Phishing for Better Cyber Risk Disclosure

Yahoo!, Equifax and Sony have all been affected by an increasingly common event: large data breaches that harmed their reputation and caused them to lose the trust of their customers.

As external attacks like these happen more frequently, investors need to understand the data security practices of the companies they invest in. They need to be confident that companies are mitigating related risks and are prepared to respond to a breach quickly and effectively.

Going Above and Beyond

The Sustainability Accounting Standards Board (SASB) defines “data security” as “technologies, processes, and practices that companies employ to protect networks, computers, programs, digital products, and data from external attacks, damage, or unauthorized access.” Thus, “data security” and “cyber security” can be used interchangeably in this context.

According to the 2017 PwC US survey, 92% of consumers agree that companies must be proactive about data protection and 60% say the responsibility of protecting data rests with companies — not governments. Furthermore, they expect companies to go beyond legal requirements. In light of these concerns, PwC suggests companies put cyber security and privacy at the forefront of their business strategy to retain customers’ trust.

Cause and Effect

A Ponemon Institute and IBM Security study of 419 companies in 13 countries found that data breaches are mainly caused by malicious or criminal attacks (47%), a human error (28%), or a system glitch (25%). Astoundingly, they found that the total cost of a data breach averages $3.62 million.

In 2017, the Canadian Securities Administrators (CSA) reviewed 240 S&P/TSX Composite Index companies’ annual filings. They noted that the following potential impacts of a cyber security incident were frequently identified by a variety of issuers across different industries:

  • Compromised confidential customer or employee information;
  • Unauthorized access to proprietary or sensitive information;
  • Destruction or corruption of data;
  • Lost revenues due to a disruption of activities, incurring of remediation costs;
  • Litigation, fines and liability for failure to comply with privacy and information security laws;
  • Regulatory investigations and heightened regulatory scrutiny;
  • Higher insurance premiums;
  • Reputational harm affecting customer and investor confidence;
  • Diminished competitive advantage and negative impacts on future opportunities;
  • Effectiveness of internal control over financial reporting.

Business Case for Cyber Risk Disclosure

Investors looking to assess if a company is protected against data breaches would typically look to company disclosure regarding cyber risks, potential impacts, as well as governance and risk mitigation. However, companies do not disclose this information consistently and completely. In the same review, the CSA found that only 61% of the companies addressed cyber security issues in some capacity in their disclosure of risk factors.

These findings can be extrapolated to companies outside of Canada. The PRI recently published a report which summarized a review of 100 companies’ public disclosure on cyber governance and risk management. The research sample included companies in a variety of sectors from Europe, the US, Australia and Asia. The report states that “While companies generally perceived cyber security as a key organizational risk, very few communicated that they have policies, governance structures and processes that were effective at tackling cyber threats.”  The report is an excellent tool for investors looking to engage with companies regarding cyber risk. For each key question the research covered, investor relevance is explained and good practices for companies are outlined.

Cyber security incidents have the potential to materially impact a company. Investors need to engage with companies to request more comprehensive disclosure regarding cyber risk governance and risk management practices. Hopefully in the future companies will improve corporate disclosure regarding data security. In the meantime, investors can use the PRI report as a guide in their stewardship efforts.


  • The Sustainability Accounting Standards Board. “The State of Disclosure 2017” (2017).
  • PwC. “Consumer Intelligence Series:” (2017).
  • IBM Security and Ponemon Institute. “2017 Cost of Data Breach Study” (2017).
  • Canadian Securities Administrators. “CSA Multilateral Staff Notice 51-347 Disclosure of cyber security risks and incidents” (2017).
  • Principles for Responsible Investing. “Stepping Up Governance on Cyber Security: What is Corporate Disclosure Telling Investors?” (2018).
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.

Case Study: Integration of ESG Analysis in Emerging Market Equities

When investing in Emerging Markets (EM), environmental, social and governance (ESG) factors can play a significant role in identifying growth opportunities, in addition to their more conventional role in helping to mitigate risk and enhance companies’ ability to deliver long-term, sustainable returns.

To illustrate how this works in practice, we asked the RBC Emerging Markets Equity (RBC EME) team to explain their approach to Marico Ltd., an Indian consumer staples company. This RBC Global Asset Management (RBC GAM) investment team is based in London, UK and manages over US$8 billion in emerging markets equities. The team’s disciplined investment process considers a broad range of factors and incorporates a strong belief that a company’s ESG record must be analysed in order to truly gauge the company’s overall potential for investment portfolios.

Combining Financial Analysis with ESG Analysis

Marico is a leading Indian consumer staples company that operates in 25 EM countries. It has developed several brands in the hair and skin care, edible oils, health foods and male grooming categories. Its biggest and most famous products being Saffola edible oil and Parachute coconut hair oil.

When the RBC EME team researches a company such as Marico, they begin by reviewing annual reports and financial statements before meeting with the company and carrying out detailed valuation work. When it comes to valuation, the RBC EME team concentrate more on cash flow-based valuation than short-term measures like price-to-earnings or price-to-book.

According to the team, companies that pay attention to ESG factors and stakeholder relationships tend to have higher – and more sustainable – returns over time.

The next step in the evaluation process is the ‘investment checklist,’ which is the key tool for the integration of ESG factors. The checklist has 75 questions divided into three sections: franchise, management quality and corporate governance. The questions are extremely detailed, with approximately two-thirds of the questions related to ESG and sustainability. The checklist is a way to thoroughly understand what motivates a company’s management in terms of its culture, ESG and long-term sustainability, while helping to ensure that the team does not overlook any potential risks. Companies receive a score between 0 and 100 and most companies owned have a checklist score greater than 80.

The questions have a long-term focus and, therefore, scores tend to remain stable over time. Additionally, there is a high correlation between a company’s checklist score and its ultimate weighting in the portfolio.

How a Company Relates to Its Stakeholders

Marico’s company philosophy, “be more, every day,” was created to sustainably transform the lives of all of its stakeholders. This focus on stakeholders is a crucial component in the RBC EME team’s analysis and, accordingly, many of the checklist’s questions relate to how a company treats its various stakeholders.

Marico’s most unique feature is its strong relationships with suppliers and farmers. Marico’s ‘Farmer First’ policy is a key corporate social responsibility initiative. Agricultural produce forms the majority of Marico’s raw materials and consequently, implementing initiatives to improve farmers’ well-being drives Marico’s sustainability efforts. Marico’s engagement with agricultural producers has empowered farmers to strengthen their production systems and increase yields on a sustainable basis. These initiatives are directed primarily towards India’s coconut and safflower growers.

Edible oil is Marico’s key product, with roughly 20% of total sales attributable to Saffola Edible Oil and over 60% market share in India. Safflower seeds are the key ingredient and Marico is India’s largest buyer with 32,000 farmers under contract.

How a Company Improves and Maintains Industry Standards

The checklist asks if a company’s processes emulate best practice and encourage the improvement of industry standards. Marico scores well in this category. Its representatives collaborate with farmers to improve crop cultivation and offer technical guidance throughout the crop cycle. Regular seed-sowing classes are taught by selected farmers to spread ‘best practices’ to other local farms.

The checklist also questions ‘cutting corners’ in production (e.g. using poor quality materials, or not paying suppliers enough). There is no evidence of this at Marico. The company ensures that good quality sowing seed is available to its farmers and its model contract provides farmers with a guaranteed, predetermined ‘fair price’ for seeds; it offers market rates whenever prices rise, and a guaranteed price should they fall. Marico has been instrumental in the introduction of new technology for safflower production and, consequently, has improved productivity.

Thanks to these initiatives, farmers have significantly improved the seed replacement rate resulting in a 2 percentage point increase in oil content from 29.5% in 2011-2012 to 30.15% in 2015-2016. Any increase in the percentage of oil content leads to a significant increase in farmers’ incomes.

Marico generates more than 30% of its revenue from its Parachute coconut oil product, India’s leading brand, with more than 50% market share in India. Marico has developed robust relationships with coconut farmers by showing them how to increase productivity and create long-term crop sustainability and higher returns. The checklist asks whether or not a firm’s culture is innovative and Marico has scored well with its supply chain innovations. Over the last 10 years, collection centres have been set up within a 20-30 kilometre radius of the farms so that small farmers can supply Marico directly. This reduces transportation times and provides farmers with a guaranteed buyer for their produce.

Marico also provides guidance on how to produce coconuts of the right quality that will receive the maximum price, and how to automate the dangerous and lengthy process of harvesting and drying coconuts and extracting the oil. Those farmers who adopted Marico’s best practices early have seen an improvement in productivity of up to 20%, and to date the program has benefitted approximately 7,700 coconut farmers.

The example of Marico and, in particular, its Farmer First policy, demonstrates how important effective management of ESG factors can be in reducing risk, and building a foundation for sustainable long-term growth in EM equities.


  • The information is current as at the 2016/17 financial year.  This information is for illustrative purposes of RBC GAM’s approach and does not constitute an offer, solicitation or recommendation to buy or to sell any security. Any buy or sell decision by RBC GAM would be as a result of any number of factors which may or may not be addressed in this article.
  • The RBC EME team is part of RBC Global Asset Management (UK) Limited
  • Marico Sustainability Report 2015-2016
  • Marico Annual Report 2016-2017
  • as of November 2017
Past performance is not indicative of future results. Market conditions are subject to change. All views, opinions and estimates expressed herein constitute RBC GAM’s judgement as at the indicated date of the information or of this document, are subject to change without notice, and are provided in good faith but without legal responsibility.  Information obtained from third parties is believed to be reliable, but no representation or warranty, expressed or implied, is made by RBC GAM as to its accuracy, completeness or correctness. RBC GAM assumes no responsibility for any errors or omissions.
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.

Want Better ESG Data? Tell the Companies

Statistics show that still too few companies report on their sustainability practices, and those that do are still not meeting the information needs of investors.

At the same time, as investors mature in their ESG integration practices, they increasingly want issue-specific information and quantitative performance metrics and targets, which only companies can provide. In the end, investors may hold the key to resolving this challenge, through continued engagement with reporting issuers on ESG disclosures.

2018 may very well turn out to be the year that ESG integration goes mainstream in capital markets. So much is happening all at once: increased focus on climate change and the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD); release of the Canadian Securities Administrators’ long-awaited Report on Climate change-related Disclosure Project (which, in our view, opens the door to better disclosure on material ESG issues in general); early signs of evolution towards impact measurement through the implementation of the UN Sustainable Development Goals (SDGs); growing competitiveness of ESG integration among asset managers in the wake of the exponential increase in UN PRI signatories; and more recently, the launch of the Canadian Expert Panel on Sustainable Finance.

These initiatives and market forces are pushing the envelope, no doubt, but we should not lose sight of – what is in our view – a key principle of responsible investment, which is to “seek appropriate disclosure on ESG issues by the entities in which we invest” (UN PRI Principle 3), and without which many of these initiatives will not succeed.

Working at the intersection of investors and public companies, we regularly hear from Investor Relations Officers that they are not getting ESG-related questions. While the roll-out earlier this year of ISS’s Environmental & Social QualityScore did succeed in drawing the attention of many management teams, are market participants any further ahead in having reliable, comparable, future-oriented decision-useful information? Have we perhaps narrowed our focus on climate change and carbon data a little too much, to the detriment of pushing for better disclosure of all ESG issues that are material to a company?

At Millani, each year we comb through the websites and reports of companies in the S&P/TSX Composite Index to collect statistics on their corporate sustainability reporting or ESG reporting practices. While we are seeing a slight increase in the number of companies reporting on ESG issues, there is still a lot of room for improvement in Canada, with only 39% of companies in the index doing so in 2018 (up from 36% last year). In comparison, 93% of the largest companies around the world report on their sustainability practices. For the mainstream investors to integrate ESG, there remains a need for more companies to provide ESG information.

Moreover, investors don’t just need more information, they need better information. Indeed, much has been said about the information disconnect between investors and companies, and how investors remain dissatisfied with the information they are getting from companies. In fact, we believe the information disconnect may be getting worse.

We are finding that as investors’ ESG integration practices mature, their focus is sharpened, they seek more company-specific explanations of how material issues are managed, more granularity. They also seek more raw data, such as key performance indicators on individual material ESG issues, rather than an aggregated overall or partial rating from third-party service providers. To be clear, these third-party providers serve a purpose in bringing information to the market, but they have come under scrutiny of late, and their sheer numbers and disparateness may also contribute to increasing the information disconnect. If we want to see a broad-based uptake of ESG issues by capital markets, there remains a need for reporting issuers to provide company-specific information and quantitative performance metrics and targets on their financially material ESG issues.

From working with companies, we know firsthand that they are aware of their material ESG issues – even though they may not call them by that name – and that they are managing them rather well. However, only if they communicate it to capital markets can they realize the inherent value of managing these issues well and generate the alpha that investors are seeking.

We believe investors already hold the solution to their need for ESG information, in the very expression of active responsible investment practice: engagement. By asking questions to the management teams about their material ESG issues, by requesting they publish information on these issues, and by clearly describing what information they need to have, investors can drive the change they want to see in corporate ESG disclosures.

Recognizing the appeal – and the pressure – in the responsible investment arena to embrace leading-edge practices that move the market forward and enhance competitiveness, we would simply advocate not to lose sight of the basics. As long as there is a need for more, appropriate, and quantitative data from companies, there will be a need for continued focus of engagement activities on ESG disclosures.

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.

RI 101: Investing and the UN Sustainable Development Goals

Once a fringe approach, Responsible Investing (RI) through the incorporation of environmental, social and governance (ESG) factors into investment decisions, is now on the cusp of going mainstream. Nearly half of the assets of the world’s leading institutional investors use RI strategies.

In the early days of RI, it wasn’t always clear to the public what the benefits would be, both in terms of ESG criteria and financial returns. But today, it is increasingly popular with both investors and advisors. There are a number of reasons for this, including the fact that issuers are now reporting on ESG issues and that an increasing number of investment strategies focus on ESG criteria in their investment policy design.

Most players in the RI field are now incorporating RI principles to reduce the negative ESG impacts of the organizations they invest in. Some are also using them as a positive screen to pick stocks of companies with a strong stance on ESG issues.

A Framework for Sustainable Development

In September 2015, world leaders adopted the 2030 Agenda for Sustainable Development at a historic UN summit. This framework includes 17 Sustainable Development Goals (SDGs), which came into force on January 1, 2016. These goals include: gender equality, good health and well-being, and access to quality education for all. The goals are defined in a list of 169 targets, which will be tracked by 232 indicators, last updated in March 2017.

The SDGs appear to be an increasingly popular framework. The Principles for Responsible Investment (PRI) signatories, for example, are using it as a reference. In a report titled “What Do the UN Sustainable Development Goals Mean for Investors?”, the PRI signatories call upon investors to inform themselves about the SDGs, to integrate them in their investment decisions to send a signal to the market and to influence companies to take SDGs into consideration and to take action.

As an example, Desjardins SocieTerra Positive Change Fund invests to generate a global impact according to 13 of the 17 SDGs. The fund does so by investing in a firm that offers tests that can be used in the diagnosis of both infectious and non-communicable diseases, contributing to the 3rd goal, Good health and well-being, and by choosing to invest in a microfinance provider operating in emerging countries that helps financial inclusion and reduce poverty, as per SDG’s 1st goal, no poverty.

In the investment world, a distinction is made between measurable benefits for publicly traded companies, and those benefits that lie outside the public markets. But going forward, the gap between these two is expected to narrow and we should be able to talk about impacts in the same way, no matter where they occur.

Major Support From Multiple Parties

To help design new investment and financing products, the United Nations Environment Programme and its finance initiative (UNEP FI) launched the Principles for Positive Impact Finance in January 2017. Based on the UN’s observations, it would cost between US$5 and US$7 trillion per year to achieve the SDGs, much of which would be coming from the private sector. Since only a limited capital injection was available through existing tools, a group of banks got together to develop a new framework to help create new products. At least, that’s what we hope for from these new principles, whose work has only just begun.

Since a number of organizations are actively promoting the adoption of RI principles worldwide, it should come as no surprise that financial strategies are being developed to create new products. One of the key roles of the markets is to offer investors the information they need to efficiently allocate capital. The work being done to highlight the benefits of RI will ensure that more accurate information is available, which should make the decision-making process easier.

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.

Why Low Carbon is a Low Bar to Improving Sustainability

In an age of climate-change awareness, investors are increasingly interested in allocating to strategies that can provide reasonable returns from holdings while limiting significant carbon emissions.

But owning a portfolio focused on the lowest carbon footprint alone may not be enough to reach the goal of creating a more sustainable global economy. In some cases, it may even be getting in the way of it.

This stems, at least in part, from how carbon emissions are currently measured and used. Many publically-traded companies self-report data that is only as good as the systems in place to either collect it (aka direct measurement), or estimate it using models that assign carbon intensity to production activities. At the same time, this data is unverified and not necessarily reviewed by government agencies as is the case for more heavily-regulated sulphur and/or nitrogen dioxide emissions.

Meanwhile, when companies choose not to self-report or do not have adequate expertise or resources to do so, the amount of carbon emitted by them is often estimated by third party research firms whose techniques for estimation are not standardized and may vary significantly between research firms.

Despite these inherent uncertainties associated with measuring carbon emissions, the data being compiled is becoming a much more important component of asset allocation and portfolio construction decisions. This is motivated by an effort to support the transition towards a low carbon economy, but also from a desire to reduce the potential risk of investing in companies with higher carbon footprints.

In some cases, incorporation of a low carbon strategy is being utilized in an appropriate and useful manner – for instance, to provide clarity on potential sources of high emissions and related risks should carbon be regulated (and priced) more effectively.

However, too often it is being used as the primary factor in decision making, in effect elevating an unregulated and imprecise measure to a level superior to other regulated, validated and more robust metrics.

In our experience, businesses that create actual solutions related to sustainability through the manufacture of equipment, devices, materials and other “stuff,” are regularly overlooked because of a myopic focus on carbon intensity. This is true even though many of these businesses have the potential to benefit from the move towards greater sustainability.

The unintended bias for many portfolios, as a result, often leans towards less intensive industries such as financials, software and services that have smaller carbon footprints and yet provide little or no exposure to businesses with more direct impact including those offering basic needs like water, food, energy, and waste.

In doing so, the investment management industry is prone to creating strategies that appear to exhibit exemplary financial characteristics and environmental credentials, but that don’t do nearly enough to positively drive forward the goal of establishing a more sustainable carbon footprint.

For instance, one beneficiary of the last several years of singular focus on carbon intensity has been the slant towards asset-light companies such as the FANG stocks (Facebook, Amazon, Netflix, Google) or conventional payments companies such as Visa and MasterCard. As investments, they have been very much in vogue from both a market rotation and carbon rating standpoint, and have demonstrated very strong positive attribution/contribution for many sustainable strategies and indices.

However, on closer inspection, these companies and the products they offer have shown themselves to be mostly irrelevant from a sustainability perspective and, despite their ubiquity, have little intentional impact on the issues at hand.

We believe this approach is shortsighted and not the best way forward for investors who are truly committed to establishing a more sustainable economy.

What’s needed are strategies that go beyond simple, unilateral comparisons of one company or sector’s carbon intensity against another, in favour of more nuanced approaches that direct capital at companies focused on solving sustainability challenges and not just at ones that avoid them.

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.

Impact Investing in Canada: Coming of Age

Over the past ten years we have seen the Impact Investing industry define and redefine itself a few times. In many regions, Impact Investing is known to encompass all forms of Responsible Investment strategies across asset classes.

But in Canada, the idea tends to fracture along asset class lines with “Impact Investing” referring to private market investments and “ESG” and “SRI” strategies referring to public market investments.

Like any pre-teen, Impact Investing currently sits on the edge of youthful maturity. Canada might be described as a “late bloomer” compared to some global comparators – less mature, with fewer investment options and less capital committed. Impact investing enters adolescence charged with emotion, fueled by nascent growth and ready to change the world. Skepticism remains high among those “older and wiser”, who dismiss impact investing as youthful exuberance. But they continue to underestimate the potential of the massive intergenerational transfer of wealth and the difference in priorities of the recipient generation.

So how will this young industry prove itself and mature into the change-making adult that we desperately want it to be?

Focus on the Impact, Not the Name

Regardless of what you call it, the fundamental premise is the same. Both retail and institutional investors increasingly want to drive positive social and environmental change with their investments, in all asset classes. Investors don’t care if we call it “Impact”, “Responsible”, “Sustainable” or otherwise. They do care about and will continue to demand options across asset classes. Investors want compelling investment opportunities that deliver returns and impact. They don’t want to listen to complicated jargon or be limited by asset class.

Yes, creating proper naming conventions is important, if it doesn’t get in the way of investing.

Build Impact Products and Strategies

To date Impact Investors have focused primarily on private equity and private debt as they explore this emerging space. Many impact investors also include alternatives such as social purpose real estate, green infrastructure and agriculture in their portfolios. The next frontier of impact investing is undoubtedly public equities. Innovative investment managers are building customized portfolios of high impact public equities focused on areas such as fossil fuel free, green energy, gender lens, board diversity, and social justice, to name a few. These are not simple ESG or SRI strategies, they go far beyond negative screening, best in class and ESG risk analysis.

They are looking for the intentionality of social or environmental impact baked into the DNA of the investee company and then measured. However, customized portfolios for accredited private investors and foundations alone will not achieve the scale of change we seek. For impact investing to “go mainstream” we need financial institutions and asset managers to integrate this thinking into products for both retail and institutional investors.

Measure the Impact

Impact measurement is the subject of much debate. Impact investors are divided on the theory, frameworks and whether it is necessary. On the more sophisticated end of the spectrum, investors have built detailed impact measurement frameworks supported by IT systems and linked to financial and strategic reporting. On the other end (and more commonly), investors have a hard time tracking a handful of impact metrics consistently. We are seeing traction with global frameworks such as IRIS and the Sustainable Development Goals (SDGs), which are key to building commonality of measurement between investors and investees. We will continue to see a variety of approaches to impact measurement based on capacity and perspective. What is important is that we measure impact in some way and continue to make the case for incrementally more impactful investments.

Impact Investing Infrastructure

As impact investing grows it needs to be supported by strong mentors and role models to reach its full potential. Impact investing can benefit immensely by leveraging the platforms, systems and distribution channels that mainstream finance depends on. Finance and investment professionals, investors, entrepreneurs, we are counting on your wisdom, your support, your ingenuity and your open minds. Impact investing is the future generation of investing. Invest in its success.

Growing up is hard. It is awkward and flawed, paradoxically characterized by insecurity, and over-confidence. Yet with youth comes clarity, fresh perspective and innovation. Impact Investing in Canada is poised to make lasting social and environmental change, but it first needs to break out of childhood and charge into maturity.

The path there will not be linear, but for the sake of ourselves and generations to come, it’s important that we press on. Determination, iteration and bias to action will see impact investing mature. We will see impact considered deeply across all asset classes, in a multitude of products and strategies. We will have depth of service offerings and asset management. And most importantly, as a result, we will have the positive impact we aspire to have. This tween will be an adult sooner than we think!

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.

Is Nuclear Energy Suitable for an RI Portfolio?

As the field of responsible investing (RI) matures, it is worthwhile to consider the environmental, social and governance risks and opportunities related to nuclear energy and other debatable issues.

For example, the United Nations cites 17 Sustainable Development Goals (SDGs)—one of these goals is ‘Zero Hunger’. In our research on a company such as Nutrien, which produces fertilizers, we could certainly categorize it as a company that solves for this goal. However, Nutrien fails or receives a negative score for other SDGs such as ‘Clean Water and Sanitation’ and ‘Life on Land’. In those areas, fertilizers and fertilizer companies are part of the pollution problem.

Nuclear energy occupies a similar grey area for the RI community—this is why we believe it’s important to debate its merits through an ESG lens. Nuclear has great potential as an energy source but is controversial for many investors.

The Nuclear Downside

Nuclear energy, which uses uranium as fuel, produces waste that remains radioactive for very long periods of time.

Long-term storage and management of radioactive waste remain central concerns. In Canada, we have our own proprietary technology called CANDU (Canada Deuterium Uranium) that requires fuel rods to be replaced every 18 months or so. These rods are stored in large swimming pools and must be continually monitored for safety and to safeguard against their reuse. Some research suggests that, in the wrong hands, this radioactive waste can be reused to create and proliferate nuclear arms.

In addition, there have been several high-profile accidents involving nuclear energy, most recently in Fukushima, Japan. Unfortunately, it is impossible to handicap the odds of a reoccurrence of a similarly high impact but low-probability event. The Canadian Nuclear Safety Commission (CNSC) has established a four-year action plan to ensure that the lessons learned from the Fukushima accident are applied in Canada to enhance the safety of our nuclear facilities. The good news is that the CNSC Task Force confirmed that nuclear facilities in Canada are able to withstand and respond to credible external events, such as earthquakes.

The Upside of Nuclear Energy

Nuclear energy produces electricity from uranium, a natural resource that is mined. The benefits of nuclear energy are low greenhouse gas emissions, low operating cost (the cost of fuel is practically zero per kWh) and high reliability as a fuel source.

Nuclear energy creates a number of high-paying jobs in the community where a nuclear plant is located and produces emission-free electricity under a highly regulated regime.

The Elusive Search for a Perfect Energy Source

As we look to a future of transportation that will be predominantly powered by electricity, a clean source of electricity will become paramount. Natural gas is less carbon intensive than coal or oil, but it does produce greenhouse gases, as well as other nasty emissions such as nitrogen oxides.

Solar panels, too, contain toxic elements such as cadmium, which is used in thin-film solar, a fact not often discussed as the industry continues to expand. Cadmium is one of the top six deadliest and toxic materials known. The cadmium in solar panels (CdTe or cadmium telluride) appears to be less toxic than elemental cadmium, but its precise level of toxicity remains unclear. Although a regulated disposal program could emerge, the long-term safety of cadmium telluride solar panels is an issue for the solar industry.

Weighing the Pros and Cons of Nuclear Energy

In our view, the main issue with nuclear energy is the disposal of used nuclear fuel—but the waste management challenge is not unique to the nuclear sector. In the solar panel industry, there are different techniques to physically immobilize heavy metals such as cadmium in a way that can be securely disposed of in a hazardous waste landfill site. Unfortunately, there are no effective similar methods for used nuclear fuel.

Having said that, it’s important to recognize the fact that used nuclear fuel is heavily guarded and regulated. While the long-term storage of nuclear waste requires physical space, the relative amount of energy produced is very high. For example, the spent fuel for all of Ontario’s 20 nuclear reactors is stored at Bruce Power’s site, in a pool the size of a 14-foot deep but otherwise typical swimming pool. It is stored there for 10 to 20 years, after which it is reprocessed or put into dry cask storage. Since the 1960s, the entire Canadian spent fuel would fit in seven hockey rinks, stacked to the top of the boards.1

Tying this back to the United Nations Sustainable Development Goals of ‘Affordable and Clean Energy’, ‘Industry, Innovation and Infrastructure’, and ‘Climate Action’, it seems that an argument could be made to consider nuclear as an investment in ESG portfolios. Even better, engineering companies that provide leading nuclear decommissioning services2 would fit very well in an ESG portfolio.


2 Nuclear decommissioning is the administrative and technical process whereby a nuclear facility such as a nuclear power plant, a research reactor, an isotope production plant, a particle accelerator, or uranium mine is dismantled to the point that it no longer requires measures for radiation protection.

The views expressed in this article are the personal views of Dominique Barker and should not be taken as the views of CIBC Asset Management Inc. This document is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this article should consult with his or her advisor. The information contained in this article has been obtained from sources believed to be reliable and is believed to be accurate at the time of publishing, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions and estimates expressed in this article are as of the date of publication unless otherwise indicated, and are subject to change. Certain information that we have provided to you may constitute “forward-looking” statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or achievements to be materially different than the results, performance or achievements expressed or implied in the forward-looking statements.
The Responsible Investment Association (RIA) does not endorse, recommend, or guarantee any of the claims made by the author. This article is intended as general information and not investment advice. 

Can Diversity and Inclusion Help Investors Beat the Market?

“The majority of traditional mutual fund managers fail to outperform their respective benchmarks after fees” is mentioned so frequently today it is almost ubiquitous. The last decade has seen a huge rise in quant funds which scour every quantitative piece of information from company financial statements to try to find factors that might allow them to beat the overall market.

But perhaps, as illustrated by the Thomson Reuters Diversity & Inclusion Index, there is a simpler answer, and one you wouldn’t find on a company’s balance sheet.

The Diversity & Inclusion Index is a simple, market-cap weighted index of the 100 companies globally with the highest Thomson Reuters Diversity and Inclusion Scores. This score is made up of 4 pillars — diversity, inclusion, people development and reported controversies related to these values. It does not consider any financial-related metrics, yet the index has outperformed the global stock market over a 3 and 5-year timeframe, on both an absolute and risk-adjusted basis. Furthermore, the outperformance is consistent, with the index beating the broad market every calendar year from 2013 through 2017.

It appears, and maybe not surprisingly, that a company with a strong culture of diversity and inclusion, which develops its people and prevents controversies, is a sign of strong management — which leads to stocks that perform well on a long-term basis.

One common criticism of ESG indices, or generally investing with an ESG orientation, is that there are inherent biases against certain countries or sectors and could thus be less diversified. For example, a low carbon index strategy would be lighter on fossil fuel companies than the broad market. This doesn’t appear to be the case when diversity & inclusion metrics are used. The oil & gas industry is represented (including Enbridge), and industrials make up 7% of the index.

From a country perspective, only one country — Switzerland — has a weight in the index that is more than 5% over or under its weight in the MSCI ACWI (all country world index). In general, European countries tend to outperform while their Asian counterparts lag. The top 3 countries, measured by their weight relative to their weight in the MSCI ACWI, are Switzerland, Germany and Ireland, while the two most underweight are Japan and China. In North America Canada is 2% overweight while the US is 3% underweight.

The absolute outperformance of the index might be explained by diversity in the workforce leading to diversity of thought, ultimately leading to stock performance, especially in industries like healthcare and technology that are very IP- and innovation-driven. A recent Goldman Sachs study found that considering only percentage of female employees would have led to 11.7% and 9.5% outperformance respectively for medical tech and pharmaceutical companies (top 40 percentile over bottom 40 percentile over 3 years). The portfolio diversification (sector and country) outlined above then (partially) explains why the Diversity & Inclusion Index also outperforms on a risk-adjusted basis.

The top company in the index globally is Accenture, headquartered in Ireland (although this is mostly for tax reasons, the majority of its revenues come from North America). Accenture has also scored a perfect 100 on the Human Rights Campaign Foundation’s Corporate Equality Index since 2007. The top company in Canada is BMO, which scores particularly well on the “Inclusion” pillar. BMO provides flexible working hours, day care services and programs on HIV/AIDS. The proportion of companies in the banking services industry that provide these are 25%, 15% and 6% respectively.

The paradigm of Responsible Investing (RI) is changing. The classic question of, “will investors sacrifice returns in order to invest more in line with their values?” is perhaps not only irrelevant, but directionally incorrect. If the last 5 years are any indication, maybe the question should be “why wouldn’t investors increase their returns by considering non-financial metrics that are statistically linked to stock performance?”

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.

Canadian Investors Step Up Their Actions on Climate Change

In Canada, the impact of climate change is becoming increasingly visible.

In a speech last year,  the Deputy Governor of the Bank of Canada spoke of “material and pervasive effects” on the Canadian economy, pointing to a confluence of climate-related weather activities in increasing number, ranging from forest fires, storms, droughts, invasive species and road closures to warming weather patterns—all of which pose potential risks to investors.

Research sponsored by the federal government estimates that the cost of climate change to the Canadian economy will reach between $21 billion and $43 billion by 2050.  Little wonder then that investors are becoming increasingly concerned about the material risks around climate change.

In December 2015, the Financial Stability Board (FSB) established the TCFD to develop voluntary, consistent climate-related financial risk disclosures for companies to use when providing information to investors, lenders, insurers and other stakeholders. The final recommendations of the TCFD were released in June 2017 after a collaborative process of global stakeholder consultations.

Last year, as part of its 2018 reporting framework, the PRI incorporated pilot climate reporting indicators based on the June 2017 TCFD recommendations. The aim was to improve industry disclosure and enable investors to implement TCFD guidance. In total, 480 PRI signatories (from 1449 globally) completed the indicators in the 2018 Reporting Framework, of which 28 were Canadian signatories (From 88 in Canada reporting).

The 2019 PRI Reporting Framework will continue to include pilot climate reporting indicators based on the TCFD. The indicators will be updated to incorporate signatory feedback including the need for streamlining and more practical guidance. The PRI will continue to drive TCFD implementation across markets, encouraging regulators, companies and investors to advance further.

Last year, the PRI, in conjunction with Baker McKenzie, produced a local review, which looked at the recommendations from a Canadian perspective.

The review found that Canada’s existing regulations requiring climate disclosure are not yet consistent across sectors or in relation to the scope or medium of reporting. As Canada has been relatively slow to implement comprehensive regulations incentivising or compelling companies to consider and disclose climate risk exposure, adoption of a clear framework consistent with the TCFD’s recommendations is likely to assist significantly in enabling companies to understand the ideal scope of their disclosures and to integrate climate risk awareness into their businesses and existing (or developing) reporting systems.

Such a framework would improve the quality and consistency of information available to investors, particularly in terms of identifying vulnerable and less vulnerable companies, and particularly companies which are regarding the transition as an opportunity to improve their sustainability and attractiveness to investors.

Climate-related disclosures made as part of mainstream financial filings will not only ensure the quality of information disclosed, but also promote and normalise the inclusion and importance of this information within the corporate and investor communities in Canada, in the context of this slow evolution of regulation on the subject. Additionally, detailed and commercial disclosures will maintain and perhaps improve investor confidence, due to the ability to consider and rely on the types of information the TCFD recommends be disclosed by all sectors, including climate risk consideration at a company’s board level, how climate risks and opportunities are contemplated by the company’s strategy and its risk management processes, and the quality of the company’s methods for measuring and monitoring the impacts of those risks and opportunities on its business.

The disclosure framework would be widely adoptable across sectors, enabling clearer and more consistent comparison between companies within a jurisdiction. This is likely to assist Canadian companies and investors in carrying out effective disclosure and in understanding disclosed information despite Canada’s multiple sub-national legal jurisdictions.

Given Canada’s unique position regarding climate risks, including its large area and diverse range of likely physical climate-related impacts, and its natural-resource reliant economy, adoption of a reliable and transparent disclosure framework will be a central element in its smooth transition to a lower carbon economy and maintaining the stability of financial markets as the transition occurs.

The report recommended that federal and provincial regulators including the Canadian Securities Administrators, to endorse the TCFD recommendations, and that the Toronto Stock Exchange and TSX Venture Exchange should reference them in their reporting guidance.

The report further noted that Canada currently has limited corporate disclosure covering ‘ESG’, or environment, social and governance factors—those elements used to measure the sustainability and ethics of a business. In addition, climate change tends to be grouped under the rubric of environmental requirements, but not addressed as a stand-alone concern. It concluded that Canadian climate disclosure is “progressing relatively slowly”.

Implementation of the TCFD’s recommendations will assist the financial sector, and those areas of the non-financial sector which face additional risk exposure during and after the transition to a global lower carbon economy, to understand and act effectively upon material climate-related risks.

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.

This is Not Your Parents’ Alberta

Alberta’s Deputy Minister of Climate Change urges investors to recognize province’s changes, climate-change leadership

Lost in its image as Canada’s oil and gas production centre is the fact that Alberta – as a province and as a society – has gone through a significant change in the last decade, including establishing a world-class climate-change framework.

That’s the assessment Eric Denhoff, Deputy Minister of Environment and Parks and the Alberta Climate Change Office, provided to a standing-room-only session at the 2018 RIA Conference on June 6th in Toronto. The session was moderated by Jamie Bonham, Manager of Extractives Research & Engagement with NEI Investments, who opened with the comment that NEI was “interested in developing a greater appreciation of what Alberta is trying to do on the climate change file so that we can have a better dialogue on where we need to go next. Like any jurisdiction in Canada, there is always room to improve, but if we don’t acknowledge the genuine and substantive efforts that Alberta has made on this file we put further progress at risk. The current focus on simplistic solutions and polarized debate is just not helpful.”

Mr. Denhoff explained, “All I am asking is that people begin to see Alberta through a bit more contemporary lens. We advocate a portfolio approach to investing – not looking at individual companies but looking at Alberta as a place to invest that is, in our view, the most successfully regulated environment for companies to operate in North America.”

For example, he said, it is easy to believe an investment in an aerospace or tech firm in California is more responsible. “But you need to look at the overall portfolio, because carbon pricing on oil and gas in Alberta is much more stringent than in California even though they wave a good flag.”

Climate change initiatives

According to Denhoff, Alberta is committed to an ambitious climate-change plan that includes:

  • Eliminating pollution from coal-generated electricity by 2030
  • Ensuring 30% of electricity generation will be from renewable sources by 2030
  • Reducing methane emissions from oil and gas by 45% by 2025
  • Enforcing the legislated upper limit of 100 megatonnes (Mt) of oil sands emissions.

Mr. Denhoff said the province’s energy efficiency program – at $600 million the largest in North America – has exceeded expectations.

“We thought about 30,000 homeowners would take advantage of the support for retrofitting their homes. More than 150,000 signed up, 10% of all homes in the province”

Other provincial energy efficiency initiatives are also oversubscribed, including an aggressive Indigenous solar power initiative. Mr. Denhoff also cited the recent creation of the largest contiguous protected boreal forest in the world with the addition of more than 1.36 million hectares to the province’s parks.

Leveraging money from its carbon pricing system, Alberta is investing $1.4 billion in green and clean tech innovation projects. That includes $440 million for projects related to the oil and gas industry, $400 million in green loan guarantees, $240 million for industrial energy efficiency projects and $225 million for the development of emissions-reducing technology.

Mr. Denhoff said Alberta’s carbon pricing system provides a sophisticated combination of carrots and sticks to reward innovation and drive down emissions across 13 sectors – a significant achievement that was accomplished in only one year.

He added that the government is committed to making adjustments for firms that can demonstrate that their competitiveness has been adversely affected by the carbon pricing system. Avoiding carbon leakage – perhaps the worst-case scenario for this system – has been one of the government’s guiding principles.

Jamie Bonham noted that industry support has been critical to the success of implementing the Alberta climate change plan, but that this support has not been universal. “We have engaged with many of the leaders in the Alberta energy industry on this specific issue and see their vocal support for climate regulation as a huge positive. We would, however, like to see this commitment extend beyond the small group of leading companies and encompass the broader industry and industry associations. Success in Alberta will require that the whole industry is engaged, and constructive, in the process.”

Rolling their eyes

Addressing the issue of the federal government’s buy-out of the Trans Mountain pipeline, Mr. Denhoff said many Albertans roll their eyes when people complain about the investment.

For one thing, he said, the number of pipelines doesn’t make a difference when Alberta has legislated a 100 Mt limit on oil sands emissions.

For another, he said, the federal government has invested billions of dollars to prop up the auto industry, billions more to help companies like Bombardier and Pratt & Whitney, and projects like the Muskrat Falls power initiative, all with little or no public opposition.

“What drives Albertans a little bit crazy is that we get up in the morning and have this unbelievably regulated industry – of course we can always do more but it is way better than virtually any jurisdiction in the world – but some people are happy to import oil from corrupt states like Venezuela, Nigeria, or other failed corrupt states around the world where there are no environmental standards.”

Albertans, he said, “are expending an extraordinary amount of effort, compared to almost any jurisdiction I know of, to get it right on emissions reduction, the regulatory environment, and on climate change. They feel they’ve made a real college try and they feel they get nothing for it.”

That is why, Mr. Denhoff said, he asks investors to look at the whole picture of what Alberta is doing. “When I look around the world at who is making the biggest change, who is most committed, Alberta is right up there.”

The views expressed in this article are attributable to the individuals who spoke at the 2018 RIA Conference. They do not necessarily reflect the views of the Responsible Investment Association.