Tips for Understanding ESG Investing

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Aaron White

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Aaron White, Vice President of Sustainable Investments at CIBC Asset Management.

We have seen a substantial increase in the launch of ESG-focused products from divestment strategies to net- zero aligned, from best-in-class ESG solutioning to sematic strategies. And we’re also starting to see some impact strategies launched in the market today. This is a great step forward being able to align client values and contribute to a client’s nonfinancial goals alongside their financial objectives. However, it does create uncertainty, as there are no standardized definitions and/or taxonomy for advisors and investors to navigate. We’re seeing some progress on this front with the EU Sustainable Finance Disclosure Regulation as well as the CFA Institute’s push for standardization. But we’re not yet there in Canada.

It is important for advisors and investors to understand exactly what they’re getting from an ESG strategy to ensure that the process and implementation meets the needs of the client. Because of this, at CIBC Asset Management, we believe that transparency is vital to the due diligence process. Advisors should be able to access publicly the framework that establishes the exclusions and the ESG process that underpins the investment strategy, they should be able to access the firm’s responsible investing policies and reporting, and should be able to evaluate the authenticity of the ESG implementation within the investment team.

Investors should be looking at the industry organization that the firm participates in, including whether they are a UN Principles of Responsible Investing signatory, and also what industry collaboration they’re involved with. If diversity and inclusion is important to a client, you want to seek out firms that actively participate in collaborations like the 30% Club and have signed the Responsible Investing Association of Canada’s statement on diversity inclusion. If climate is the most important consideration, look for firms participating in Climate Engagement Canada, Climate Action 100+, the RA Canada’s Statement on Climate, and many others. The willingness to participate in these collaborations sets the tone for the culture at the firm and sets priorities for not just how they engage with investee companies, but also how they consider these social and environmental challenges as part of their investment process.

Advisors should also seek robust reporting related to the ESG and sustainability characteristics of the strategies they invest. Firms should produce quarterly and annual commentary for clients to track the nonfinancial progress of their investments. Investors may also look to annual sustainability and stewardship reporting to ensure that outcomes are matched with intent. And finally, the most important consideration for advisors is to understand what outcomes are important to your client. It is key that advisors first understand what nonfinancial goals or objectives that your client is hoping to accomplish with their investment and then seek out strategies that contribute to those goals. This is where the discovery process needs to change. Advisors should focus on understanding their clients deeper than what a traditional financial planning discovery session is able to uncover and establish what is important to your client and their family. It is then possible to seek out ESG strategies that target the specific outcomes that align with those values and intent.

Lastly, leverage your firm relationship. I spent a lot of time working with advisors to both help and integrate these considerations into their businesses, but also facilitating conversations with clients.