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Amanda McPherson. I’m with CIBC Asset Management, and I’m responsible for fixed income credit research.
SRI funds, or socially responsible investing funds, generally refers to negative screening to avoid investment in companies engaged in activities such as alcohol, gaming, or tobacco. Some SRI funds also incorporate restrictions on exposure to nuclear or carbon emissions.
I actually don’t believe that SRI funds are a growth area. The realm of responsible investing has really evolved beyond SRI into full ESG, or environmental, social, and governance integration. That’s the systematic and explicit inclusion by investment managers of ESG factors into traditional financial analysis. It means really looking deeper into companies’ efforts in the areas of ESG.
So for example, with ESG integration, investors don’t simply exclude investment in bonds issued by Molson Coors because their primary business is brewing. But really, let’s look at the relevant ESG issues that affect the company’s credit quality, such as water and energy use. An analyst seeks to answer, how does the company minimize the use of water and how is management looking to reduce electricity consumption and production? The answers tell us a lot about whether or not the company has already invested for the future and is in a good competitive position versus their peers, and is therefore perhaps a better investment than its peers who are lagging in these areas.
I would caution that there is a high degree of subjectivity when it comes to RI, or responsible investing. There was an article in the Financial Post in which they reported that 45% of active responsible investing funds listed on the Responsible Investing Association’s website have exposure to at least one stock connected to fossil fuels. This is not really surprising to me and is not necessarily wrong. It just really depends upon the product strategy. There’s no clear definition of responsible investing, and some people equate it with ethical investing. I don’t believe that’s the case, but it is a relative thing, and unless a responsible investing portfolio says it’s fossil-free or low-carbon, it may very well include Canadian oil and gas companies. This is fixed income or equity.
And companies which screen well on environmental, social and governance criteria within the oil and gas space — maybe they’re using new technologies or have leading edge practices and work with local indigenous communities — can still be very attractive investment opportunities. For example, we’ve seen some bonds issued by the East Tank Farm development. This is a partnership between Suncor and first nations groups, and local first nation groups have working interest partners and owners, which really benefits the community. The takeaway from this is the importance of doing your own due diligence and checking the investment parameters to see if they align with your objective. So SRI, or socially responsible investing, screening may not be growing, but ESG is. About two-thirds of asset managers now employ one form of ESG investing over at least a portion of their investment mandates.
Some trends in ESG, or environmental, social, and governance investing, include impact investing. That comprises investment which is undertaken with the intention of making a specific social or environmental impact, and green bonds may be considered a form of impact investing. There’s also been discussion of replacing or augmenting the green bond principles with a specifically Canadian framework. The CSA, which is the Canadian Standards Association, is actively working on developing definitions and structures that are appropriate for the Canadian market. They’re trying to develop a national standard in Canada for green and transition finance. Other countries already do this. Europe, Japan, and Australia have already done this, and such standardization could help the market expand and prevent possible greenwashing. Greenwashing is making a misleading claim about the environmental benefit of a product or an activity.
Another trend in ESG investing is increased engagement with companies in which we invest, especially in the areas of disclosure and transparency. This helps all investors. Abilities become better informed as we get more fulsome and better-quality information from the companies in which we invest. And it’s not just equity investors which engage with companies — fixed income investors also have the opportunity to meet with management teams.
And a final thing I wanted to note on this, just watch for developments from Morningstar. Morningstar bought a stake in Sustainalytics, and Morningstar said that they would be eliminating their old ESG ratings and they would be moving to use Sustainalytics’ new risk rating, and they do expect changes in portfolio ratings as a result.