Incorporating environmental, social and governance (ESG) factors into investment decisions is more than a niche practice for specialized funds. It’s become a “competitive advantage” for asset managers, says CIBC’s Dominique Barker.
“It’s not just for socially responsible investing funds that have negative screening. It’s for all investments and [helps to make] better investment decisions for our end clients,” says Barker, portfolio manager and senior analyst of equities at CIBC Asset Management. She’s been mandated to lead efforts to include ESG factors into the research process.
“We’re finding that by understanding ESG issues and by engaging with management teams, it provides us with the insight that helps us actually determine the value and determine assumptions that we incorporate into our models,” she says.
ESG factors are especially helpful as a tool for measuring risk at individual companies, explains Barker. She points to a case where examining a mining company’s corporate social responsibility report helped her identify rising costs as well as better understand the company’s cost structure and value.
As a result, incorporating such factors routinely helps her choose companies to hold in a portfolio.
“If I have two companies, and company A has a poor safety record in the energy industry, for example, and company [B] has an average record, and both companies have a similar valuation, I’m obviously going to choose the one that has a better safety record,” says Barker.
“You can only determine that by actually looking at the ESG factors and reading the corporate social responsibility reports, and actually measuring the risk on that factor.”
Brand value through quality ESG
A company’s brand value can potentially be damaged by social responsibility failures. “Any bad news can quickly be reflected in a stock price,” says Barker.
That’s why looking at companies in terms of their products’ sustainability, employee or community relations, environmental performance and human-rights practices is important. A failure or “glitch” in even one of these aspects that leads to bad press, she adds, can negatively impact the brand.
Institutional investors are increasingly integrating ESG factors into investment analysis to manage risk and enhance returns, a February report from Natixis Investment Managers said. More than half of those surveyed said ESG investing helped to mitigate risk.
But ESG products are also becoming popular among retail investors, says Barker.
A September 2017 study from Mackenzie Investments that found investors want Canadian-owned, global investments also revealed the vast majority (91%) of respondents expect their reliance on socially responsible investments to increase or stay the same in the next two to three years.
To help boost interest in such investments, the United Nations-supported Principles for Responsible Investment (PRI) suggested in its May 2017 blueprint for responsible investment that asset management firms can help “set the direction of markets” by focusing on mandates that “acknowledge the effects their investments have on the real economy and the societies in which [investors] live.”
CIBC Asset Management became a signatory of the PRI in November.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.