RESPONSIBLE INVESTING AND THE NEW NORMAL

Transcription

1 RESPONSIBLE INVESTING AND THE NEW NORMAL NEI RESPONSIBLE INVESTING ROUNDTABLE

2 Amid the continued evolution and mainstreaming of responsible investing (RI) as a bonafide investment category, we go to the experts to get their views on how this rapidly growing category is evolving and what it means for advisors and their clients. The five investment professionals in our roundtable bring their views from different roles and regions within the responsible investment industry. Collectively they manage approximately $1 trillion in Assets Under Management (AUM). Table of Contents The Experts... 3 Foundations...4 What s in a Name?... 7 The Numbers...8 The Trend...9 The Proof...10 The Evolution...11 The Opportunity...12 The Growth...13 Looking Forward...14

3 The Experts Antoine Sorange, Head of ESG Analysis at Amundi Asset Management Antoine leads a team of 16 RI financial analysts and is responsible for the RI analysis and Environmental, Social and Governance (ESG) integration for the whole Amundi Group that manages around 160B in RI assets as of December Amundi Asset Management is Portfolio Sub-Advisor to the NEI Global Total Return Bond Fund. Bob Walker, VP, ESG Services and Ethical Funds, NEI Investments Mr. Walker leads a team of eight ESG professionals to drive NEI s Responsible Investing Program. He has 25 years experience developing responsible investment in Canada working with investment institutions, public companies and governments to create long term sustainable value for all corporate stakeholders. Brian Minns, Manager, Sustainable Investing at Addenda Capital Inc. In his capacity as Manager, Sustainable Investing, Brian Minns is responsible for the development and continuous improvement of Addenda Capital s approach to considering environmental, social (ESG) matters in investment decision-making processes. He also engages with companies, regulators and policymakers on ESG matters. Addenda Capital Inc. is Portfolio Sub-Advisor to the NEI Ethical International Equity Fund. David Richardson, Managing Director at Impax Asset Management David is the Global Head of Marketing and Client Service for Impax Asset Management. He speaks extensively across the globe on the long-term trends of rising global populations and wealth, changing demographics, urbanisation, increasing consumption, and the resultant increases in resource demand. Impax Asset Management is Portfolio Sub-Advisor to the NEI Environmental Leaders Fund. Deb Abbey, Chief Executive Officer, Responsible Investment Association (RIA) Deb leads the Responsible Investment Association (RIA) Canada s membership association for Responsible Investment (RI). Members include mutual fund companies, financial institutions, asset management firms, advisors, consultants, investment research firms, asset owners, individual investors and others interested in RI. 3

4 FOUNDATIONS NEI: It is hard to believe but Responsible Investing (RI) in Canada has been around for 30 years. How has the RI landscape transformed over that time frame both in Canada and around the globe? DAVID RICHARDSON It has been both evolutionary and revolutionary. From our vantage point in Europe we have seen RI evolve from the negative screening of sin stocks to best-in-class stock selection using disclosure based Environmental, Social and Governance (ESG) data to now a risk-based approach to ESG investing using materiality data. The revolution has come from forward looking investors who are seeking to align their portfolios with sustainability opportunities and are moving to invest in companies that are sustainability solution providers. These investors want to know more about their investments than just performance and P/E ratios. They are rightly demanding measurable environmental and social impact data on their investments to know that they are moving the dial in addressing the planet s many problems. DEB ABBEY I ve been in this industry for over 20 years and I ve seen a lot of changes. It isn t just about my values or your values anymore. It s about managing risk to long-term shareholder and stakeholder value. In a world where climate change, water scarcity and global supply chain issues dominate the business pages, that job has become a lot more challenging for investors everywhere. Responsible investors know that the integration of environmental, social and governance or ESG factors into the selection and management of investments can provide quality risk-adjusted returns and positive societal impact. What s changed in the past decade is that it s becoming a mainstream function of good investment practice, resulting in better, more informed investment decisions. Our world is very complex, and the tools that investment managers have traditionally used to manage risk simply aren t up to the task any more. Interpreting quarterly financial results just isn t enough. We need to know how the companies we invest in are managing the future: ESG analysis gives us a bigger and clearer window into their operations and the quality of their management. 4

5 BOB WALKER At least three major changes: First, data availability. Thirty years ago, public companies simply did not disclose information on their ESG policies and performance. But over the past 30 years, because of the demands of responsible investors, we see widespread corporate reporting on issues that matter, from greenhouse gas emissions to labour standards in the supply chain. We now have the information we need to make informed investment decisions grounded not only in financials but also in terms of ESG performance. Second, engagement. As late as 1999, many responsible investors believed it was impossible to engage public companies in active dialogue and advance improved ESG performance. That myth has been eradicated as investors have acted and the benefits of engagement have been proven. And third, the entry of mainstream investment institutions into the responsible investment space. Globally, institutions with more than $60 trillion in assets under management now claim they are putting in place responsible investment programs. 1 BRIAN MINNS There has been an evolution from the early emphasis on providing products that would allow investors to make investments that are consistent with their values to a more widespread embracement of the view that ESG issues can affect the performance of investment portfolios and that investors have a duty to play a role in helping the companies they invest in adopt sustainable business practices. In the past few years, a seismic shift has started to occur with many mainstream investors embracing responsible investing practices because they have come to understand that it is consistent with their fiduciary duty to their clients. A lot of this recent adoption appears to be driven by the view that responsible investing can help investors add value for their clients. "Our world is very complex, and the tools that investment managers have traditionally used to manage risk simply aren t up to the task any more. Interpreting quarterly financial results just isn t enough. We need to know how the companies we invest in are managing the future... Deb Abbey 1 Based on the 2015 Canadian Responsible Investment Trends Report, Responsible Investment Association (RIA). The subtotals throughout the report sum to a total that is greater than $1.01 trillion. RIA subtracted overlapped assets from the total to avoid double counting. 5

6 ANTOINE SORANGE ESG criteria into management processes has become a major component, both for asset managers and for many asset owners in general and pension funds in particular. This is not the only positive movement observed with regard to this topic. While initially, RI practices differed significantly from one region of the world to another, there has been a gradual convergence of practices: it is not uncommon now to see a combination of the so-called Best in Class approaches, previously used more in France, with engagement approaches, traditionally more the preserve of Anglo-Saxon or Scandinavian countries. It is interesting to note that a Eurosif study found that all Sustainable and Responsible Investment Strategies are continuing to grow, in aggregate, with no exception, at a faster rate than the broad European asset management market. Some examples of growth rate between 2011 and 2013 include: Impact Investing Exclusions Best-in-Class Eurosif notes that over this same period, the overall European asset management industry has grown by an estimated 22%. 6

7 WHAT S IN A NAME? NEI: One of the challenges this category has had since its infancy is the lack of consensus on terminology. Names like Ethical Investing, Sustainable Investing, Socially Responsible Investing, Responsible Investing and ESG Investing are constantly thrown around. Do you believe that the category can gain some consensus with respect to naming and by extension its overall external packaging to help drive it forward and present a more unified front to the world? DEB ABBEY I think that there is a growing consensus. That you referred to responsible investment or RI in the first question is evidence of that. In recent years, responsible investment has come to encompass ethical investing, socially responsible investing, environmental investing, sustainable investing, green investing, community investing, mission-based investing and impact investing. They are all components of RI and have played a part in its history and evolution. We are seeing greater adoption of the term RI in Canada and around the world. Its strength is that it is being adopted by retail investors, institutional investors, academics, NGOs and governments. That has not happened in the past. BOB WALKER I think a measure of consensus has been achieved: the broad category is responsible investing and the issues we focus on, in addition to strategy and financials, are captured under the ESG categories. That said, we re always going to have people customizing their language to engage different corners of the market. I don t think we should get hung up on these differences or in how we name the broad categories. What matters is the common ground we can find in an effort to achieve quality risk-adjusted returns, drive improved ESG performance and make markets function to advance the broad interests of society. ANTOINE SORANGE Consensus might be helpful to deliver a more unified message, but we believe that these different names actually reflect the fact that responsible investing is a diverse and dynamic field, with a lot of innovation both in terms of research and of products. Whatever the name, we believe it is important to accept the co-existence of several methods of selecting ESG friendly investments. Responsible Investment is still a young and growing market, and approaches to ESG vary. Asset managers have developed their own methodologies, and this diversity of offering meets asset owners various expectations, depending on their own view of the world, values, investment universe and political or local issues. 7

8 THE NUMBERS NEI: According to the United Nations Principals for Responsible Investment (PRI) RI global assets under management (AUM) are $US 59 trillion as of April The majority of these assets reside with pension/institutional investors. Why, in your opinion, have institutional investors so readily accepted the mantle of early adopters, whereas retail investors have been slower in their adoption? BRIAN MINNS From just a handful of signatories at launch ten years ago to its current global reach, the growth of the PRI has been truly amazing. In Canada alone, we have more than sixty investor signatories and ten professional service partners. Many PRI signatories, such as NEI Investments, offer products to retail investors. Some of these institutional investors are early adopters, and indeed innovators, but I think we are now into the growth of the early majority. The retail market does not seem to be as far down the path of adoption but I think it has reached a critical mass that demonstrates there is a lot more growth to come. DAVID RICHARDSON.Interestingly, surveys in the UK show that ~70% of retail investors would like to invest responsibly, and we certainly see lots of institutional investor interest, commitment and investment along the UNPRI ethos. However, many financial advisors to retail investors are not yet educated about these markets and about the opportunity set. DEB ABBEY Retail investors have traditionally been seen as value-based investors whereas institutional investors such as pension funds have been regarded as the stewards of their beneficiaries or pensioners retirement savings. That has put them in the role of fiduciary and managing risk has played a big part in their decisions. With mounting evidence that managing material ESG issues has the potential to increase long-term risk-adjusted financial performance, asset owners are increasingly concerned about these issues and integrating ESG factors into the selection and management of investments is becoming mainstream. In parts of Canada and in other jurisdictions around the world, institutional investors are required to disclose whether they are integrating ESG factors into their investment process and if so, how. Regulation is increasingly a driver of responsible investment practice. While retail has been slower to gain widespread adoption, our RIA 2015 Trends report showed that in two years, RI mutual funds grew by 52.3% vs. 29.8% for non-ri funds. Awareness of responsible investing is growing as more and more investment advisors bring RI into their practices. We ve seen significant growth in our Advisor membership in the past year and we ve just had one of Canada s largest brokerage firms join the RIA. 8

9 THE TREND NEI: There is little doubt that the optics of being a responsible investor have become more fashionable and marketable over the last few years. With RI becoming more popular, how can investors/ advisors differentiate asset managers that are simply box-ticking or posing as legitimate RI portfolio managers from those that have taken meaningful steps towards integrating/utilizing ESG factors as a core component within their investment process? ANTOINE SORANGE.Investing in a responsible way is growing at the heart of companies fiduciary duty and investment strategies. As a result of growing demand, product offering is developing fast and there is no regulatory standards or norms in terms of responsible portfolio management. It is key for investors to understand how their asset managers implement ESG policies, according to their own objectives and strategies, and to evaluate the quality and robustness of the solutions offered. There are various indicators to be watched. The transparency of information is essential to evaluate the ESG integration policy led by the asset manager. Investors should ask their providers about the principles of their ESG analysis, how these policies are concretely implemented in portfolios, on which asset classes, what is the proportion of total investments that can be considered as sustainable investment. Quantitative factors also often reflect the depth of the ESG policy: number of values covered by ESG analysis and rating, number of exclusions, number of companies met every year about extra-financial issues etc. Besides, engagement is a very strong sign of the consistency and ambitions of a provider s responsible investment policy. Responsible investing is not only a question of choosing the companies that demonstrate best practices today and avoiding the others. It is also about building the future, by encouraging and helping companies to adopt socially, environmentally and governance responsible practices. "Investors should ask their providers about the principles of their ESG analysis, how these policies are concretely implemented in portfolios, on which asset classes, what is the proportion of total investments that can be considered as sustainable investment. Antoine Sorange 9

10 BOB WALKER This is a significant challenge for anyone stressed for time which is everybody of course. At this stage I m afraid that the only way to make this distinction is to do your homework: look at the disclosures made on fund websites and other materials. In particular, look for examples provided on how and when these funds have made a positive impact on the companies they hold. Look for public policy activity on key issues like climate change and human rights. The leading responsible investment funds go beyond bilateral engagement with companies and seek to engage with governments and standard-setting bodies to improve ESG performance across the market. You can also look to third-party endorsements such as responsible investment awards or prominent media mentions. Some of the most successful firms, again, are working hard to get the word out on how and when responsible investment can make a difference as well as make money. DAVID RICHARDSON As with everything, it is important to ask questions and not just take things at face value. Investors should ask managers for examples of companies excluded due to ESG issues, or better yet, examples of successful engagements with company management. Managers that don t have a thorough or well integrated ESG research process will fail this test. Investors and their advisors need to research carefully and ask thoughtful questions. THE PROOF NEI: There are still a number of misconceptions about RI that include underperformance relative to conventional investments, operating within a limited investment universe and lack of clarity on how it reduces risk in a portfolio. Is it a reasonable expectation for investors and advisors to ask for tangible proof that their RI investment is performing on these fronts? BOB WALKER It s not only reasonable; it s absolutely necessary. Good fund companies with a track record of effectiveness will be able to point to numerous examples of how they have made a difference through engagement and, while past performance is not necessarily indicative of future results, they may also be able to point to a positive historical track record of financial performance. Beyond this, they ll be able to direct advisors and investors to the burgeoning literature on the financial performance of responsible investment portfolios. This research has been building steadily over the past 15 years and is at a point where the naysayers really need to defend their claims. The positive impact of responsible investment in all its dimensions is now, at this stage of the game, undeniable. 10

11 BRIAN MINNS Yes, it is certainly reasonable for investors and advisors to ask for evidence and I would expect them to do so as they continue to gain comfort with different approaches to responsible investing. When doing so, investors might want to expand their definition of value add beyond the traditional confines of risk and return. Other aspects of sustainable investing being undertaken by investment managers such as corporate engagement or promoting sustainable financial markets might be very hard to tie directly back to the performance of an investment fund. However, there is a general consensus that companies with healthy ESG practices will likely deliver better long-term results than those with inferior practices. On the topic of risk and return, if an investment manager is undertaking a truly integrated approach to considering ESG issues then there should be no alternative to compare performance to either they believe ESG issues can impact performance and they integrate it for all clients or they aren t really practicing responsible investing. DAVID RICHARDSON Absolutely! RI investors and advisors should ask their managers to provide tangible evidence that ESG research can add value and/or reduce risk and their managers should have good answers. This is no different than asking a manager why their investment process produces excess returns over the market. More broadly though there is a significant amount of recent, large-scale, peer reviewed academic research that clearly points to the benefits of RI in investments from the likes of Harvard, Oxford, and the London Business School. This makes sense; now more than ever, the sustainability of a company and its future growth prospects matters much more than this quarter s earnings. THE EVOLUTION NEI: Brian and Antoine, your organizations started as traditional Investment Managers focused on financial analysis. What was the rationale for adopting and integrating ESG principles into your investment process? 11

12 ANTOINE SORANGE RI is one of Amundi s four founding pillars. Amundi has decided to factor ESG criteria into its investment policies, with a clear conviction: a company that respects the environment, capitalizes on its workforce and has good governance clearly has more chances of achieving strong economic and financial performance than less virtuous competitors. Moreover, we consider that responsible investing is an important driver of business, and that it will become more and more important to demonstrate strong capabilities in this field in the coming years. With around 160 billion invested in this strategy at end of 2015, Amundi is one of the most committed players at European level. Far from being inconsistent with financial performance, integrating ESG criteria strengthens a company s performance. Moreover, Amundi s RI approach is also resolutely motivational. Its methodology has always been communicated to issuers in a fully open and transparent manner, embracing a spirit of dialogue aimed at sharing its conviction and encouraging companies to take extra-financial criteria on board. BRIAN MINNS Addenda Capital is still a traditional investment manager but we believe that paying attention to ESG issues can help us provide better investment outcomes for our clients. Moreover, we believe that in the long run, investors would benefit if we align our investment activities with the broader interests of society. We are active investors and our investment teams have a strong emphasis on fundamental research and analysis. When we identified growing interest amongst our clients to see more explicit use of sustainable investing practices we initiated educational opportunities and debate through discussions internally and with major clients. Sustainable investing is consistent with the approaches of our investment teams and so we started to plot a course to enhance our activities. We started with our new (at the time) Canadian Equities team and then included U.S. and international equities followed by bonds and commercial mortgages. We are now working to continuously improving our sustainable investing practices. "...we consider that responsible investing is an important driver of business, and that it will become more and more important to demonstrate strong capabilities in this field in the coming years. Antoine Sorange THE OPPORTUNITY NEI: David, since the launch of Impax in commitment to Responsible Investing has been at the core of your organization s mission. What was the rationale for integrating ESG principles from day one? 12

13 DAVID RICHARDSON At Impax, we have always viewed ESG research as a way to get to know the companies we invest in better, to understand their character and qualities. For Impax it has been a way to add value and sustainable alpha. Indeed our research finds that companies with stronger ESG ratings have outperformed weaker ones over time. Not surprisingly, we have found that companies that are providing products or services as solutions to major societal and environmental challenges are on the right side of change. Their business prospects are better and their future growth prospects are higher. We can t understand why every investor would not want to know more about the ESG risks of the companies to which they commit capital. THE GROWTH NEI: David and Antoine, Europe has seen tremendous growth in RI. As asset managers based out of Europe, what insight can you share with respect to the European financial advisor s acceptance and promotion of this type of investment with investors? ANTOINE SORANGE As we said before, the European RI market is as of today essentially driven by a few large institutional investors. While there can be variations across countries, retail investors are substantially under-represented on this market, even though studies tend to show there is latent demand and growing interest in responsible investing. So far, most of the retail market is supply-driven. Sales principally happen in a push situation whereby the distributor recommends specific funds to his clients, or through defined employee savings plans or retirement plans (like the French PERCO). We still need a greater dissemination of RI practices amongst the retail market in order to convert potential demand into purchasing behaviours. To do so, financial advisors are definitely at the heart of this process. DAVID RICHARDSON In Europe as in North America, we are already seeing the leading ESG investors and financial advisors look beyond just ESG related risks and ratings provided by their investment managers. The next frontier is looking at the sustainable activities of the companies in which managers are investing and the opportunities and solutions that these companies can provide. This leads to measuring not just the impact of a company s manufacturing process, for instance, but what their products are doing to the planet and the people that live on it. In this way, it is possible to measure the total environmental and social impacts of the investment, not just one side of it. For instance, the true carbon footprint of a Tesla over its lifetime is dramatically lower than a Chevy Camaro s. Ultimately, this holistic way of looking at a company s carbon footprint reveals an important difference in their business models and ultimately their long term value. 13

14 LOOKING FORWARD NEI: In 2016 we have seen some globally recognized data providers in the financial services industry launch their own ESG rating systems to help foster a simplified view of responsible investments for the financial industry and its investors. What impact do you see these rating systems will have on RI investments and what does it mean to practitioners that have developed and refined their own proprietary rating systems for many years now? BOB WALKER Good and bad. The good is the ratings systems can again help raise the profile for responsible investment in the retail space. The bad is that these systems reflect only each data providers specific evaluation and scoring methodologies. These methodologies are not at all settled or even widely-shared. In our experience, most firms treat information from these service suppliers as just one source of many and not as the gospel truth on how a company looks from an ESG perspective. Even worse, the fund rating systems do not incorporate any assessment of a responsible investors engagement program. For NEI, as for many funds, engagement is the cornerstone of responsible investment. To leave this out of any assessment of responsible investment represents a deep flaw. Without it, we fear that retail investors may be misled on what responsible investment is really all about and which firms are doing the most effective work when it comes to raising ESG standards. DAVID RICHARDSON Overall, we think the impact is mixed; more data is not necessarily better data. On one hand, these new ESG rating systems are pushing companies to provide more transparency into their business practices and how they treat their stakeholders. This information will give us better insight into certain aspects of the companies in which we invest. The health warning though is that for example most ESG-research providers rated Volkswagen (VW) as excellent prior to its devastating emissions scandal. In addition, these new ESG rating systems didn t take into account the inherent emissions policy risks of the automobile sector at all. This is the flaw in relying on external ESG research and opting for the overly simplistic solution of tilting portfolios to companies with a Best in Class ESG methodology. 14

15 DEB ABBEY.At this point, these rating systems provide a snapshot in time. They do not indicate which funds have intentional responsible investment strategies such as ESG integration, corporate engagement or responsible proxy voting. They look at the ESG ratings of individual companies within a portfolio but that doesn t reveal the significant time and resources spent by RI mutual funds with proprietary rating systems. NEI for instance, does in-depth company and sector research and engages in dialogue with many of the companies in its portfolios. The new ESG ratings don t measure the impact of ESG policy initiatives or the many other activities that differentiate RI funds. From an advisor or investor standpoint, they provide some current information about the ESG ratings but they re missing the bigger picture. As an industry association, we are looking at ways to differentiate the leaders in responsible investment so that advisors and investors can identify funds that meet their RI criteria. BRIAN MINNS On the one hand, these new sustainability ratings for funds might open the door to a conversation between clients, their advisors and investment managers regarding the importance of ESG considerations that might not otherwise have happened. However, on the other hand, metrics based solely on the holdings of a fund at one point in time cannot possibly capture all of the important responsible investing activities a fund is undertaking (or not undertaking) for a client. In the words of the managing director of one of the data providers that has begun offering these fund ratings, an ESG metric alone, does not provide an indication of the quality of a fund manager s ESG strategy, capabilities, process or intentionality. 2 ANTOINE SORANGE There is increasingly available information on ESG and this is a very positive fact as it shows the growing interest for the theme and might encourage investors in ESG investing. On the other hand, comparability between issuers, different sources of analysis and rating methodologies might be confusing for investors. In this new landscape, communication between investors and their counselors or asset managers will play a big role. 2 See 15

16 NEIinvestments.com The viewpoints expressed by the speakers represent their opinion at the time of the NEI Responsible Investing (RI) Roundtable dated March 22, 2016 through April 4, Those views are subject to change as markets change over time and may differ from views expressed by other associates and affiliates at their firms. Information and opinions expressed during the roundtable do not constitute investment advice. Any securities mentioned are not necessarily held by NEI Investments and are not recommendations or solicitations to buy or sell those securities. Impax Asset Management participated in the roundtable on March 22, 2016, NEI Investments participated on March 24, 2016, the RIA participated on March 28, 2016, Amundi Asset Management participated on April 1, 2016 and Addenda Capital Inc. participated on April 4, Any reference to a particular company, security, industry or market sector should not be considered an indication of trading intent of any funds managed by NEI Investments. This material may contain certain statements that may be deemed forward-looking. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those discussed. There is no guarantee that investment objectives will be achieved or that any particular investment will be profitable. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. NEI Investments, Ethical funds, Northwest Funds, Make Money. Make A Difference, and Aiming For Better Returns With Less Risk are registered marks and trademarks owned by Northwest and Ethical Investments L.P