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Sustainability rebalanced

May 2, 2022 | Last updated on October 11, 2023
5 min read
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Canadians are increasingly interested in investments that will not only meet their financial goals but also support their desire to create a more liveable planet. These concerns typically fall into the environmental, social and governance (ESG) framework.

Early ESG strategies tended to focus on investing in companies that are already considered “clean” while avoiding investments in companies that were deemed “dirty” – indeed entire sectors may have been shut out.

This approach can reduce capital flows to companies that are striving to improve their ESG scores, as well as sectors that are vital to the transition to a lower-carbon economy.

If we are to achieve such goals, we must rebalance our approach to sustainability to be more inclusive.

The path to a greener future is bound to be messy, involving a massive overhaul of our critical infrastructure. Large-scale projects to produce and distribute more clean energy, for example, are financed almost exclusively with debt, not equity, making fixed income investments the key to sustainability.

Funding the future

The Mackenzie Fixed Income Team is playing an active role in ensuring our investment decisions are funding a better future.

We strongly believe that strategic fixed income investment in issuers with positive momentum and sustainable use of proceeds will support and enhance the transition to improved social standards and a decarbonized economy.

We’re focused on identifying bond issuance that will finance positive change, at both the macro and the corporate levels, because we recognized that good ESG practices are critical factors that can affect the financial performance of bond issuers.

This is why all our fixed income strategies include an upfront ESG risk assessment, that aims to eliminate exposure to controversial issuers and unethical activities.

Our specific sustainable strategies go further, to include an impact analysis that assesses the use of proceeds from a bond to ensure adherence to the mandates’ core thematic objectives.

If a company in a traditionally “dirty” sector issues a green bond, we must determine whether the proceeds of the bond are truly improving the company’s sustainability. This kind of insight is not something that you can just pick up off the shelf. We do our own research to ensure that the issuer is not relying on a “seal of approval” from an agency with lax standards.

Our in-house models include not only Mackenzie’s proprietary ESG research, but also data from global institutions, including the World Bank and the United Nations’ Sustainable Development Goals. This level of scrutiny requires research far beyond the traditional fundamental analysis of the underlying business.

Of course, if the issuer is not creditworthy in the first place, we will not invest in that issuance.

Engagement over exclusion

We approach all sectors with an eye toward identifying the businesses that apply strong ESG practices compared to their industry peers.

Just as credit risk assessments vary between industries, our process of analyzing ESG positioning is uniquely targeted to suit the characteristics of individual issuers. Many companies are honestly working to improve their ESG records. Engagement with these businesses gives us a seat at the table to ensure they live up to that expectation.

Our analysis uncovers businesses that have demonstrated the ability and will to improve their low current ESG scores, as well as those that are more exposed to ESG risks due to the nature of their industry.

After adding a bond to a portfolio, we engage with the issuer on critical ESG concerns throughout the duration of the investment to ensure the stated improvements are made.

In the best-case scenario, continued engagement with issuers who presently score poorly has led to improving the company’s sustainability and the issuance of sustainable and green-labelled debt.

We are involved in over 100 ESG engagements annually, each of which is logged so we can monitor what action an issuer has taken on the concerns we have raised.

In recent years, we have prioritized climate change and diversity/inclusion as engagement themes. The team also actively encourages companies to issue green bonds if they have a clear green use for the proceeds. If they are still developing clear ESG targets, we encourage issuance of sustainability-linked bonds.

For example, a steel producer may require funding to transition from coal to new electricity-based production methods. Its legacy carbon footprint as a coal consumer may overshadow its aspiration to become a “green steel” producer. To achieve this transition, it may issue bonds that specifically fund that transition.

Such “use-of-proceeds” bonds are issued to finance dedicated environmental and/or social projects. The proceeds are specifically earmarked for this intended use. While the use of the proceeds is ring-fenced for the specific project, the bond is backed by the creditworthiness of the issuer as a whole.

Investment and engagement with the companies striving to improve enables a transformation that is not only better for business, but also for our world.

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