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.

 

Better understanding of RI and its benefits starts by changing how we talk about it.

It’s tempting to look at the rapid uptake in Responsible Investing (RI) solutions and conclude we’re doing everything right. RI assets in Canada are growing – now over $2T, up 42% the past two years. RI-focused mutual fund assets are up 34% and have grown to over $11B. And RI now represents just over half of the Canadian investment industry – up from 38% two years ago. This is just some of the exceptionally good news you can find in the latest RI Trends Report.

If we, as RI practitioners, all sat back and did nothing, it seems the RI wave would continue to grow. But sitting passively by is not in our nature or interest. And it’s a good thing, too. Because for all the success we’ve witnessed around the adoption of RI, the persistent challenges to more widespread adoption – the perception of underperformance, for example – remain squarely in our path. Until we find a way to resolve those challenges we will not reach RI’s true potential.

So how do take RI to the next level?

Let’s start by looking at the difference between institutional and retail channels in the adoption of RI. In the institutional space, which typical leads the retail trend, RI is humming along nicely. Institutional investors appear unmoved by the RI performance myth. In fact, the RI Trends Report survey found that the managers of pensions and institutional money favour RI for its risk benefits, return potential and overall fiduciary duty.

In the retail space, the growth trend has also been strong, albeit from a lower base. What’s concerning here though is the apparent disconnect between retail investors (who have made it clear they not only support companies that consider ESG factors in their operations, but also fully expect their advisors to incorporate ESG considerations into their investment portfolios), and their advisors. According Allianz Global Investors, only 14% of advisors proactively introduce RI into their client conversations.

When asked about the reluctance to incorporate RI into their practices, advisors trot out the usual suspects: performance concerns, lack of solution breadth and the assumption that since their clients aren’t asking for RI specifically, there must be a lack of interest.  We know all this to be patently untrue. And though we’ve banged our heads against the wall for years trying to overturn these perceptions with clear, seemingly irrefutable evidence, it doesn’t seem to matter.

There may, however, be another reason for the reticence, one we hear with increasing frequency. Despite the obvious potential for business growth many advisors tell us they don’t introduce RI because they simply don’t know how to talk about it. And why is that? It might be because we, the providers and promoters of RI solutions, aren’t helping them.

It all comes down to how we talk about it. Typically, we position RI one of two ways: we either lead with our values and present RI as the “right thing to do”. Or we lead with facts and argue that RI is a better way to invest. Both approaches have the potential to inhibit rather than enhance adoption.

When we lead with values, we’re asking an advisor or investor to believe in the same things we do. What are the odds of that? Like people everywhere, advisors and investors come to the table with deeply ingrained beliefs. And if those beliefs are not aligned with the values of RI, there is little chance of changing them – at least in the short term.

When we lead with the facts of RI, we run the potential for even greater disassociation. RI performance data may resonate in the institutional world, but if many retail advisors truly believe RI underperforms, hitting them over the head with our facts is unlikely to change their minds.  Advisors who have invested successfully for their clients (and after the bull run we’ve had that’s probably everyone) are unlikely to respond well to the message that they’re doing it all wrong.

So what to do?

The solution to this dilemma lies in how we frame the RI conversation. Instead of talking about what RI is, or how it works, wouldn’t it better to open the conversation with a discussion of what RI can actually do for investors? Talking about RI this way addresses what matters most – meeting investor needs.

A needs-based conversation puts advisors on much more solid ground when discussing RI as well. What advisor hasn’t, for example, talked to investors about the need to manage risk? Or uncover new opportunities for growth? These are universal needs that can be met in very distinct ways through RI solutions. There are also burgeoning investor needs such as the desire to make a positive impact beyond investment returns that only RI solutions can meet.

Framing the conversation in a manner that puts the client’s needs first also sets the advisor up to demonstrate real value, a critical consideration in a post-CRM2 world.

Ultimately, the key to making that big RI breakthrough we all want is about making the right connection with our audience. We’ve achieved a significant degree of success talking about RI the way we always have. Is that enough to keep RI growing? Or could changing the conversation lead to greater adoption?

By reframing our discussions around the spectrum of needs that RI solutions are uniquely structured to meet, we’ll make it easier for advisors to talk about RI and stand a much better chance of having both advisors and investors overcome the perceptions that currently prevent more widespread adoption.

Disclaimer
The views expressed are those of the author and not necessarily those of NEI Investments.

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.

In 2016 Inspirit Foundation – a public foundation working to promote inclusion and pluralism through media and arts, support for young change leaders and impact investing – committed to a 100% impact portfolio to leverage our full asset base for financial returns and positive social and environmental impact.

We formalized this commitment in our Investment Policy Statement (IPS), which states that Inspirit’s investment decisions must be guided by three principles:

1. Risk-adjusted financial performance
2. Movement toward a low carbon portfolio
3. Positive impact through alignment with Inspirit’s organizational vision

By 2020, Inspirit is expected to meet our goals for a 100% impact portfolio. Here is a major chapter of the narrative of how we are getting there:

Conducting the initial audit

When we committed to a 100% impact portfolio, most of Inspirit’s portfolio was in the public market being managed by three investment managers with balanced mandates who were tasked with investing across the asset classes of fixed income, Canadian equities, and global equities. In order to analyze the performance of our investments, we conducted an audit of our portfolio based on our updated IPS.

Measuring performance indicators

Then, we enlisted the support of our investment consultant, Proteus, to assess financial performance using four main indicators: net returns vs. benchmark, information ratio, up-market capture ratio, and down-market capture ratio. We also subscribed to research offered by MSCI to understand the carbon and impact performance of our portfolio. This research allows us to measure our portfolio’s exposure to carbon emissions. Our portfolio’s positive impact is assessed through Environment/Social/Governance (ESG) scores and revenue from products and services that contribute to the United Nation’s Sustainable Development Goals (SDGs).

Benchmarking performance indicators

Next, we benchmarked the financial, carbon, and impact performance of our portfolio against a traditional benchmark, which primarily consisted of the FTSE TMX Universe Bond, S&P/TSX Composite, and MSCI ACWI (CAD). For aspirational purposes, we also benchmarked our portfolio’s performance against the MSCI Sustainable Impact Index, a benchmark with strong financial results, a low carbon footprint, holdings that are top performers along ESG metrics, and a selection methodology that identifies holdings deriving 50%+ of their revenues from products and services contributing to the SDGs.

Finding the right expertise

The analysis indicated our portfolio had room for improvement on financial, carbon, and impact performance. In order to improve portfolio performance, we committed to transitioning from a balanced portfolio approach to a specialized asset class style. Data demonstrated to us clearly that it is rare for investment managers to consistently sustain outperformance across multiple asset classes. We determined we needed to transition Inspirit’s portfolio management from three investment managers with balanced mandates investing across asset classes to investment managers each with specialized mandates to invest in specific asset classes.

In May 2018, Inspirit released a Request for Statement of Interest and Qualifications inviting submissions from investment managers to help us satisfy the goals in our IPS within the fixed income asset class. We started our transition to a specialized asset class investment approach with fixed income due to underperformance of that asset class within our portfolio compared to our benchmark. We received a high number of quality submissions, which we scored based on five main categories:

1. Investment firm and their commitment to diversity, equity, and inclusion – 20% scoring weight
2. Proposed product overview, thesis, and fees – 20% scoring weight
3. Proposed product’s financial performance – 30% scoring weight
4. Proposed product’s carbon performance – 5% scoring weight
5. Proposed product’s impact performance – 25% scoring weight

After reviewing and scoring all the submissions, we conducted two rounds of interviews before coming to a final decision. In the end, we were pleased to select Addenda Capital as our new manager and allocate our entire public fixed income portion of our portfolio to their Impact Fixed Income Fund.

With our investment in Addenda’s Impact Fixed Income Fund, we now have over 85% of our portfolio invested in impact investments. These investments are top performers along environmental, social, and governance metrics and ideally also earn at least 50% of their revenue by contributing to the United Nations Sustainable Development Goals.

We plan to continue to transition our portfolio from one with traditional investments to one entirely composed of impact investments, and also one with a balanced investment approach to one with a specialized asset class investment expertise. The next step is a Request for Statement of Interest and Qualifications for a global equities manager, followed by a search for a Canadian equities manager that can satisfy the financial, carbon, and impact goals outlined in our IPS. We expect to fully transition to a 100% impact portfolio in 2020.

Please follow our progress here.

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.