and restoring the environment.

Investors can reduce the carbon intensity of their portfolios in many ways, through funds that exclude fossil fuels, integrate ESG factors, or focus on positive impact. Despite the positive aspects of these approaches, many funds do not provide a “pure play” into renewables, and often still include carbon intensive industries. Many clean energy focused funds invest in diversified utility companies which, in addition to their clean energy projects, also include significant amounts of fossil fuel generation and distribution. For investors that are seeking a “pure play”, there are two primary options to focus on: ‘pure’ renewable energy companies, such as publicly traded companies like Boralex, Brookfield Renewables, Innergex, and RE Royalties, and green bonds.

While investing in equity does present certain risk given the fluctuations of equity markets and performance of individual companies, green bonds present an alternative way to invest in the renewable sector by offering a more predictable fixed income style return. In contrast to buying shares and owning a piece of a renewable energy company, green bonds are a loan from the investor to a company to be used exclusively for investing in green projects.

The investor receives interest income on their investment (typically higher than a savings account or GIC) over a defined period of time, otherwise known as the term of the bond. At the end of the term, the investor receives the full value of principal back. In general, bonds are lower risk than stocks because the repayment takes legal priority (also known as seniority) above shareholder equity. That said, most green bonds are not secured against the projects themselves, particularly in the case of renewables. For more investor security, some green bonds are “senior secured” against the underlying assets, but these are rare (about 4% globally).[1] While green bonds offer more predictability and security, the one downside to green bonds is that they are usually illiquid, which means the investor usually must wait until the end of the term for the full principal to be returned.

How can investors know whether a project is truly green?

The market for green bonds is expanding dramatically as investor sentiment towards environmental issues intensifies, but the industry and standards are still evolving. Investors are left wondering how green the projects being funded truly are. According to BNN Bloomberg, approximately 90% of green bonds[2] issued are externally reviewed to ensure proceeds are used to finance or re-finance green projects. Investors should seek out green bonds that follow an established framework with recognized third-party verification.

The most used frameworks are the Green Bond Principles, endorsed by the International Capital Market Association (ICMA) and the Climate Bonds Initiative certification. The largest third-party verifier against these standards, the Centre for International Climate Research (CICERO), builds on the guidelines to give investors an indication of how ‘green’ the projects are based on the projects funded. CICERO uses three shades of green: 1) dark green is for projects that correspond to a long-term low carbon and climate resilient future, such as clean, renewable energy; 2) medium green is for projects that represent steps towards a long-term vision, but are not there yet, such as plug-in hybrid buses; and 3) light green is for environmentally projects that do not alone contribute to the long-term vision, such as efficient fossil-fuel infrastructure. Such standards help investors select investments based on the level of environmental impact they would like to make in their portfolios.

Figure 1. CICERO Shades of Green

 

Green bonds are an innovative and important financial instrument to help achieve global and national emission targets. The green bond market has been growing rapidly over the past several years. In 2019, CDN$9.6 billion in green bonds were issued in Canada and US$255 billion were issued globally.[3] While this still represents a small portion of new bond issuances, this emerging sector is becoming more mainstream and on the radar for climate-conscious investors. For investors wanting to take climate action, green bonds provide a stable, predictable, fixed-income investment with measurable impact benefits.

Sources:

[1] Green with Envy: Canada’s Green Bond Market is Growing into a Global Player. https://www.dbrsmorningstar.com/research/344968/green-with-envy-canadas-green-bond-market-is-growing-into-a-global-player

[2] BNN Bloomberg – Canada leads in green bond deals as 2019 issuance hits $9.6B, above past years.
https://www.bnnbloomberg.ca/video/canada-leads-in-green-bond-deals-as-2019-issuance-hits-9-6b-above-past-years~1854214

[3] BNN Bloomberg – Canada leads in green bond deals as 2019 issuance hits $9.6B, above past years.
https://www.bnnbloomberg.ca/video/canada-leads-in-green-bond-deals-as-2019-issuance-hits-9-6b-above-past-years~1854214

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.

Strong data privacy protections enable corporations to establish boundaries and limit access to information that is protected under data privacy laws.

Following the outbreak of COVID-19, companies and governments have adopted exceptional measures to safeguard employees, customers, and the public. Some of these measures include the use of technology to enable remote workplaces, and to collect, process, and share personal information in new ways.

Companies handling personally identifiable information, financial data, and/or health information must have in place robust cyber security protocols to limit the risk of data and privacy breaches. In addition, the method and type of data collected, how it is used to drive decisions, where it is stored, and for how long, are important considerations for data privacy during the pandemic and beyond.

What is data privacy and how has it evolved over time?

The right to privacy is a “fundamental human right” recognized in the United Nations Declaration of Human Rights, the International Covenant on Civil and Political Rights, and other international and regional treaties. Most countries recognize the right of privacy explicitly within their constitutions. While the definition varies, it may include the privacy of personal data or information (e.g., medical records); the protection of people’s bodies (e.g., drug testing) and personal space (e.g., homes); and the privacy of our communications (e.g., mail, telephones). Data security aims to ensure that any personal information that is collected, used, or stored is protected from unauthorized use.

Over the past decade, governments and consumers have become increasingly concerned about data privacy and security, largely due to the rise of globalization, advancements in technology, the use of multimedia, and the evolution of business models that derive financial value from personal data.

The increased focus on data privacy and security has ushered in a new generation of government regulations. For example, in 2016 the European Union (EU) approved the General Data Protection Regulation (GDPR), which applies to the collection of data from residents by firms inside or outside of Europe. The cost of non-compliance with privacy regulations and requirements can be steep. Companies found to be non-compliant with the GDPR, for example, can be fined up to EUR€20 million, or 4% of a company’s annual turnover (whichever is higher).[1] Many companies have been fined in recent years for data privacy violations or breaches, including British Airways (EUR205 million in 2019), Marriott International (EUR110 million in 2019), and Google Inc. (EUR50 million in 2019)[2] under the GDPR, as well as Facebook (USD$5 billion in 2019)[3], Google and its subsidiary YouTube (USD$170 million)[4] by the Federal Trade Commission (FTC).

How can companies address data privacy?

A company’s exposure to data privacy issues is largely a function of their business model, what data they collect, and how they process, store, and share that data. In order to effectively address data privacy and protect the security of data, a company should:

1. Establish board oversight and accountability
2. Know and comply with all laws and regulations
3. Only collect necessary data
4. Understand and receive consent
5. Implement robust data security management practices
6. Build awareness of data privacy.

How does COVID-19 impact data privacy?

Since the outbreak of COVID-19, companies and governments have taken unprecedented measures to help contain the virus and protect the population. This includes the use of technology to collect, use, and share data with the goal of limiting infections, establishing effective policies, and enabling vaccine research. Under these circumstances, the right balance needs to be struck between public health and safety and the need for data privacy and security.

Data privacy and security related impacts of COVID-19 include the:

• collection and sharing of medical, health, and other personal data
• tracking and monitoring of individuals’ location and status
• threats to data security from digitization of processes and practices, and increased risk of cyber-attacks
• modification of laws related to data privacy and protection

How will data privacy and protection change as a result of COVID-19?

The COVID-19 pandemic has required governments and companies to adapt quickly to a rapidly evolving situation. While data and technology have an important role to play in helping companies and authorities identify, track, and monitor the spread of COVID-19, data privacy and security must remain important considerations. Once the immediate needs of the crisis have passed, companies and governments will need to:

• Verify compliance with privacy laws: Data that may have been collected under emergency acts, modified laws, or specific guidance related to COVID-19, will need to be identified and assessed to ensure that any ongoing collection, processing, or sharing of data is in compliance with all privacy laws.
• Confirm individuals’ consent and data rights: In cases where personal data will continue to be collected and/or held, companies and governments should ensure that consent is provided. While implicit consent or voluntary provision of data may have been adequate during the crisis under modified laws or requirements, explicit consent may be required moving forward, especially if the purpose for which the data is collected has changed.⁵
• Verify data privacy and security: Technologies or processes, such as video conferencing, remote onboarding, or digital verifications, may have been implemented during the crisis without having gone through an organization’s normal third-party risk-management process. Companies should ensure that any gaps in the verification process are filled to avoid potential non-compliance with privacy laws or security violations.

The quality and effectiveness of a company’s data privacy and security is one factor RBC GAM investment teams consider in their ESG integration processes. This may include consideration of a company’s data collection, use, consent, and monetization process; the strength of its privacy policies; managerial responsibility; privacy and security audits; staff training; reporting; and board oversight. To learn more about RBC GAM’s approach to responsible investment, visit www.rbcgam.com/ri.

Sources:

[1] Regulation (EU) 2016/679 of the European Parliament and of the Council, April 27, 2016, European Union Law (Link)

[2] GDPR Enforcement Tracker, tracked by CMS Law Tax, accessed April 28, 2020 (Link)

[3] Facebook fined $5 billion by FTC, must update and adopt new privacy, security measures, July 24 2019, USA Today (Link)

[4] Google and YouTube Will Pay Record $170 Million for Alleged Violations of Children’s Privacy Law, September 4 2019, Federal Trade Commission (Link)

[5] COVID-19, Managing privacy and cyber issues, March 2020, McCarthyTetrault

RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

Climate change is arguably the greatest challenge of our time. Most experts agree that, to prevent the most dangerous consequences of human interference in the climate system, it is imperative that economies across the globe make the transition to a low-carbon, and ultimately carbon-free, future.

The choices we make in our daily lives, from the food we eat to the clothes we wear, all have an impact on our ability to advance the fight against climate change. This is especially true of our investment decisions. By making a collective commitment to invest only in companies that are dedicated to reducing their carbon footprint, individual investors can help incentivize major corporations to align their business goals with the imperatives of environmental justice.

We believe that making investment decisions that are both responsible and financially profitable requires a multi-pronged, active approach. Our aim in what follows is to outline what we view as the key components of such an approach.

Divestment

Critical to the fight against climate change is striking at the root of the problem: fossil fuels. The transition to a fossil fuel-free economy will take many years, but we can help accelerate this process by withdrawing our financial support from the companies most responsible for climate change. This means eliminating investments in:

• Oil, gas and coal producers
• Pipeline companies
• Natural gas distribution utilities
• Liquefied natural gas operations

Decarbonization

This involves avoiding companies with an above-average carbon footprint, and investing in those that commit to two key measures:

• Board-level directives to incorporate climate risk into business decisions, financial analysis, investment evaluation and long-term planning.
• Conservation and energy efficiency targets, greenhouse gas emission reduction targets, or green power purchasing/production goals.

A good example is Apple Inc., which has an outstanding record on both fronts. Here are some highlights:

• Transitioned to 100% renewable energy for the electricity used in its offices, retail stores and data centres in 43 countries.
• Reduced emissions from direct operations to only 2% of the company’s carbon footprint.
• Expanding emission reduction efforts with its Supplier Clean Energy Program to transition the company’s entire supply chain to 100% renewable energy.
• Reduced its carbon footprint by 35% between the years of 2015 and 2018.
• Decreased average product energy use by 70% over a 10-year period.
• In 2016, Apple became the first U.S. tech company to issue a green bond.

Importantly, when industry leaders like Apple take such a clear and decisive position on climate risk, other companies tend to follow suit, creating a ripple effect that produces real results for the environment.

Reinvestment

Here the focus is on companies developing the new energy paradigm that will define our post-carbon future.

Over the past several years, broad-based recognition of the need to combat climate risk has led to significant growth in alternative energy, non-fossil-fuel-based transportation technology and green infrastructure projects. For example:

• The share of renewables in global electricity generation jumped to nearly 28% in Q1 2020 from 26% in Q1 2019, with the increase coming mainly at the cost of coal and gas.¹
• Global electric vehicle sales have increased steadily, reaching 1.2 million in 2018, while sales of conventional gasoline-powered passenger vehicles have declined by almost 500,000.²
• Ratings agency Moody’s forecasts a 20% annualized increase in green bond issuance, surpassing US$200 billion.³

A company that exemplifies the transition to a post-carbon world is TPI Composites, Inc., the largest U.S.-based independent manufacturer of composite wind blades for the high-growth wind energy market supporting global wind turbine manufacturers. Wind blades TPI manufactured in 2018 have the potential to eliminate 213 million tonnes of CO2 throughout their average 20-year lifespan, equivalent to emissions from over 45 million cars driven for a year or over 520 billion miles driven.

Shareholder engagement

We believe that investment fund managers should use the leverage they possess as major shareholders to urge companies to continue striving for a higher standard in combating climate change. This means actively and regularly engaging with management, either one-on-one or in concert with other shareholders or stakeholders. Shareholder engagement can also be very effective in getting companies back on track in cases where they have deviated from their strong commitment to environmental responsibility.

Putting it in writing

Canadians who wish to invest responsibly have an increasingly wide range of options in a rapidly expanding marketplace, making the selection process quite difficult and even overwhelming. Compounding this challenge is the task of separating the funds that merely pay lip service to environmental responsibility from the ones that have a true commitment to combating climate change.

We believe that, in addition to the four characteristics outlined above, there is a very simple gauge of that commitment: a willingness to state in the prospectus – a binding regulatory filing – that the fund’s objective is to invest in companies that are dedicated to environmental responsibility. The IA Clarington Inhance SRI Funds, managed by Vancity Investment Management Ltd., incorporate this multi-pronged, active approach and commitment to sustainability.

Sources:

[1] International Energy Agency, Global Energy Review 2020.
[2] http://carsalesbase.com/global-car-sales-2018.
[3] Gaurav Sharma, “Green Bond Market Poised to Hit a Mammoth $200B Valuation in 2019,” Forbes.com, January 31, 2019.

Contributor Disclaimer
The information provided herein does not constitute financial, tax or legal advice. Always consult with a qualified advisor prior to making any investment decision. Statements by the portfolio manager or sub-advisor responsible for the management of the fund’s investment portfolio, as specified in the applicable fund’s prospectus (“portfolio manager”) represent their professional opinion, do not necessarily reflect the views of iA Clarington, and should not be relied upon for any other purpose. Information presented should not be considered a recommendation to buy or sell a particular security. Specific securities discussed are for illustrative purposes only. Mutual funds may purchase and sell securities at any time and securities held by a fund may increase or decrease in value. Past investment performance of a security may not be repeated. Unless otherwise stated, the source for information provided is the portfolio manager. Statements that pertain to the future represent the portfolio manager’s current view regarding future events. Actual future events may differ. iA Clarington does not undertake any obligation to update the information provided herein. The information presented herein may not encompass all risks associated with mutual funds. Please read the prospectus for a more detailed discussion on specific risks of investing in mutual funds. Commissions, trailing commissions, management fees, brokerage fees and expenses all may be associated with mutual fund investments, including investments in exchange-traded series of mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Trademarks displayed herein that are not owned by Industrial Alliance Insurance and Financial Services Inc. are the property of and trademarked by the corresponding company and are used for illustrative purposes only. The iA Clarington Funds are managed by IA Clarington Investments Inc. iA Clarington and the iA Clarington logo are trademarks of Industrial Alliance Insurance and Financial Services Inc. and are used under license.

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.

As we begin this decade, the need for action to drive Canada’s transition to a low-carbon economy has become an imperative. While we probably didn’t need reminding of the urgency of the climate crisis, last week the World Economic Forum’s 2020 Global Risks Perception Survey revealed that respondents ranked environment and climate-linked events as the top 5 most likely global risks occurring over the next 10 years. The survey respondents also ranked climate action failure as the risk with the greatest impact on the global economy, if it were to occur.

Responsible investors have long been at the forefront of understanding the systemic nature of climate-related risks, and we believe the opportunity to act is now urgent.

In November 2019, we wrote to the Prime Minister and the newly-appointed Ministers of Finance, Environment and Climate Change, and Natural Resources to re-iterate our support for the recommendations of Canada’s Expert Panel on Sustainable Finance, and noted the broad support those recommendations had within the financial sector. We encouraged the government to prioritize the Expert Panel’s recommendations, which would demonstrate its commitment to driving progress towards Canada’s transition to a climate-smart, resilient and prosperous economy.

In the Minister Mandate letters (issued on December 13, 2019), we can see that addressing climate change is definitely a priority for this federal government. The Honourable Jonathan Wilkinson, Minister of Environment and Climate Change, was tasked with leading the government’s “plan for climate action, a cleaner environment and a sustainable economy. This includes exceeding current 2030 targets and developing a plan to achieve a net-zero emissions economy by 2050.” Priorities include the implementation of the Pan-Canadian Framework on Clean Growth and Climate Change along with aspirations for clean tech, zero-emissions vehicles and other initiatives. However, none of the Mandate letters made direct mention of any Expert Panel recommendations.

Our concern that sustainable finance had been overlooked was allayed on January 14, 2020, when Minister Wilkinson wrote to us acknowledging our letter. The message we received is clear: the government acknowledges that sustainable finance initiatives have a key role to play in achieving Canada’s climate objectives. Further, he is “extremely keen to engage the private sector directly in advancing solutions” and will be working with Finance Minister Morneau to review the Expert Panel recommendations.

On January 24, 2020, we were very pleased to receive a letter from The Honourable Seamus O’Regan, Minister of Natural Resources. Minister O’Regan confirmed that he will be working closely with the Ministers of Environment and Climate Change and Finance to consider the Expert Panel’s recommendations. He also assured the government’s commitment to working towards achieving a low-carbon and climate-smart economy in Canada.

We welcome these very positive signals from the federal government. Sustainable finance is on their agenda, and they are open to engaging with the private sector to address the climate crisis. With climate-related risks looming, we are encouraged by this opportunity for responsible investors to collaborate with the federal government to enable Canada’s transition to a climate-smart economy.

With seismic corporate shake-ups like the Google walkout, Starbucks shutdown, and Paul Weiss exposé, diversity & inclusion (D&I) skyrocketed to become a top priority for the private sector in 2018. Attention to D&I has fluctuated in and out of focus for decades but new levels of transparency and accountability, brought on by social media, have firmly secured it as a business must-have.

To reflect this cultural shift, publicly traded Canadian companies will now be required to report on representation of women, Aboriginal persons, visible minorities, and individuals with disabilities in senior management and on boards.

The new regulations are designed to help organizations surface and address bias in their processes and unlock the performance benefits associated with having diverse employees and inclusive culture. This data can also serve as a powerful resource for investors looking to double-down on corporate D&I leaders. While the business case for D&I has been made over and over, new data paints an even more compelling picture:

1. Talent attraction and retention: 30% of millennials report having already left an employer for a more inclusive one (more than half of millennials say they would take this leap)
2. Risk management: Inclusion related scandals see an average 7% loss in market capitalization (translating to a total $4 billion USD lost in 2018)
3. Gender diversity: companies founded and co-founded by women perform better over time, generating 10% more cumulative revenue over a five-year period
4. Ethnic diversity: a 1% increase in ethnic diversity is associated with an average 4% increase in revenue across Canadian companies

To comply with the new legislation, all Canadian businesses will need to adopt a robust way of collecting and analyzing their employee data. At Diversio, we use technology to streamline this process. We also use machine learning to identify specific problems and tactical solutions.

Diversity and inclusion is a journey – every company has its own strengths and weaknesses. In our experience, progress can be accelerated and sustained through four steps:

1. Diagnose problems: Step one is to collect data and create a baseline. Privacy and anonymity are key. In our experience, employees are up to three times as likely to identify as part of a minority group if they feel secure and anonymous. They are also more likely to be honest about their day-to-day experience.
2. Benchmark performance: The next step is to compare a company to its peers. Granularity is critical. Effective companies look at diversity by role (e.g., entry level, director, executive) rather than top-line numbers. They also compare inclusion metrics, such as access to networks, flexible work, and absence of
3. Identify solutions: The unfortunate reality is that most programs and policies designed to promote diversity simply don’t work. Too many companies waste resources implementing ad hoc programming without evidence to support effectiveness. This is where predictive analytics is changing the game. Diversio’s machine learning technology uses a company’s baseline data to identify solutions that are most likely to succeed in their environment.
4. Track progress: Diversity and inclusion must be treated as a business priority, including tracking and accountability. Not only does this build momentum, it ensures that resources are wisely spent – especially when progress is tied to bottom-line performance.

To illustrate the types of challenges faced by industries under heaviest public scrutiny, we aggregated data for more than 60 of our banking, asset management, venture capital, and tech-sector clients based in Toronto. While many companies seem diverse from a birds-eye view, a deeper-dive shows that women and minorities are underrepresented in leadership.

Exhibit A: Representation of women, ethnic minorities and persons with a disability in Finance and IT sectors (Toronto)

While there has been a growing focus on gender diversity, there is less attention to ethnic, racial and cultural minorities, persons with a disability, the LGBTQ2+ community and socioeconomic backgrounds. Diversity data of all kinds should be collected and tracked.

It is equally important to collect and track inclusion data. Our team does this by analyzing employee engagement data through six metrics that are demonstrated inclusion drivers. These metrics are aggregated into a company’s Inclusion Score, which our clients track over time.

Exhibit B shows aggregated findings on employee experience from our sample set. It is important to note that these companies are “early adopters” of inclusion technology and may not be representative of the broader industry.

For this particular sample set, we discovered that exclusion from professional networks and low flexibility and biased feedback were the biggest barriers faced by women and minorities. Nearly twice as many women as men score their employers high for harassment. This is an even greater problem for individuals with disabilities, with nearly one-quarter reporting harassment in their organizations.

While harassment may be the most egregious form of bias and discrimination, women and minorities experience other obstacles as well. For example, one-third of LGBTQ2+ employees say they don’t have the flexibility to meet at-home care obligations, a reflection of the growing number of same-sex parents.

The systemic differences in workplace experience are further exacerbated when intersectionality comes into play. Ethnic minorities with a disability are more than twice as likely as white men without a disability to report receiving biased feedback from their managers. And one in three ethnic minorities with a disability feel that their opinions and contributions are not valued in the office.

Exhibit B: Employee experience of inclusion in Finance and IT sectors (Toronto)

What does this mean for investors?

Investors play a critical role in encouraging their portfolio companies to embrace D&I. More and more investors recognize the benefits of this competitive advantage and go as far as setting internal D&I standards and expectations for their companies. The Women in Technology Venture Fund at BDC Capital, for example, has partnered with Diversio to assess D&I across their portfolio companies. They believe this will provide a benchmark for diversity and inclusion and enhance portfolio company performance.

For investors looking to join the growing roster of industry leaders, we recommend working with your portfolio companies to collect and get smart about employee data. Set targets, identify problem areas, implement informed solutions, and track progress over time.

For investors looking to meet industry standard, we recommend integrating D&I into your ESG strategy and due-diligence process. Ask companies for metrics on their D&I performance, and incorporate this information into your investment decisions.

Across the world, governments and enterprises alike are recognizing the growing importance of moving beyond rhetoric when it comes to diversity and inclusion. Data, metrics, and technology can help investors adapt to this new normal and improve returns in the process.

A revolution happened today – a revolution in how business leaders define their purpose.

In 1970, the economist Milton Friedman wrote: “There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” Friedman went even further by calling social responsibility a “fundamentally subversive doctrine.”

In short, the Friedman Doctrine stipulated that companies should focus solely on maximizing profits while obeying the law. For decades, this thinking has provided the theoretical foundations of how business gets done.

Until now.

Today, the US-based Business Roundtable of 181 CEOs announced that it has abandoned the Friedman Doctrine and replaced it with a new vision that focuses on a broader set of stakeholders including customers, workers, suppliers and communities in addition to shareholders.

The powerful group – which includes the CEOs of Apple, Amazon , Goldman Sachs, Bank of America, and ExxonMobil among others – now says companies should “protect the environment” and “foster diversity and inclusion, dignity and respect” for employees while also delivering long-term profits for shareholders.

The demise of the Friedman Doctrine marks a fundamental shift in how business leaders understand the purpose of a corporation. No longer is social responsibility a “subversive doctrine” – rather, it is part of the very purpose of a corporation, according to those who run 181 of the largest corporations in America.

Responsible Investors have been incorporating environmental, social and governance (ESG) issues into their investment decisions for years because they recognize that well-governed companies with strong performance and social and environmental metrics are likely to be better long-term investments. The Business Roundtable has redefined the purpose of a corporation in line with this thinking. This announcement provides leverage for responsible investors who engage with companies on ESG issues.

The Friedman Doctrine is out, and the Stakeholder Doctrine is in. We would love to see a similar statement from the Business Council of Canada (BCC). We will be reaching out to the BCC to start a dialogue.

Excitement. Urgency. Responsibility. This is what you felt if you attended the 2019 RIA Conference in Montréal on April 24th and 25th.

Roger Beauchemin, CEO of Addenda Capital and Vice-chair of the RIA’s Board of Directors, put it very simply in his opening address; the growing attendance, with a record 570 registrants and over 100 more on the waiting list, is a testament to how salient responsible investing has become – not only for financial market participants in Canada, but for us all. “I hope that you will leave this conference with a renewed sense of energy and determination to change the world, because together we can, and honestly, together we must.”

From climate change governance and women in leadership to artificial intelligence and cannabis, the two-day bilingual event had something for everyone. If you missed out on the largest ESG event in Canada, here is a look at what took place throughout the plenary sessions.

2019 RIA Conference Day 1

Artificial Intelligence: Responsible Disruption?

It seems as though new applications for artificial intelligence (AI) are rolling out on a daily basis, transforming our work tasks and presenting us with an abundance of questions. How do we ensure that data is used responsibly? How will AI affect our workforce, and what does a socially inclusive transition look like? Chadi Habib, Executive Vice President of Information Technology at Desjardins Group, joined David Beauchemin, Cloud Lead for Eastern Canada at Google, to demystify what AI really means and where it’s headed. Whether we like it or not, the revolution is here: an estimated 75% of business applications will use AI by 2021.

However, Mr. Beauchemin emphasized that just because we can apply it, doesn’t mean we should – Google follows a principled approach that limits AI to socially beneficial applications, and avoids those that cause harm or infringe on international and human rights.

Keynote – The ‘S’ in ESG: The Role of Investors in Driving Respect for Human Rights

Attendees had the privilege of hearing from Professor John Ruggie of Harvard University, architect of the UN Global Compact and the UN Guiding Principles for Business and Human Rights, in a captivating keynote address. Professor Ruggie touched on three main points: how critically important ESG has become in our extraordinarily turbulent world economy, the urgent need to drive ESG further into the mainstream, and how a more scrupulous look at the human dimension of the ‘S’ can strengthen consistency of data and confidence in ESG overall. “You cannot fix a problem with the tools that created it. We need new tools – and ESG is such a tool.”

SDGs In Action: How Are We Going To Achieve The Sustainable Development Goals?

Experts from Unilever, CN Rail, Mercy Investments and Aviso Wealth tackled the question: how can investors and companies work together to achieve the SDGs? Moderator Fred Pinto, Senior Vice President and Head of Asset Management at Aviso Wealth, set the stage with the idea that using the SDGs as a common goal will allow companies to create a framework for building a more sustainable future through new products and services. The benefit is to everyone.

The panel explored the idea that it’s not only about achieving the SDGs but also measuring businesses performance within the framework of the SDGs. If the SDGs are the world map of the future of human prosperity, health and well-being, gender equality, environmental resilience, and financial security, businesses need to unlock ways to succeed within them.

Conscious Capitalism Keynote Address

While capitalism remains the best system we’ve ever known for creating prosperity, the harsh reality is that “capitalism is broken”. Negative externalities are difficult to swallow, but can no longer be ignored. In her afternoon keynote address, Erika Karp, Founder and CEO of Cornerstone Capital, grounded the audience with a well-needed conversation about being uncomfortable.

Karp is undoubtedly one of the few people capable of delivering a speech with the perfect balance of candor and light-heartedness. “There are a lot of things that we are very uncomfortable with,” said Karp, referring to the many environmental and social challenges we face today. “The key is to grab onto those things and do something about it”. Fortunately, we’re already seeing strong momentum from different corners of the sustainable finance world: widespread adoption of ESG disclosure standards, social media driving unprecedented transparency and high-speed information exchange, the emergence of powerful data processing and improved data quality, and the largest wealth transfer into the hands of the most socially conscious and purpose-driven generation there has ever been. And this is just the beginning.

Climate Change Governance

Led by Sophie Lemieux, Vice President of Institutional Markets at Fiera Capital, the last session of the day focused on climate change’s emergence as a major corporate governance issue for companies. The onus, agreed the panel, which included representatives of pension funds CDPQ and Bâtirente, falls onto board members. They pointed to how tools offer only guidelines, not rules, and it is ultimately up to board members to address climate change risks.

Milestones, like COP21, can be used to guide climate change planning for boards, too, though regulation is needed to create mandatory climate change disclosures. Only then can investors and companies conduct proper analysis and move forward systematically.

2019 RIA Conference Day 2

Before diving into another full day of engaging discussions and busy networking breaks, the crowd received some encouraging opening remarks from Luc Fortin, President and CEO of the Montréal Exchange (MX) and Global Head of Trading with TMX Group. Having signed on to the United Nations Sustainable Stock Exchanges (SSE) initiative in February of this year, TMX has shown leadership in promoting sustainability performance and transparency in capital markets.

Education and industry dialogue are top priorities, which is why Mr. Fortin was pleased to announce that TMX had just joined the RIA as its newest Associate Member. “For TMX, collaboration is key and it’s the ultimate enabler of success,” said Mr. Fortin. “Our clients and stakeholders are our trusted partners in making Canada’s markets stronger and more resilient.”

The Future of Sustainable Finance in Canada: A Discussion with the Expert Panel

When the Expert Panel on Sustainable Finance set out to engage a multitude of stakeholders on low carbon, clean economic growth in Canada, they expected that not everyone would want to participate. Turns out, Canadians are even more generous than previously thought. Kim Thomassin, Executive Vice-President of Legal Affairs and Secretariat at la Caisse de dépôt et placement du Québec (CDPQ), and Tiff Macklem, Dean of the University of Toronto’s Rotman School of Management and ex-senior deputy governor of the Bank of Canada, spoke with Roger Beauchemin, CEO of Addenda Capital, about the Panel’s comprehensive consultation and the challenges to Canada’s low-carbon transition.

In general, the Canadian public has a hard time seeing sustainability as a financial opportunity, and nearly all roundtable participants brought up the data issues in assessing climate risks. A public-private partnership focused on collecting climate information and developing analytical tools may be part of the solution. The Panel will release their much anticipated final report and recommendations in May.

Going Long on ESG: What’s the State of Play, and Where are we Heading?

Many see Michael Jantzi, ESG pioneer and CEO of Sustainalytics, as a community leader within the responsible investment industry. In a compelling speech on the current and future state of ESG, he did exactly what a community leader would do: acknowledge the progress and confront the issues. On the positive side, the ESG long game is probably here to stay. A strong foundation, built by others many decades ago, has translated into amazing growth opportunities.

At the same time, with more opportunity comes more responsibility. “ESG, to this point in time, hasn’t been looked at as closely as it’s going to be looked at,” cautioned Jantzi. The more serious issues, however, bubble beneath the surface. “We are seeing a crumbling of civility in discourse,” said Jantzi, referring to increasing politicization and polarization of ESG issues among general populations. “If you believe that [these issues] are important to non-politicize, than we have to get involved.”

Managing Human Capital To Enhance Shareholder Value

A company is only as good as its people. So how can investors and companies work together to effectively manage people and create more value for employees, management and shareholders? Moderator Olivier Gamache, President of Groupe Investissement Responsable (GIR), was joined by panellists Armelle de Vienne, Senior Associate, ESG analysis at Rockefeller Capital Management, Valérie Cecchini, Vice President and Portfolio Manager at Mackenzie Investments, and Erica Coulombe, Associate at Millani, to discuss the many forms of managing human capital, including hiring practices, employee training, employee well-being and employee retention.

The discussion covered how managing human capital is not a singular challenge, especially when you consider differences across industries and regions. These complexities make it difficult for some companies to create a comprehensive strategy and report results precisely. But the conclusion of the discussion was clear: there is a correlation between effective human capital management and financial performance.

Women In Leadership: How Can Companies And Investors Accelerate Progress On Gender Parity?

Gender diversity at the board level has stalled in Canada and elsewhere. It’s an ESG issue that investors and companies are able to address very effectively, improving leadership and diversity at the highest rungs of the corporate ladder as a result. So, how can we accelerate progress? According to panellists Sherazad Adib, Senior Director at Catalyst, Tina Debos, Senior Consultant, Diversity and Inclusion at Bell, Vicki Bakhshi, Director, Governance and Sustainable Investment at BMO GAM, and moderator Milla Craig, President and CEO of Millani, investors have several tools at their disposal, including:

• Introducing board term limits to encourage change
• More engagement from investors to encourage company-level diversity goals
• Creating mutual funds that focus on gender diversity
• Updating legislation that reflects the perspective of investors and companies today
• Broadening the qualifications for board positions
• And better measurement and disclosure of diversity and inclusion

The Alpha And Beta Of ESG Investing

According to Thierry Roncalli, Head of Quantitative Research at Amundi Asset Management, the time for investors to act is now. We’re facing global issues that challenge our economic model, like climate change, and while many investors have welcomed ESG into their investment strategy, others remain hesitant. The most common question for laggards is perhaps the most obvious: what is the link between ESG and performance?

Roncalli suggests the results are mixed. Up until 2014, research showed that ESG may impede performance but more recent data is much more positive, showing a correlation between long term value and positive ESG ratings. Part of the problem is that ESG scores are relative and not absolute, so when comparing them to other indicators, like credit score, they’re less consistent.

When investors consider these additional ESG insights, like extra-financial risk and risk management in the long term, there is a strong connection between ESG and performance. Roncalli’s concluding message to an audience of several hundred investment professionals: “If we move collectively, we can see that we can move the market.”

This is a summary of the 2019 RIA Conference plenary sessions. Conference slide decks and more information on select sessions can be found below:

• 2019 Conference Slide Decks
• Panel de la conférence de l’AIR: Intelligence Artificielle – Perturbation Responsable?
• Erika Karp: Conscious Capitalism Keynote Address
• Michael Jantzi: Going Long on ESG – What’s the State of Play and Where Are We Heading?
• Panel de la conférence de l’AIR: L’avenir de la finance durable au Canada – Discussion avec le groupe d’experts
• RIA Conference Panel: Change Management for Next Generation ESG

Next year’s RIA Conference will be held in Toronto on June 8-9th. Subscribe here for updates on registration, speakers and more! Subscribe now.

Disclaimer
The views and opinions expressed in this article reflect those of the speakers 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 speakers. This article is intended as general information.