Time to think about risk “like never before”

There’s little doubt that both responsible investment (RI) and the use of environmental, social and governance (ESG) data have been growing in recent years.

The Responsible Investment Association’s (RIA) latest surveys, for example, show that RI assets in Canada increased from $2.1 trillion in 2017 to more than $3 trillion in 2019. Further, the organization’s 2020 Investor Opinion Survey found the vast majority of respondents to its online poll remained very or somewhat interested in RI.

Add the pandemic to that mix, and what you have is an acceleration of industry and investor interest in the use of ESG criteria that takes material, non-financial risks into account, said a speaker panel during this week’s virtual Conference of Montreal, called Bridging a Disconnected World, organized by the International Economic Forum of the Americas.

The panel, which discussed the use of ESG factors and more, included: Marc-André Blanchard, executive vice-president and head of CDPQ Global; Kunal Kapoor, CEO of Morningstar; and Kristi Mitchem, CEO and head of BMO Global Asset Management.

To understand responsible investment, investors need interest and time, Mitchem said. And one effect of the Covid-19 outbreak is “it’s really changing the consciousness of people because they have personally experienced the pandemic,” she said.

Based on how families and communities have been impacted, “what it’s increasingly allowing is for people to make that connection between the challenges that we’re facing as a society, and the economic and financial impact that not addressing [those issues] can have,” Mitchem said.

Kapoor noted that a separate but related trend has also contributed to RI growth this year.

As firms invested more heavily in digital innovation, in part to overcome social-distancing hurdles, they also moved closer to their goal of further personalizing investment tools.

“We’re sitting here and saying that ESG can have many cuts, and that your values can be different than mine, and most investment strategies these days don’t get into that level of detail,” he said.

“But technology is enabling a very meaningful change in how wealth and asset management services are delivered; it’s very possible that in the future there will be a very personalized delivery for each of us,” leading to greater investor engagement and reflection of their values.

As people focus more on their values and individual needs, the ESG versus non-ESG performance debate will also fade, Kapoor said.

So much of the discussion around whether ESG strategies should be used is based on its potential to under- or overperform, he said, “but we should get past that. The constant debate actually clouds the ability to really have a deeper look at preferences and building portfolios around impact.”

Generally, “when companies start to take on better corporate governance principles, they start to do better,” he said, noting that looking for good governance “has never been controversial.”

What will change going forward, Kapoor said, is “we’ll think of E and S [factors] the same way.” And, just as the measurement of investment risk became an industry staple several decades ago, so too will the use of ESG data.

The largest hurdle is that the industry “is only in the infancy [stage] on data,” said Blanchard, particularly when it comes to social and diversity issues.

“I see critics who talk about greenwashing and who say we should be skeptical of everything that is not measured properly,” he said, and that’s why so many initiatives are aimed at data standardization.

“We’re only at the outset of what measuring [social issues] really means. Coming out of this pandemic, the S is still a struggle,” Blanchard said.

However, companies are trying to clarify their practices around compensation and diversity, and governments, companies and institutional investors are already working together to foster better conditions.

“You’ll see that more and more, and [solutions] will take the form of very surprising partnerships as we look at risk like never before,” Blanchard said.