The breathtaking progress of modern technology has bettered our lives in innumerable ways, but little reflection is needed to see that, for all its benefits, today’s cutting-edge technology is not entirely positive, and in many ways threatens our core humanity.

Nowhere is this clearer than with Facial Recognition Technology (FRT). Combining biometrics and artificial intelligence, FRT enables its users to identify a person by mapping their facial features and comparing this data to facial images stored in a database.

While FRT has potential benefits, the sheer scale of the harm this technology can cause, from racial profiling to full-blown dystopian mass surveillance, makes it imperative for governments to establish and enforce clearly defined limits on its use. As investors, we can help accelerate these efforts through targeted and coordinated advocacy.

The “Good”

Potential benefits of FRT include preventing terrorist attacks, overturning wrongful convictions, aiding criminal investigations, preventing school shootings, improving airport and border security, and even simple things like unlocking an iPad.

In most of these cases, however, it is extremely difficult to strike the right balance between personal privacy rights – a core pillar of a free and democratic society – and the often-competing benefit of added security. So even where FRT is arguably a positive, its use is an ethical minefield for any society that values individual liberty.

The “Bad & the Ugly”

It is easy to see how FRT can be used as a tool of oppression by authoritarian governments. China, Russia and other dictatorial regimes across the globe have incorporated this technology as a tool of Orwellian mass surveillance, enabling them to suppress free expression and quell dissent.

The use of FRT for malign purposes is not restricted to state actors. For example, apps are now available that allow users to scan uploaded photos against every available online image for potential matches. Critics worry these apps can be abused by stalkers and harassers, leaving women escaping abusive partners vulnerable. Identity theft is another major concern. For example, hackers breached U.S. Customs and Border Patrol systems in 2019, making off with a trove of facial image data and license-plate information.

Racial bias is another major problem. For example, data sets tend to overrepresent White, middle-aged men, and FRT algorithms have been shown to misidentify Asian and Black faces up to 100 times more often than White faces. Both of these failings have led to harmful legal outcomes for minorities.

Setting Boundaries

Meaningful steps are being taken to stem the potential abuse of FRT. In the U.S., a number of jurisdictions have outlawed its use by law enforcement and government agencies. In some cases, the ban has been extended to the private sector as well. Some states have either proposed or passed legislation that places limits on the collection of biometric data, and enshrined into law the need to receive informed consent from anyone targeted by FRT or related technology.

The European Data Protection Board and the European Data Protection Supervisor, Europe’s two privacy regulators, have urged lawmakers to completely ban FRT in public areas. Current legislation making its way through the European Parliament would place hard limits on biometric identification, including FRT.

Here in Canada, privacy laws recently curtailed the RCMP’s use of FRT. Last year, an investigation by the Privacy Commissioner revealed that the Mounties violated the Privacy Act in their use of Clearview AI’s FRT database. Clearview AI, a private sector company with over 3,100 law enforcement contracts in the U.S. alone, maintains a database of billions of images harvested from social media, which the RCMP used to run searches on suspects.

In a statement, the Privacy Commissioner said “the use of FRT by the RCMP to search through massive repositories of Canadians who are innocent of any suspicion of crime presents a serious violation of privacy.” A number of municipal police services were also found to have used Clearview AI, but along with the RCMP, they have stopped doing so – if for no other reason than because the firm has abandoned its operations in Canada. Importantly, the RCMP disputes the Privacy Commissioner’s finding that using Clearview AI violated the Privacy Act.

A Role for Investors

Vancity Investment Management Ltd. (VCIM), sub-advisor of the IA Clarington Inhance SRI Funds, believes investors have a responsibility to use their leverage as shareholders to advocate for positive change. That’s why we’re deeply committed – as part of our longstanding and robust program of shareholder engagement – to advancing the cause of responsible limits on FRT.

Last year VCIM signed the Investor Statement on Facial Recognition along with 51 other global institutional investors, collectively representing $4.8 trillion in assets under management. The Statement urges companies involved in FRT to:

1. disclose the accuracy of their technology after measurement by a recognized and relevant scientific assessment institution;
2. disclose the source(s) of their image databases and demonstrate that their technology is constantly monitored to detect algorithmic biases, particularly with respect to race, gender, or age;
3. demonstrate proper due diligence of clients before making the technology available to them; and
4. demonstrate that effective grievance mechanisms are in place to enable victims to report consequences and access remedies.

The Statement forms the basis of VCIM’s ongoing engagement with IBM and Cisco. Together with like-minded shareholder groups, we are urging both companies to make a firm commitment to the best practices laid out in the Statement.

Visit inhancesri.ca to learn more about Vancity Investment Management’s shareholder engagement activities.

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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, and iA Wealth and the iA Wealth logo, are trademarks of Industrial Alliance Insurance and Financial Services Inc. and are used under license.

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

Canadian financial advisors registered with the Investment Industry Regulatory Organization of Canada (IIROC) will now be discussing the topic of ESG with retail clients on a regular basis, thanks to new guidance from the regulator.

The recently published Guidance Note encourages financial advisors to collect information from their clients about their investment objectives relating to environmental, social and governance criteria or the client’s other personal values. This means that while gathering information about their client’s immediate and long term investment goals, like planning for retirement or the purchase of a home, advisors will also learn their clients personal preferences in regard to ESG factors in their investments. For example, if a client is passionate about the environment, or wants to support women owned businesses, advisors are encouraged to take such factors into account when making investment decisions on their behalf.

The new KYC guidelines, which took effect December 31 of last year, come after years of advocacy from the Responsible Investment Association (RIA), including direct engagement of IIROC, in keeping with our strategic priorities. By accepting the RIA’s proposal, IIROC’s updated rules represent a significant step towards meeting retail investors’ appetite for ESG and sustainability focused investment opportunities.

Bridging the RI Gap

Historically, Canadian retail investors with an interest in ESG or sustainability have been notably under served by their financial advisors. The Responsible Investment Association’s (RIA) 2021 Investor Opinion Survey, based on a poll of 1,000 individual investors in Canada, found that 77% of respondents want their financial services provider to inform them about responsible investments aligned with their values, but only 27% of respondents had ever been asked if they were interested. There is no shortage of responsible investment (RI) products to satisfy this demand, but advisors need to understand their clients’ values in order to connect them to suitable investments.

For the most part, advisors seem confident they can step up and meet the demand. In the RIA’s 2021 Advisor Opinion Survey, of 539 financial advisors in Canada, while only 37% said they regularly initiate conversations about ESG and RI with their clients, a staggering 85% claim to be comfortable talking about ESG. The new guidelines will hopefully help kickstart these conversations, but there are plenty of hurdles that still need to be addressed.

Our survey also found that advisor willingness to speak on RI is linked with their perceived knowledge on the subject. The less advisors claimed to know about RI, the less likely they were to bring it up to a client. In addition, many advisors shared concerns about greenwashing and a lack of standards, which may be preventing them from initiating RI-related conversations. While embedding client values into KYC guidelines is a big win for responsible investing, advisor education and increased standardization are still necessary to align advisors with their clients.

What’s Next?

In recent weeks, the Canadian Securities Administrators (CSA) have issued new guidance for fund managers on ESG disclosure, and a consultation on proposed new climate risk disclosure requirements for public companies is underway. These new developments signal the growing relevance of ESG and responsible investment to all Canadian financial market participants, including financial advisors.

Advisors wishing to learn more about the effect of these new standards can tune into our ESG, KYC, and Client Focused Reforms session at the 2022 RIA Virtual Conference.

Getting to global net zero by 2050 will require a significant increase in renewable energy deployment, including solar power, by 2030. The International Energy Agency (IEA) reports that for solar power, this is equivalent to “installing the world’s current largest solar park roughly every day.”

Currently the main renewable energy sources globally are hydropower, wind, solar and other renewables such as biomass, waste and geothermal, with hydropower the largest renewable source accounting for over 60% of global energy generation, contributing 7% of global energy in 2019. The IEA forecasts renewables to account for close to 95% of the increase in global power capacity throughout 2026, with solar providing over half.

With such predictions and the world trying to solve for climate change risks, it is not a surprise that clean energy has done exceptionally well on financial markets, not only outperforming fossil fuel companies but also public equity market indices. Corporate funding for solar projects, including venture capital funding, public markets and debt financing, was US$13.5 billion in the first half of 2021 compared to $4.6 billion in the first half of 2020.

While this is encouraging, the forecasted exponential growth in renewables comes paired with a different suite of ESG concerns: negative impacts on human rights, from forced labour to land grabbing and indigenous rights violations, occurring at various levels of the supply chain, spanning from the mineral extraction phase to manufacturing, to the project level.

Human rights in the renewable energy industry

Between 2010 and 2021, the Business and Human Rights Resource Centre (BHRRC) received over 200 allegations of human rights violations linked to the renewable energy sector. These include land right disputes in Chile and Ethiopia, killings of activists protesting a hydroelectric power plant in Guatemala, underpaid migrant workers in offshore wind farms in Scotland and violations of Free, Prior and Informed Consent (FPIC) with indigenous peoples in Kenya and other countries.

In November 2021 the second iteration of the BHRRC’s Renewable Energy Benchmark was released, which ranks the world’s largest renewable energy companies on their implementation of core human rights approaches as set out by the UN Guiding Principles for Business and Human Rights (UNGPs). The report raises alarm bells, with the average score of only 22%. The benchmark found that while there were a few emerging leading companies, there remained a significant deficit in corporate policies related to land rights, Indigenous rights, land tenure, community rights and respect for human rights defenders. Among the poor scores are companies in our Canadian and U.S. backyards.

There are also significant human rights and forced labour concerns connected to the solar industry, in particular. Solar panels require polysilicon, and close to 50% of the world’s supply of polysilicon is sourced from the Xinjiang Uyghur Autonomous Region in China (“Xinjiang”). The Canadian government, the US, UK and The Netherlands have declared that China has committed genocide and crimes against humanity in its treatment of Uyghurs and other Muslim-majority peoples in Xinjiang and are amongst the countries that have imposed sanctions in response to these violations. Research by the Sheffield Hallam University that traced major solar supply chains from raw materials to panel production, found significant forced labour concerns linked to the region for 90 Chinese and international companies.

The importance of human rights due diligence

Unfortunately, the latest Corporate Human Rights Benchmark (CHRB) reports that 79 companies across different sectors still fail to score any points on the benchmark’s human rights due diligence indicator.

Human rights due diligence is a key core component to fulfilling corporate responsibility to protect human rights under the UNGPs. It leads companies to identify, assess and act upon its human rights risks. The BHRRC’s 2021 Renewable Energy Benchmark report noted that some renewables companies seem to be confusing human rights due diligence with audits, which is not an uncommon mistake – however, while audits are useful tools to assess compliance with certain policies, they are not designed to identify human rights harms.

This is a crucial takeaway for investors engaging companies on human rights and supply chain risks as well: the need to go beyond asking companies to conduct and report on audits of suppliers, for example, and towards expecting companies to have a robust human rights due diligence process in place.

What can investors do?

Robust due diligence, rather than auditing, has been a consistent ask from investors of companies engaged through the collaborative investor initiative on Xinjiang.¹

The Investor Alliance for Human Rights is coordinating collective investor engagement with companies linked to or implicated through their value chains to human rights abuses across sectors, and also coordinates an engagement stream with solar panel companies. The Alliance also published Investor Guidance on the Human Rights Crisis in the Xinjiang Uyghur Autonomous Region that provides guidance to investors on how to engage with portfolio companies and other stakeholders to address human rights violations.

At BMO GAM we have prioritized engagement on human rights due diligence across global holdings by supporting the Corporate Human Rights Benchmark (CHRB) and integrating its findings in updates to our voting policy and approach. In 2021 we were part of a group of investors who sent letters to companies scoring low or zero on the CHRB’s indicator on human rights due diligence to urge them to improve, and we will continue to use our leverage with investee companies to encourage adoption of better policies, practices and disclosures.

There is more that investors can do beyond company engagement, including advocating for strong human rights regulations and standards globally and in key markets. Sustainable finance, green bond standards, carbon offsetting projects and carbon credit markets all require more robust integration of human rights standards. And as recommended by the Investor Toolkit on Human Rights, investors themselves can also commit to conducting human rights due diligence on investment portfolios to flag adverse human rights impacts.

Investments in renewables undoubtedly will continue to grow, and it is in investors’ favour for this growth to be sustainable and good – rather than harmful – to people. Our industry should collectively make preventing and mitigating human rights abuses an equal priority to preventing and mitigating harmful effects from climate change.

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

The global pandemic has resulted in many changes for Canadians, not the least of which is increased engagement in how their money is invested. As awareness of responsible investing increases, we expect demand for aligning investment portfolios with helping society to increase as well.

From our perspective, the key is active portfolio management. We find that the most effective way to achieve performance is by undertaking extensive fundamental research and actively engaging with companies.

Accentuate the positive

For our sustainability focused mandates, we look to stay true to our active investing roots in our approach to ESG. It’s been our experience that the exclusionary approach to ESG that goes hand-in-hand with passive investing, by its very nature may miss out on many opportunities for investment performance and positive contributions to society.

An active approach to ESG can focus on positive company inclusions that may drive the most meaningful impact towards a more sustainable economy.

Sustainable investing – why a broader target makes sense

For inspiration on key themes and areas of focus for driving positive change, we have looked to the UN Sustainable Development Goals and other important development organizations that help guide our investing approach.

When it comes to our active approach to ESG, we have identified five key investable themes that help us find companies well-positioned to generate higher profits by making positive contributions to the world:

• Sustainable energy generation
• Efficient energy consumption
• Responsible consumption and waste management
• Sustainable industry, infrastructure and communities
• Good health and well-being

Leaders, Enablers, and Improving Stories – a comprehensive approach

Within each theme, we identify three types of drivers of positive change to broaden the investment opportunities to drive society forward. We look for companies that are leaders, enablers, or improving stories and invest in businesses that are making progress along these key themes, with financial performance aligned to a positive societal contribution.

Leaders are acknowledged to be at the front of the pack when it comes to driving one or more themes forward and incorporating sustainable business practices. A great example of a leader in sustainable energy consumption is a Canadian real estate firm that manages a broad portfolio of properties, over 95% of which are green-certified by BOMA, BEST or LEED. Their leadership extends well beyond building certifications, with a 38% reduction in greenhouse gases over a 10-year span and a commitment to reduce their carbon footprint by 80% over four decades.

A great example of an enabler is a leading engineering company that is a meaningful holding in our mandates. The company derives a dominant share of its revenue from projects that are helping to improve the emission profile and environmental impact of key municipal infrastructure. Though not an obvious ESG leader, the firm’s expertise in design enhancements is making an important contribution to improving sustainability.

Critical to societal success are improving stories. Investing in firms that are not acknowledged sustainability leaders but are actively making strides to improve their operations is essential to building the sustainable global economy. Of note was an investment we made in a Canadian power producer that transitioned its mix from entirely coal-fired to predominantly renewable power over several years.

In short, we look to include not only the more obvious sustainability leaders, but also those that are enabling others to achieve sustainability targets and those that continue to improve. This supports our strategy to invest in a diversified portfolio of firms working to achieve societal goals.

An active management approach to responsible investing

As investors increasingly look for ways to build a portfolio that reflects their values, enhances societal outcomes and delivers desired performance, we firmly believe that our active approach will help deliver the right solutions for responsible investing. Targeting leaders, enablers and improving stories that are making progress on our key investable themes is critical to achieving the right mix of companies, risk, reward and returns. We actively manage portfolios by looking beyond indices and ratings agencies, and as a result, our investments are aligned with broader sustainable themes and have a more meaningful impact on achieving societal goals.

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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.

What is a fiduciary? A fiduciary is an entity “to whom power or property is entrusted for the benefit of another.” Fiduciary duties include “a duty of confidentiality, a duty of no conflict, and a duty not to profit from one’s position.”

In our annual survey of attitudes towards responsible investment, institutional investors cited fiduciary duty as the top reason for incorporating ESG in their investment approach.

For the minority of respondents who said they do not use ESG principles in their investment approach, however, a plurality said it was because they do not believe ESG to be consistent with the fiduciary duty to maximize returns. The U.S. had the most adherents of this viewpoint, followed by Canada and Asia. This confusion as to whether fiduciary duty requires or forbids ESG is perhaps an outgrowth of recent changes in the investment and legal spheres.

At one time ESG factors were generally considered nonfinancial in their nature, so legal scholars wondered whether fiduciary duty might restrict fiduciaries from taking them into account. Some wondered, that is, whether fiduciary duty permits consideration of ESG factors. “Some institutional investors, whether asset owners or investment managers, have defined their fiduciary duties in narrow terms, arguing that they preclude consideration of Environmental, Social and Governance (‘ESG’) factors in investment processes.”

In 2005, the legal background began to change. That year, the United Nations Environment Programme’s Finance Initiative (UNEP FI) commissioned a report known as the Freshfields report which set forth the principle that managers could consider ESG factors without violating fiduciary duty. That report looked at the laws in a number of the world’s most advanced economies and came to the conclusion that “integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions.”

This report confirmed that ESG factors can be taken into account, and set the groundwork for the assessment of materiality. In the UK, the Law Commission in its 2014 report on Fiduciary Duties of Investment Intermediaries acknowledged this anxiety while seeking to lay it to rest: “We hope that we can finally remove any misconceptions on this issue: there is no impediment to trustees taking account of environmental, social or governance factors where they are, or may be, financially material.” While allowing fiduciaries to consider ESG factors, the report stops short of mandating this: “we do not think it is helpful to say that ESG or ethical factors must always be taken into account.”

The UK is not alone in wrestling with these sorts of issues. A 2021 report by Freshfields, entitled “A Legal Framework for Impact,” looks at the law in the United States and finds that “the current understanding, especially in the context of pension fund management, is that where an environmental, social or governance factor has material implications for the realization of an investor’s financial investment objective, then the investor will be under a duty to take it into account appropriately in the way it seeks to discharge its duties to pursue that financial objective.”

In the U.S., two 2020 Labor Department (DOL) rules imperiled the consideration of ESG under the fiduciary duties required under ERISA, a law governing workplace retirement savings. The rules, which focused on the consideration of “pecuniary” and “non-pecuniary” factors when selecting investments, and on the role of proxy voting in fiduciary duty, were issued towards the end of the Trump administration and viewed as barriers to the consideration of ESG factors in investment and voting decisions. However, under the Biden administration in 2021, the DOL confirmed it would not move ahead with enforcement and ultimately proposed new, clarifying rules, promptly reversing course.

In Canada, as the Responsible Investment Association (RIA) notes, “The evolution of fiduciary responsibility as it pertains to ESG issues led the Ontario government to amend the pension fund investment regulations in 2016, requiring pension funds to include in their statements of investment policies and procedures (SIPPs), information about whether, and if so, how ESG factors will be incorporated into their decision-making process.”

The Principles for Responsible Investment (PRI), a UN-supported network of investors promoting responsible investment, states that fiduciary duty mandates consideration of ESG factors, saying “the fiduciary duties of loyalty and prudence require the incorporation of ESG issues.” The PRI bases its position on three points: 1) ESG incorporation is an investment norm, 2) ESG issues are financially material, and 3) policy and regulatory frameworks are changing to require ESG incorporation. The PRI suggests that “Investors that fail to incorporate ESG issues are failing their fiduciary duties and are increasingly likely to be subject to legal challenge.”

One can see that the legal discourse regarding ESG and fiduciary duty is rapidly evolving. But it’s not just the legal discourse. The changes in legal opinion reflected above track similar changes in the investment community, where material ESG considerations are increasingly part of investment decision making.

At RBC Global Asset Management, all of our investment teams integrate material ESG considerations into their investment approaches. We believe that being an active, engaged and responsible owner empowers us to enhance the long-term, risk-adjusted performance of our portfolios and is part of our fiduciary duty.

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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 Canada continues to face hard truths about the past and present experiences of Indigenous Peoples, governments, businesses, and individuals seek to contribute to reconciliation in myriad ways, albeit with varying degrees of success. The investment industry can be a significant lever for progress; recent surveys and academic research join a growing chorus urging capital markets to do more. Multi-asset investment managers can address Indigenous rights and reconciliation in the investment process by using different tools and investment vehicles, unique to each asset class. Below we offer insights on how investors can integrate Indigenous rights via a multi-asset lens.

Managing Risks in Equity Investments

Financial relevance is generally the primary lens through which equity investors view environmental, social and governance (ESG) factors. For many industries, Indigenous relations could impact investment outcomes. Energy, mining, and utilities companies have long faced financial, operational, and reputational risks associated with poor Indigenous relations. Protests and construction delays, legal challenges, and adverse market sentiment can have real financial consequences for companies that mismanage their license to operate in Indigenous communities. The Dakota Access Pipeline and Keystone XL Pipeline are two of many recent examples that illustrate these investment risks. Indeed, in the United States, as of March 2021, the extractives sector faced the highest number of controversies about alleged adverse impacts on Indigenous populations, such as environmental degradation, human rights concerns, and social inequalities.¹

Several tools are available to build an investment process that considers and integrates Indigenous rights and relations. Data, for example, is especially important for asset managers with large equity portfolios – i.e., potentially thousands of companies – in active and passive funds. Such investors need to be able to efficiently, and at scale, identify and monitor on an ongoing basis companies with high-risk exposure or poor historical performance in this area. While the extractives sector overall is commonly known to face risks associated with Indigenous relations, not all companies may operate in Indigenous communities or on or near traditional Indigenous lands. Furthermore, data on which companies have implemented best practice policies and programs – such as those aligned with the UN Declaration on the Rights of Indigenous Peoples (UNDRIP) and free, prior and informed consent (FPIC) – or which companies face related controversies can help narrow the engagement focus. It can also help track progress of portfolio companies over time.

Stewardship activities such as engagement and proxy voting are also effective mechanisms for exercising influence on Indigenous issues amongst investee companies. In addition to advocating commitment to UNDRIP and FPIC, investors could encourage companies to better report the impact of their operations on Indigenous communities. Setting clear proxy voting guidelines and policies on Indigenous relations can enhance investor communication on expectations. Supporting related proposals or voting against directors in situations where controversies are present and/or progressive policies are lacking also emphasizes investor accountability on this topic.

Fixed Income and a Framework for Impact

For debt investors, leveraging data and engagement are also ways to manage downside risks stemming from poor Indigenous relations at both corporate and non-corporate issuers. But there are opportunities to contribute to positive impact more directly in the fixed income space. The green, social and sustainability bond market is quickly growing. In 2021, debt issuances under various sustainability labels surpassed $1.5 trillion USD globally, doubling from $747 billion in 2020. Some analysts expect it to reach $2.5 trillion in 2022. These instruments have the potential to advance reconciliation with Indigenous communities, so long as the bonds are structured in alignment with recognized principles.

Investors seeking to participate in these bonds should have a due diligence process based on established frameworks – such as those set out by the International Capital Market Association. The frameworks should specify acceptable use of proceeds to ensure the investments’ impact serves the needs of Indigenous communities. They can also include use of proceed categories which identify activities that support the socioeconomic advancement and empowerment of Indigenous Peoples, and/or categories like affordable housing and access to healthcare. Bond frameworks should also include quantifiable and measurable metrics to keep issuers accountable to stated goals.

Real Partnership in Real Assets

While consideration of Indigenous rights and issues in equity and fixed income investments may produce socioeconomic benefits for Indigenous communities, an investor’s influence on actual outcomes is tangential at best. However, in alternative investments, specifically in real assets, the ability for investors to contribute to Indigenous Peoples’ economic independence can be much more direct. For example, real estate investors can lease land directly from Indigenous Peoples for new property development – a long-term arrangement that can generate wealth for both investors and the local community. Additionally, real estate strategies can establish manager due diligence frameworks and selection criteria that consider Indigenous rights, especially for managers and properties located within or near Indigenous communities.

Infrastructure projects can also be opportunities for collaboration with Indigenous Peoples. In fact, the ability to win contracts and obtain regulatory approval from governments may depend on Indigenous ownership and participation, via seats on the board, as an example, where they are in a capacity to manage these projects alongside investors. Approaching and structuring projects in this way – particularly projects tied to the energy industry or impacting natural capital – can be critical to an inclusive and just transition to a low-carbon economy.

This is by no means an exhaustive list of the ways multi-asset managers can promote Indigenous rights in the investment process. Investment innovation can play a role in this space. We must also move beyond the common industries given the systemic nature of this issue in Canada and abroad. Furthermore, true reconciliation requires the investment community to meaningfully reflect and act beyond investments – within organizational diversity and inclusion efforts, procurement vendor policies, and engagement with Indigenous organizations. All this to say: there is still much work to be done.

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Sources:
[1] Block, Samuel. (April 2021). Native Americans’ Pivotal Role in US Climate Change Agenda. MSCI ESG Research. This report contains information (the “Information”) sourced from MSCI Inc., its affiliates or information providers (the “MSCI Parties”) and may have been used to calculate scores, ratings or other indicators. The Information is for internal use only, and may not be reproduced/redisseminated in any form, or used as a basis for or a component of any financial instruments or products or indices. The MSCI Parties do not warrant or guarantee the originality, accuracy and/or completeness of any data or Information herein and expressly disclaim all express or implied warranties, including of merchantability and fitness for a particular purpose. The Information is not intended to constitute investment advice or a recommendation to make (or refrain from making) any investment decision and may not be relied on as such, nor should it be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. None of the MSCI Parties shall have any liability for any errors or omissions in connection with any data or Information herein, or any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

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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.

When it comes to sustainable investing, the asset management industry has historically focused on the “E” and “G.” The movement towards measuring companies’ environmental footprints is highly visible, with public commitments to net-zero emissions coming from investors of all shapes and sizes, asset managers, and corporations alike. However, measuring social impact in investments is just as important to the financial industry and global conversation around creating a more sustainable world. For asset managers to make meaningful progress towards sustainability goals, we must invest in a way that not only considers the environment, but also people and communities.

Organizations like the Principles for Responsible Investment (PRI) and the Global Real Estate Sustainability Benchmark have created frameworks for our industry to track progress around ESG issues. Previously starved for detailed information about the diversity of a company’s staff or the emissions of their buildings worldwide, investors are gravitating towards these frameworks so they can track the impacts that their portfolio holdings have on the world. This has led to more standardized reporting around environmental factors as well as diversity, equity, and inclusion, as investors are aligning due diligence questions with the leading global standards.

But social impacts of investments are not always straightforward to quantify. The asset manager can play a powerful role in gathering information about the financing of projects and companies – and helping those companies improve the ways in which they are impacting people’s lives. It can be useful when asset managers expand the amount of data they collect on social impact while also offering investors and their holdings actionable ways to positively influence the world.

Asset management firms can and should use technology and resources to increase investor awareness of the social impacts of their portfolios. In working towards our own goals to make the world a more equitable place, BentallGreenOak (BGO), an SLC Management company, developed the BGO Social Impact Assessment Tool, one of the first data-driven “S” factor applications for the real estate equity and debt sector. Aligned with the United Nations Sustainable Development Goals (SDGs) and other international best practices, creating this tool has helped BGO assess the social profile of its assets, including how they impact health and well-being, economic growth, and inequality in our communities. The tool launched at over 400 properties in 2020, representing more than $27 billion (USD) in global assets under management.

The time and resources put into creating and expanding this tool has refreshed our perspective on what makes for excellence in social performance at the asset level. For example, we are thinking more about the ever-evolving state of urban transportation and how our buildings will accommodate more bike traffic and other forms of clean commuting. We are also seeing first-hand how valued our investments are in common amenity spaces like meeting rooms, recreational facilities, and healthy eating options and fitness have become essential in tenant acquisition and retention. Additionally, as we embark on asset renewal plans, we are exploring how we can invite more natural light, fresh air, and artistic expression into our indoor environments. And our continuing experience with Covid-19 has added greater urgency to our portfolio-wide plans to establish best operating practices and new capital investments that will help us mitigate current and future infectious disease events.

The asset manager of today is a social convener who must be able to weave their assets into the fabric of the community in which it resides to secure long-term growth and value. Increasingly, this requires honest introspection from firms on the people and talent that we have assembled to lead our ESG journey and challenging where we fall short on diversity, equity, and inclusion. As we continue to invest in dynamic, cosmopolitan centres of culture and commerce, the makeup of our people must reflect that same richness in diversity too. Our investors and tenants are holding us accountable on this front, and every day we are learning how much better we are when leaders from varied ethnicities, generations, and identities are powering the decisions we make in the boardroom and in our buildings. Underperforming buildings that become obsolete over time almost always suffer from detachment to their community surroundings and social settings and falling victim to this risk is an existential risk that can no longer be taken for granted.

By creating this tool, we also learned how to bring teams with varied levels of ESG investing experience into the process of measuring social impact. In a true socially conscious enterprise, we are all ESG practitioners, and we must all be keenly aware of the role we fulfil in delivering excellence in this regard. The path to a more sustainable world is not short, and the people within our industry have entered this path at different stages of their career and in different ways. As asset managers, we must meet our own employees where they are in their own journeys by creating tools and programs that will help them reorient the way in which they think about the social impacts of their portfolios.

The “marathon not a sprint” maxim can be applied to the external challenges that came forward as we created the BGO Social Impact Assessment Tool. There were gaps in the social data that international standards prompt investors to ask. But perhaps more importantly, a lack of understanding of why social impacts need to be measured in a portfolio emerged. Third-party standards can help track progress of global companies, but they don’t always provide ways for those companies to make change. Action plans are critical for companies in sectors with heavier social and environmental footprints on the world, like industrials. A key element of this tool is that it provides bespoke strategies as to how each asset, and ultimately, portfolio, can improve its social impact over time. The financial industry doesn’t have all the answers right now as to how they play a role in improving this landscape. We must continue to innovate and evolve our own investing processes so that our clients know how their money is being put to work in our communities. We must be transparent in our communication with our clients, giving them more, and actionable, information on the progress we can all make towards social equity through investment.

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Contributor Disclaimer
This material contains opinions of the author, but not necessarily those of SLC Management or its subsidiaries and/or affiliates.

© 2022, SLC Management

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.

In figuring out a novel solution, it’s usually the “how” that spurs the most debate. So, too, with the path to net zero. Most of us accept the science of global warming. Most of us appreciate that without remedial action, the planet and its inhabitants will be at risk. There is a consensus that we must cut greenhouse gas emissions to net zero by 2050. There is no credible objection to why we need to act. Nor, really, to when. It’s about the “how.”

History, experience, and position in the world shape views. Our own roots, as an active investment manager, lie in South Africa. We were the first investment manager with an African background to sign the Net Zero Asset Managers Initiative. We did so because we believe in the goal – and because we believe there is a particular path to its achievement.

Investing for active returns as well as for net zero in the real world is challenging. We’re learning new disciplines for the industries and companies we assess. We must understand their sustainability models and how they affect company values. Assessing companies’ and countries’ transition pathways and commitment to achieving net zero needs analysis, deep sector knowledge and, very importantly, active engagement.

It’s in calling for active engagement that we differ from an approach to net zero that is unfortunately still common in developed markets.

There is a view among many developed-market investors that the way to reach net zero is simply by cleaning portfolios. In other words, by divesting from countries and selling companies characterized by high emissions. Yes, this will surely clean a portfolio. What it won’t do is clean the real world.

Let’s play this out.

Imagine if “portfolio purity” became the standard. We’d end up with a pristine array of developed-world portfolios concentrated in a narrow array of assets. At the same time, the rest of the planet would be left to its own devices, with assets prey to bad owners and irresponsible capital-allocation practices. We’d be guaranteeing a world of partial net zero, which, in turn, would guarantee no net zero at all. Emissions would not be reduced by 2050. They would be exponentially escalating.

To divest may demonstrate either a lack of understanding or of sincerity regarding the climate crisis, because divestment exacerbates the crisis.

While emissions in emerging markets are growing, the US and Europe have contributed a combined 62% of cumulative global historic emissions. Given who’s primarily responsible for emissions over time, it would be a craven act for rich countries, their investors, asset owners and institutions to abandon the rest. It’d be akin to removing the ladder from a burning house. The effect would be to starve emerging markets of investment capital at the very time they need an extra $2.5 trillion a year to finance their energy transitions.

Electricity is a primary example of a sector where positive engagement and finance could result in gargantuan change.

Many emerging markets rely on fossil fuels for power production. Per capita electricity from such fuels in South Africa is 89%; in India, 74%; and in Indonesia, 61%. By 2019, meanwhile, the price of electricity from solar photovoltaic and onshore wind had dropped below the price of electricity from gas and coal. Yes, a transition to renewables in these markets would be a mighty undertaking. But yes, also, a transition must take place. Not just for the benefit of these countries, but to ensure that there is a net zero for the whole world.

Hence our view that we must actively engage. This means staying invested, even in certain high emitters — but with the vital caveats of a fixed time horizon for change and immutable goals to achieve net zero. From companies, we must demand clear transition plans to 2050, capable of being measured and monitored. What we are calling for is patience, because a real solution will take time.

Our focus, as a global investment community, should be on the facilitation and provision of transition finance.

As an asset allocator, we encourage the commitment of capital to help finance the vast shift that’s required. We also encourage a commitment to refining the ways in which progress against climate goals is measured.  We would like to see the creation of financial instruments that help capital allocators align portfolios with a real-world and inclusive decarbonization. These instruments would channel capital to companies and projects that move the global economy closer to carbon neutrality and let poorer nations effect a transition to net zero. An inclusive transition, just and effectively financed, will be of benefit to all. There is no viable alternative.

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Contributor Disclaimer
Ninety One is an independent, global investment manager dual-listed in London and Johannesburg. Established in South Africa in 1991 as Investec Asset Management, the firm demerged from Investec Group in 2020 and became Ninety One. Ninety One manages more than $190 billion and offers active strategies across equities, fixed income, multi-asset and alternatives to institutions, advisors, and individual investors around the world.

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.

There are finite limits to our planet’s natural resources. Intensive exploitation at an increasingly rapid pace prevents nature from regenerating thus contributing to depletion and impoverishment. Our linear economic model, which consists of producing, consuming and throwing away, has a key role leading to devastating impacts on our environment.

Figure 1: Our Economy Favors an Unsustainable Linear Model

The demographic and economic explosion of the 20th century and the advent of mass consumption with cheap and easily replaceable products have put too much pressure on our environment and we are now sounding an alarm. Indeed, this linear economy has overlooked two important points: our natural reserves are limited and nature needs time to regenerate and make new resources available. According to scientific experts, at this pace of extraction, some raw materials will no longer be available in the next 50 year^[1] while there will be an increasing demand for energy and natural resources as the world population is expected to reach 9 billion by 2050.

Besides, the linear model of producing more and more and throwing away large amounts of waste, with limited recycling, is in contradiction with the planetary limits. Global waste production was estimated to be 1.3 billion tonnes per year in 2012 vs 2.01 in 2018 (+55%) and is expected to grow to 3.40 billion tonnes by 2050 under a business-as-usual scenario (+160%). As of 2018, it is estimated that globally about 37% of waste is disposed of in some type of landfill, 33% is openly dumped, 19% undergoes materials recovery through recycling and composting and 11% is treated through modern incineration. The consumer society has finally given rise to a society of waste.

Figure 2: Almost 2 Earths were needed to support humanity’s annual resource consumption in 2019

In these circumstances, how can we help companies to move from a linear to a circular model to limit the damage to our environment?

The Rise of the Circular Model

We therefore need to move from a linear economic model to a circular economic model that will limit the damage to the environment, giving it time to regenerate by promoting the extension of the life span of produced goods – notably through eco-design, reparability, durability, and the second-hand market. It must also include better treatment of waste allowing raw materials to be reused to create new goods, thus closing the loop. The circular economy is a solution that has become increasingly successful in recent years: the concept has spread from a small circle of insiders to a growing number of companies and citizens.

However, defining the circular economy is not easy and there is no universal definition today. At Amundi, we consider that the circular economy is a change of economic model that allows producing sustainable consumer goods, while protecting nature – by giving it time to regenerate – and ensuring the well-being of individuals.

This new economic model translates into:

• A better management and use of natural resources
• Goods designed and produced to last
• Consumers who are informed about the environmental impacts of what they buy and who consume sensibly
• A more efficient system for processing end-of-life products from which more secondary raw materials can be obtained.

Each stage of the production of a product or a consumer good must therefore be reviewed in the light of this above definition:

Figure 3: The Circular Economy Proposes a New Economic Model that Re-evaluates each Stage of Production

Investors have a Role to Play in Promoting a Circular Economy

As investors, promoting a circular economy is an opportunity not only to help decouple environmental degradation from economic growth but also a financial opportunity that drives innovation and competitiveness. Research shows that the circular economy offers a $4.5 trillion economic opportunity by reducing waste, stimulating innovation and creating employment. New business models focused on reuse, repair, remanufacturing and sharing models also offer significant innovation opportunities. However, for these prospects to be realized, companies need to re-think their entire business model and business strategy and this requires investor support. In the short term, there is an interest of companies to perpetuate the linear model as turnover is based on producing and selling at scale. The circular economy, on the other hand, proposes a new model in which the good has been designed to last and in which its longevity is key. This longevity translates again into eco-design, reparability, durability and recyclability and will require a complete redefinition of company strategy (aka a circular makeover). This change is not simple and certainly cannot happen overnight but again investors have a key role to play in supporting and encouraging this circular transition.

Best Practice Recommendations for Corporates

To encourage circularity, investors have to be armed with best practice recommendations to inspire the right kind of systemic change. However, there is no one circular model, but rather a variety of systems that work together to create a comprehensive circular strategy. This means there is ultimately no ‘one size fits all’ strategy for companies.  However, to promote a circular economy across all sectors  and companies one thing is key: the concept of circularity must be integrated into company strategy.

Based on our work on the topic and company engagements, at Amundi, we have identified the following recommendations for best practice divided into four main categories:

A Circular Model has to Come from the Top

Circular economy must be strongly integrated into the core business model of the company. This means circularity is not simply assimilated into general ESG strategy, but that the strategy around circular economy is a distinct topic with strategic CEO and board oversight. Updates on the circular economy strategy should be presented to the board at least once or twice a year.

Translate a Top Down Strategy into Clear Quantitative Commitments

Companies should establish strong and clear circular economy commitments with objectives and quantitative targets. Many companies are developing targets to increase the recyclability of materials used, but they must also focus on increasing the amount of recycled content used in new products (i.e start viewing second hand products/materials as new resources and not waste). Quantitative targets need to also go beyond material based targets and focus on fully circular product targets. For many sectors, this is great in theory but not practice as it is technically impossible or too expensive to scale. Regardless, these theories will only become a technical reality if companies drive strategies to dedicate resources to solving these problems. Thus, we support quantitative product targets where circular solutions are technically possible and R&D/Capex targets to mobilize resources in areas that need further innovation.

Get all Hands on Deck to Design and Prepare for a Circular Economy

A true circular strategy needs all hands on deck. This includes internal teams ranging from product developers, purchasing departments, and logistics to sales & marketing.  We recommend internal training to empower employees to incorporate circularity principles into their day to day work but also technical training where needed such as to further eco-design in product development or on  communicating circularity to customers so they remain involved in the circular process.

In addition, circularity requires collaboration with external stakeholders including suppliers and third party experts. Companies need to ensure that suppliers are seen as partners in this circular revolution. We have observed that strong supplier partnerships with a longstanding core group of supplies helps companies better integrate circularity into their business.  For areas where technical innovation is still needed, we encourage companies to work with their peers, circularity experts, and NGOs to collectively address these problems and find solutions.

Think about the End in the Beginning

Finally, at the end of life of products, we encourage companies to think of the end in the beginning (it is a loop after all). Designing for disassembly and raw material recovery is essential to kicking off this circular cycle. To effectively do this, there are a wide range of things to consider including the recyclability and longevity of individual components versus the recyclability of the products overall. Also, consideration is needed for how products and components are collected and how these materials feed back into the original system. This is certainly not an easy task and it will ultimately look different for every material, product, company, and sector. The point is, these discussions need to happen in the beginning, not the end involving the relevant people and teams right from the start.

Conclusion

True circularity is certainly easier in theory than practice but the impact of a linear model means it is no longer a viable strategy. Companies thus need to imagine new ways of doing business and a circular mindset will help companies address these impacts while remaining competitive. Yes, technical challenges exist, but our work at Amundi has shown that the integration of the circular economy by companies has accelerated over the last few years and feasible solutions are beginning to scale. It is ultimately companies that are ambitious in their adoption of circular strategies who are the ones driving change and innovation. Thus, our message to corporations is that the time to act is now.

Sources:
[1] Metal depletion: should we be worried?, Ademe, 2017.

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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.

The climate crisis is closing in on us quickly, and at the heart of the climate crisis is consumerism. It is the reason the planet has too much plastic and CO2, losing too many trees, and using more fresh water than the Earth can produce. According to The World Counts, on a global scale we need the same as 1.8 Earths to support our demand for resources and absorb our waste.

If everyone on Earth consumed at the same rate as Western consumers, we would need five Earths to support us. And the number of consumers is growing fast. By 2030, the number of consumers on the planet will be 5.6 billion, compared with 4.3 billion right now. The World Counts defines a consumer as “someone able to buy goods and services beyond the satisfaction of basic needs. Specifically someone having more than US$10 a day to live on – also referred to as middle class.” If nothing changes, we will be out of fresh water, have no more trees, and no more seafood at some point in the next 30 to 80 years.

Writing about anti-consumerism and responsible investing is not easy. Fundamentally, the general premise of investing is buying companies that you think are going to increase sales, by increasing the production of the goods or services they sell. Investing in anti-consumerism sounds like a paradox. So where is the intersection of investing and anti-consumerism? Is there an intersection?

Tech seems like a logical place to start, although the major tech companies can hardly be seen as anti-consumer.

Apple Inc. promotes its goal of being carbon neutral by 2030 and, to its credit, has reduced greenhouse gas emissions every year since 2015, but their primary business is producing and selling phones, tablets, and computers. As a result, they emitted 22.6 million metric tons of greenhouse gases in 2020.

Alphabet Inc. (Google’s parent) and Meta Platforms Inc. (owner of the Facebook social media service) make most of their money from advertising, advertisements that promote consumption, while Amazon.com Inc.’s business relies primarily on consumption. The big tech companies obviously serve a valuable purpose, and there is a place for them in some RI portfolios, but not for promoting anti-consumerism. Most tech funds hold some combination of the mega-cap tech players – if not all of them. Here again, it’s not easy investing with an anti-consumer perspective.

How about food and water companies? Food and water are, first and foremost, basic necessities of human survival, so at the very least food and water companies are providing for human needs as opposed to human wants.

That brings us to companies like Xylem Inc., which focuses on creating “sustainable, efficient, and autonomous water systems” by increasing the use of technology and data analytics. Then there is Halma plc, which brands itself as a “global group of life saving technology companies,” including a group of water analysis and treatment companies. One of these is Hydreka, which produces equipment and software for water optimization and monitoring. Helma (and its subsidiaries, like Hydraka) is a component in the iShares Global Water Index ETF (TSX: CWW), which tracks the S&P Global Water Index, providing “exposure to 50 companies from around the world that are involved in water related businesses.”

In terms of food companies, there are many related to agriculture and fertilizer, but an easy argument can be made that they actually contribute to overconsumption, and it’s a fact that they contribute significant greenhouse gas emissions. A study from the University of Michigan found that 10%-30% of a household’s carbon emissions come from food, and according to the UN’s Food and Agriculture Organization, almost 15% of global greenhouse gas emissions come from animal agriculture – 65% of that is from beef.

What we eat is important in the fight against climate change. Two of the bigger companies that provide meat alternatives are Beyond Meat Inc. and Impossible Foods. Beyond Meat is publicly traded but Impossible Foods is not, so I’ll focus on Beyond Meat here.

The number-one ingredient in Beyond Meat’s “Beyond Burger” product is pea protein, which results in significantly lower GHG emissions to produce than beef. According to Our World in Data, the production of 100 grams of beef protein results in 50 kg of GHG emissions, while 100 grams of pea protein results in 0.44 kg of GHG emissions.

Beyond Meat commissioned the University of Michigan to study the lifecycle of the Beyond Meat Burger and found that “the Beyond Burger generates 90% less greenhouse gas emissions, requires 46% less energy, has >99% less impact on water scarcity and 93% less impact on land use than a ¼ pound of U.S. beef.” The Desjardins SocieTerra Positive Change Fund currently lists Beyond Meat as a holding. Hopefully more get on board once Beyond Meat gets more established. 

Investing in anti-consumerism is not easy, but it’s not impossible. As responsible investors, the bottom line is that we need to look at what our investments are producing and how they promote consumerism, or better yet how they don’t promote consumerism.

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Contributor Discalimer
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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.