Month: May 2023

The steady progression of responsible investment (RI) in Canada over the last decade has given way to a flood of new developments. Fund companies have expanded their ESG teams and investment products. Regulators are advancing standards around disclosures, risk reporting, and terminology. And companies and investors alike are trying to map their climate ambitions to reality with net zero emissions targets at the forefront.

Topics that were until recently the domain of ESG specialists are becoming central to long term investment strategies, with leading organizations integrating ESG from the top down and throughout. There is also higher demand than ever for more standardized reporting as investors grapple with concerns about greenwashing, RI terminology and changing disclosure requirements, signaling a maturing industry.

Responsible investment is at a turning point where theory must turn into practice in order to reshape the Canadian economy It is in this unique context that we organized the first in-person RIA Conference since 2019, covering leading-edge and emerging topics in ESG and sustainable finance with national and international experts.

From Tuesday, June 6th to Wednesday, June 7th, we hosted the largest gathering of RI professionals in Canada for 25 expert-led sessions featuring 90+ speakers on the most important topics in the industry.

Big Picture Trends in RI

RI is evolving at every level, including global and regional standards and regulations. With Canada uniquely positioned to lead in key industries necessary for the transition to net zero, such as critical minerals, batteries and renewable energy, it is important that we forge this path instead of waiting to be told how to proceed. Large-scale investment is needed to transition our economy, but capital requires clarity and consistency. Disclosure and sustainability standards are key to mobilizing positive investor influence on the environment and society.

The 2023 Conference featured several panels focused on “big picture” challenges, as well as the establishment of better definitions, scoring, and reporting, which could define the future of responsible investment, including:

• Advancing Sustainability Reporting Standards: An Update from the ISSB
• Harmonizing RI Terminology: Progress Report on the CARET Project
• Regulators Roundtable: ESG in Focus
• Achieving Net Zero By 2050: Developments from SFAC & NZAB

The Investable Future, Now

The future of responsible investment is intertwined with our need to transition to a sustainable and inclusive economy. Embracing sustainability and inclusivity is imperative, not only to mitigate risk but also to identify new investment opportunities for a prosperous and equitable society. Several sessions explored specific sustainable investment opportunities and their related challenges, including:

• Investing in a Circular Economy: Tackling Global Challenges and Capturing Opportunities
• Innovations in Agriculture: Towards More Sustainable Food Systems
• Plugging into Electrification: Why and How to Expand and Decarbonize Canada’s Grid
• The Future of Energy: Deploying Capital for a Sustainable Future
• Critical Minerals: An Essential Input in the Energy Transition

Societal Shifts and Progress

Disruptive trends and societal shifts are bearing a variety of impacts on our way of life, from the prevalence of artificial intelligence, to our aging population and loss of biodiversity. By monitoring, mitigating, and/or adapting to these shifts, investors can position themselves to seize opportunities, reduce risks, and contribute to a more sustainable and equitable future. We convened experts on the following topics:

• AI is Transforming the World: What Does it Mean for Your Portfolio?
• Demographic Disruptions: Implications for the Financial Markets
• Real Assets & Responsible Investing: Sustainable and Long-Term Opportunities
• The Next Imperative: The Urgent Need for Investor Action on Biodiversity

Practical Knowledge for RI Advisors

Responsible investment represents an opportunity for advisors to grow their businesses. Research shows that ESG issues are becoming increasingly important to retail investors, and financial advisors need the knowledge and tools to help clients incorporate these factors into their investment decisions. Attendees developed their knowledge and shared peer-to-peer insights in sessions such as:

• Advisor Conversations: Engaging with Clients About RI
• Empowering RI Advisors: Unleashing Insights and Overcoming Challenges

Investing with an Impact

By strategically deploying capital into businesses, organizations, and projects that generate positive social and environmental outcomes, impact investors can drive meaningful change, foster innovation, and contribute to the sustainable development of communities and the planet. The 2023 RIA Conference shed light on key impact initiatives and frameworks in the following sessions:

• Halfway to 2030: Investor Action on Achieving the SDGs
• Accelerating Social Finance in Canada

Connecting with the Responsible Investment Community and Thought Leaders

In addition to the plenary sessions, attendees enjoyed a variety of opportunities to network, collaborate, and engage with industry colleagues. The 2023 RIA Conference offered an unparalleled opportunity for RI professionals to gain cutting-edge information from top thought leaders, share knowledge, exchange ideas, and collaborate.

Mark your calendars for the 2024 RIA Conference in Vancouver, BC on May 28th and 29^th!

Food prices are rising everywhere. While food insecurity is a global trend stemming from several strong macro-economic forces at play, certain unique market characteristics could be exacerbating the problem within Canada. If incomes fail to keep up with inflation, Canadian food insecurity is expected to worsen further. We outline the situation and suggest 7 actions investors can undertake to tackle the issue.

Why food insecurity should matter to investors

The World Food Programme estimates 345.2 million people around the globe will be food insecure in 2023, more than double the number estimated in 2020. Statistics Canada data showed that in 2021, 5.8 million Canadians (1.4 million of which were children) across ten provinces were living in food-insecure households. Use of food banks rose 35% between 2019 and 2022 and it is estimated that food banks and other non-profits dispensing free food will see another 60% increase in demand in 2023. Experts believe the problem of food insecurity is expected to get worse if incomes fail to keep up with inflation. Without significant change, food insecurity will become a larger issue in Canada and globally.

Addressing food security and hunger, in addition to being a moral imperative, is an investor issue. The 2023 World Economic Forum Global Risks Report lists the cost-of-living crisis as the number 1 risk in the next two years to the global economy. At a global scale, food shortages and rising food prices are linked to social unrest, which can lead to destabilization of markets. A prime example of this were the “food riots”: in 2011 when the UN’s Food and Agriculture Organization (FAO) Food Price Index peaked, and riots erupted in 48 countries. For reference, the FAO Food Price Index has never been higher than in May 2022, even when compared to the 2011 peak. 

While it is unlikely that food insecurity in Canada will lead to social unrest at home, it does have negative knock-on effects. High food prices and inflation for many reduces the ability to save money. When grocery prices dramatically increase, Canadians’ ability to save money for retirement, school or for emergencies, is also reduced. Retail investors under financial strain might prioritize household spending over mutual fund investing. A reduction in discretionary spending by Canadian consumers can also negatively affect revenue of corporate issuers investors hold.

The price of food in Canada

As of January 2023, grocery prices in Canada had risen 11.4% compared to the previous year – almost double the overall inflation rate of 5.9%.  There are many contributing factors.  Covid-19 and geopolitical conflict have disrupted supply chains while climate events are challenging status quo means of agriculture and quantity of food produced.  Escalating energy and fertilizer costs are also contributing factors.

In 2021 and 2022, grocery chain profits in Canada increased significantly amidst rising global inflation. Research examining the trend highlights how some of the Canadian grocers posted higher profits in the first half of 2022 relative to average past performance over the last five years.

Grocery Inflation

Statistics Canada reports that while year-over-year inflation is 7.7 per cent for all products, groceries have gone up 9.7 per cent.
Source: StatCan CPI food purchased from stores.
Toronto Star Graphic

There are calls for greater transparency from the grocers on the link between rising food prices, supply chain costs and where the rising profits come from.  The major grocers themselves note that excess profits can be attributed to sales in non-food segments such as makeup and pharmacy products, not to only from increases in food prices, and that they are in fact taking on more costs than they are passing on to the consumer. Enhanced disclosure by operating segment to give better insights into whether profits are coming from the pharmaceutical business, grocery business or elsewhere, could give away competitively sensitive information. However, seeing the numbers to verify the source of profits would help dispel concerns.

Under current practices, Canada’s major grocers do not disaggregate disclosures by operating segment (i.e. food versus non-food items) despite International Financial Reporting Standards (IFRS) requirement that disclosures be disaggregated if the nature of the products and services, and the means by which they are produced, are dissimilar. Investors can use their position of influence to encourage grocery retailers to enhance disclosure, mitigate food price-related risks and contribute to tackling food insecurity.

Canadian market dynamics and the Grocery Code of Conduct

Five large retailers control approximately 80% of Canada’s grocery retail market. The Canadian Competition Bureau is currently investigating whether competition in the sector is playing a role in the increase of grocery prices, with their report expected in June 2023. Some expect the bureau to recommend that the federal government create changes in the law to give it more power to address competition concerns.

Food supply chain complexities within Canada, including provincial border tariffs, also keep certain food prices artificially high or in some cases leads to forced food loss (see the Spotlight section).

Spotlight  The Canadian dairy, poultry and egg industry is a prominent example which showcases the difficulties of working in Canada’s food supply chain. Canada has a highly controversial supply-management system which regulates supply and imposes high border tariffs on taxes for these three food groups. This system, while in theory protects Canadian farmers, has been shown to have flaws, and is not holding up to the socio-economic pressures arising from high inflation. Dairy farmers, for example, are forced to dump milk in order to keep market supply levels within set quotas. Recently, these dairy farmers have been speaking out against the ‘milk-dumping’ policies, saying that more supply could lower prices. Additional supply could also potentially alleviate pressure on food banks.

Furthermore, an estimated 12% of Canada’s avoidable food loss and waste occurs during the retail phase of the supply chain. Grocery retailers can play a key role in reducing food loss and waste including through influencing their supply chains, for example through procurement practices. 

Concern that uneven power dynamics between grocery retailers and suppliers undermines the resiliency of Canada’s food supply chains has also led to efforts to develop a Grocery Code of Conduct to enhance transparency, predictability, and fair dealing within the sector.  The voluntary Code’s anticipated release is by the end of 2023.  One of the code’s intentions is to establish more equitable administration of retail fees that suppliers pay retailers to sell their goods.  Current practices have been characterized as retroactive, unpredictable, and unilateral (the latter of which places smaller suppliers at a significant disadvantage) undermining conditions to support greater product variety, innovation, and supply chain resiliency in Canada.  

While a Grocery Code of Conduct will not directly regulate prices nor fees that retailers set for food processors, it will establish contractual obligations for greater risk sharing including requiring more collaborative forecasting of supply orders.  

The Code will also include a dispute resolution mechanism, adjudication process, mediation and arbitration models, and enforcement mechanisms, all of which will help promote fair and ethical trading between Canada’s grocery retailers and suppliers that ultimately help support greater domestic supply chain resiliency.  A Grocery Code of Conduct can also help promote better worker conditions within Canada’s food supply chains by creating greater stability to support, for example, provision of a living wage and safe working conditions.

What can investors do?

Investors benefiting from higher grocery retail profits have their own obligation to conduct due diligence with investee grocery retailers accordingly to ensure that short term gains are not being prioritized over the longer-term implications that acute food inflation could have on returns across all portfolio investments.

Investors can encourage 7 best practices with companies both up- and downstream the food value chain and with policymakers:

1) Engage with Canadian grocers and food distributors to encourage more transparent disclosures aligned with the IFRS standards, which would create more transparency on profits by segment.

2) Encourage investee grocery retailers in Canada to proactively contribute and adhere to the principles within the upcoming Grocery Code of Conduct.

3) Given that food insecurity is expected to get worse if incomes fail to keep up with inflation, engage companies across portfolios on committing to providing Living Wages. Also consider support for initiatives such as the Workforce Disclosure Initiative, which creates reporting standards for companies on workforce matters including wage levels and benefits.

4) Encourage investee grocery retailers to implement effective human rights due diligence practices (HRDD) to prevent and mitigate actual or potential adverse human rights impacts from business activities. Under an HRDD approach, companies would need to investigate what adverse impacts operations have across the value chain. Access to food as a fundamental human right would be a key salient topic for companies in the food retail sector.

5) Keep an eye out for the Canadian Competition Bureau’s report in June to identify whether there are policy engagement opportunities based on its recommendations and advocate for human rights-based food policy with governments.

6) Encourage companies to advocate within their industry for more favourable market dynamics in Canada, which could help to lower food prices (such as in the example of the dairy, poultry and egg industry).

7) Encourage food retailer practices to reduce food waste and to donate excess food to food banks in line with the Canadian government’s recommendation for reducing food waste between food retailers in Canada.

Access to food is a fundamental human right and is embedded in the Universal Declaration of Human Rights. As responsible investors whose approach includes investing or engaging for sustainable outcomes, we can take actions such as the ones above to contribute to the second UN Sustainable Development Goal to reach ‘Zero Hunger’ by 2030, both abroad and at home.

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The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

The gradual increase of green bond issuance through the 2010s accelerated into a tidal wave of ESG-labelled debt issuance in the early 2020s (Figure 1). The original green bond concept has developed into a use of proceeds category that includes green, social, and sustainability bonds. This category works well for government and corporate issuers that have specific green projects that qualify under green bond frameworks and can be verified by second party opinion providers. Sustainability-Linked Debt is one of the best ways to ensure that companies achieve their ESG targets and their sustainability goals.

Figure 1. Global GSSSB issuance forecast to reach $900 billion to $1 trillion in 2023 (Annual GSSSB issuance by instrument type)

Note: Excludes structured finance issuance. f–S&P Global Ratings forecast. GSSSB-Green, social, sustainability, sustainability-linked bonds.
Sources: Environmental Finance Bond Database, S&P Global Ratings.
Copyright © 2023 by Standard and Poor’s Financial Services LLC. All rights reserved.

The newer concept of Sustainability-Linked Debt has a coupon structure that is linked to corporate ESG targets and specific ESG Key Performance Indicators (KPIs) that are defined at issuance and go by the labels Sustainability-Linked Bonds (SLBs) and Sustainability-Linked Loans (SLLs). This category is open to any issuer that has relevant corporate ESG targets and consistent reporting for ESG KPIs (Figure 2).

Figure 2. Industry Classification: Sustainability-Linked Structures

Source: Bloomberg, Environmental Finance Data, Mackenzie Research
Historical Data 2019-2022 – 308 SLB assessed

Companies are generally motivated to issue SLBs to align their financing strategy with their sustainability strategy. Some critics think it is not sufficient for companies to define and report on their own targets, but this does not necessarily lead to lacklustre results. Companies with ambitious targets, who understand the risk and opportunity in their approach to ESG, can get it right. While not all ESG targets and SLB KPIs are relevant and ambitious enough, credit and ESG analysts can indeed sort out the ‘good’ SLBs from ‘bad’ SLBs.

In general, what gets measured gets managed. Mechanisms such as sustainability-linked debt ensure that words turn into action and that failures to achieve ESG targets will be high profile and will result in significant reputational damage for both executives and the company – as well as a modest interest rate penalty. The benefit to the issuer is primarily to boost their reputation and their sustainability credentials. In recent years, companies have set targets in their SLB frameworks ranging from the reduction of greenhouse gas emissions to the increased use of renewable energy to specific targets related to gender equality and to racial and ethnic diversity (Figure 3).

Figure 3. KPI – Key Performance Indicator (SLB – ~96% Data Coverage)

Source: Bloomberg, Environmental Finance Data, Mackenzie Research
Historical data 2019-2022 – 308 SLB assessed that include 394 KPIs
Figure 3 shows % of the 394 for each type of KPI

An available universe of over 300 SLBs shows that half of issuers use one KPI and half use more than one KPI (Figure 4). We provide an example of how the most frequently used ESG KPI can be used below.

Figure 4. Number of targets – KPI (SLB Universe)

Source: Bloomberg, Environmental Finance Data, Mackenzie Research
Historical data 2019-2022 – 308 SLB assessed
Figure 4 shows % of the 308 that have 1, 2, 3, 4, or 5 KPIs

ESG KPI – Greenhouse Gas (GHG) Emissions Reductions Targets by 2025 and 2030

Corporates can follow government GHG emission reduction targets or select their own targets by 2030 as a key milestone towards their Net Zero by 2050 commitments. GHG emission reduction targets are the most popular, with over 50% (Figure 3) of SLBs having at least one target related to GHG emission reduction. Corporates are focused on Scope 1 and 2 emissions for their targets although some have started to include Scope 3 emissions that better reflects their total carbon footprint (Figure 5). Scope 3 is more difficult to estimate and generally outside of the companies’ direct control because they represent the upstream emissions of their supply chains and downstream emissions of their customers.

Figure 5. GHG emission reduction targets – Type

Source: Environmental Finance Data, Mackenzie Research
Historical data 2019-2022 – 308 SLB assessed

Examples of ESG KPIs include the few SLBs issued to date in Canada. These three SLB issuers below represent the full set of SLB issuers in Canada, but many more are expected in the coming years to join the growing list of SLB issuers from the United States, Europe, Latin America, and Asia Pacific. 

Conclusions and Recommendations

The Mackenzie Fixed Income Team believes that corporate debt issuers should focus on 2 or 3 ESG KPIs to be included in their SLB frameworks, issuance and reporting.  In our view, issuers should select their most important environmental KPI, their most important social KPI, and any other KPI that is specific and material to their business. A certain number of company projects can be financed with green, social, and sustainability bonds. The rest of their debt financing and refinancing needs can be met with sustainability-linked bonds and loans. We are starting to see companies who are driving towards or who have already achieved 50% ESG-labelled debt or even 100% ESG-labelled debt by using a combination of green, social, and sustainability use of proceeds debt and sustainability-linked debt. 

Companies should select the metrics that are most material to their company and to their sector. This process should start at the top of the company with the development of corporate ESG strategy by the executive team and the board of directors. The corporate ESG strategy and any related targets should be important to and driven by the CEO as well as the CFO and communicated as such to all stakeholders, demonstrating to potential investors the company’s commitment to sustainability.

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The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

While integrating Environmental, Social and Governance (ESG) considerations into real estate investment decisions has become mainstream over the past decade, the role of lenders in this evolution has often been overlooked. Real estate lenders are increasingly integrating ESG considerations into origination, underwriting and due diligence processes — as well as engaging with borrowers on sustainability considerations throughout the life of the loan. Identifying and incorporating into the lending process ESG factors which are material – meaning, omitting, obscuring or misstating these factors could be reasonably expected to influence investor decisions – may help mitigate risks at the underwriting stage and ultimately de-risk assets through the holding period to loan maturity.

ESG-Focused Lending and Risk Profile Enhancement

Lenders who rely solely on comparable market transactions for underwriting, without incorporating material ESG risk factors and important non-financial information, may fail to address issues that transform into tangible financial risks. As a result, investors ignoring material ESG considerations may misprice investment opportunities and potentially suffer higher loan impairments or losses. 

Further, by engaging borrowers on material ESG issues throughout the holding period, lenders may gain an opportunity to improve income security and predictability and may nudge borrowers toward mutually beneficial ESG performance improvements that help drive positive property-based outcomes, such as better tenant attraction and retention. 

ESG Integration in Real Estate Debt: A Practitioner’s Guide

Many of the ESG integration approaches from real estate equity investing are transferable to commercial mortgages. The key to adapting equity-focused practices for debt investing is determining how to right-size ESG information requests and streamline the integration approach. ESG integration should be considered across three stages in the commercial mortgage debt issuance process:

1) Origination/Underwriting: Collecting and assessing ESG information during this stage is crucial for contextualizing a commercial mortgage opportunity. Sophisticated lenders are increasingly using ESG checklists during underwriting to obtain enhanced visibility on material ESG issues, which significantly impacts mortgage attractiveness and the negotiated terms. Factors to consider include (but are not limited to):

a) Sustainability-focused building certifications: These can offer third-party validation of a property’s environmental and/or social attributes — and position it to be more competitive from a tenant attraction/retention and operating perspective (e.g., indoor air quality enhancements).

b) Operational performance of the underlying asset: Objective measures of operating efficiency, such as the ENERGY STAR Portfolio Manager score (the industry benchmark for commercial buildings) as well as energy use intensity and operating costs, can influence the borrower’s debt servicing abilities.

c) Reputation: The borrower’s operating reputation, existing community/stakeholder relationships and potential controversies (e.g., a history of “renovictions” for multi-family building owners) can impact a lender’s outlook on the property’s income and value creation potential.

d) Proximity to key amenities and transit: Objective measures such as a property’s walk, bike and transit scores can influence its ability to attract and retain strong covenant tenants.

2) Due Diligence: At this stage, select ESG metrics are measured, assessed and folded into the investment thesis. Red flags at this point will often change the trajectory of the investment, at a minimum requiring a revisit to the underwriting. For example, lenders can issue an ESG survey or checklist that builds on information gathered during the underwriting phase, such as:

a) The governance capabilities of the borrowing group, including assessing their policies and governance structures through borrower group interviews.

b) Property condition and climate resilience considerations through a review of third-party Building Condition Assessment reports and assessments of exposure to natural hazards (e.g., seismic) and physical climate risks (e.g., flood, wildfire, sea level rise), while also ensuring adequate insurance coverage is in place.

c) Environmental contamination or pollution risk assessment, ensuring an Environmental Site Assessment report and detailed findings are considered.

d) Compliance with regulatory reporting requirements for energy use, water consumption and/or greenhouse gas emissions, which could result in fines or penalties to the owner if not in compliance.

3) Post-Underwriting (Holding Period): Sustainability considerations can be integrated into portfolio management processes primarily through engagement with the borrower. For example:

a) Alongside annual financial statement requests, lenders can request property-specific sustainability information (e.g., planned sustainability retrofit projects and ongoing initiatives) to facilitate constructive dialogue on sustainability-focused opportunities for the property.

b) Lenders can discuss sustainability-focused operational enhancements or retrofit financing opportunities (e.g., “green loans”).

By proactively engaging borrowers on ESG considerations throughout the life of the loan, lenders not only position themselves for success during the holding period, but also for potential mortgage renewal and follow-on financing opportunities. 

Case Study: ESG Integration in Underwriting May Lead to Improved Financing Terms 

Property: New build, downtown Toronto office

Notable Features: Platinum certification from Leadership in Energy and Environmental Design (LEED), the most widely used green building system, with on-site renewables

The property was built in 2016 to far exceed building code requirements with energy and water efficiency-focused features. As a result, it achieves operating costs (excluding realty taxes) approximately 25% below competing properties. This reduction has allowed the borrower to remain competitive while charging a higher net rent. In the event of market turmoil and falling rental rates, the borrower’s cash flow stream will likely remain more resilient than its competitors’. The lender also considered the LEED Platinum certification, LEED’s highest rating level, to further protect itself from downside risks as it meets tenants’ ever increasing sustainability requirements. 

As a result of the sustainability attributes of the property, the borrower was able to increase the financing proceeds by about 10% while maintaining loan fundamentals consistent with market-leading pricing. Consequently, the lender’s broad understanding of ESG impacts allowed it to be more competitive than peers, whose underwriting was based solely on market standards.

Conclusion

As outlined, there are good reasons for lenders to expand their influence with respect to ESG engagement in commercial mortgage lending. Those include creating a more resilient loan portfolio, benefiting from broader market trends due to valuation premiums or discounts based on a property’s ESG profile, and a recognition that tenants have increasing leverage in some property types to force concessions. Integrating ESG considerations can help provide downside protection as well as the potential to strengthen relationships with borrowers through constructive dialogue.

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This document may contain forward-looking statements (“FLS”). FLS reflect current expectations and projections about future events and/or outcomes based on data currently available. Such expectations and projections may be incorrect in the future as events which were not anticipated or considered in their formulation may occur and lead to results that differ materially from those expressed or implied. FLS are not guarantees of future performance and reliance on FLS should be avoided. 

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The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

The current lack of expertise in sustainable finance

Environmental, social and governance (ESG) considerations have become increasingly important for modern risk management and portfolio optimization. Governments, businesses and asset management firms are committed to achieving net-zero goals, and Canadians are showing more and more interest in responsible investment (RI). It is clear, however, that the financial services sector in Canada lacks advisors and investment experts with adequate knowledge of sustainable finance, and this is being felt by advisors and clients alike. 

The figures speak for themselves

To examine this gap, Toronto Finance International (TFI) and Deloitte conducted research in 2021, which revealed the importance of developing skills and paved the way for inclusive sustainable finance expertise within organizations. 

The study by TFI and Deloitte highlighted, among other things, the mismatch between supply and demand in financial institutions. In fact, 68% of respondents mentioned that there is a demand for sustainable finance skills but that the supply falls short.

The report also highlighted some recruitment and retention challenges, including how intensifying competition for ESG professionals and the growing need for specialized skill sets make it difficult to find and retain top talent.

This vicious cycle fueled by lack of expertise and talent in the sustainable finance space is being felt even by advisors, where the limited capacities of teams represent an obstacle to better training.

A persistent knowledge gap

Knowledge is essential for investment advisors since they are a conduit between investors and asset managers. Therefore, raising awareness and educating clients about responsible investment starts with educating advisors. 

According to the Responsible Investment Association’s (RIA) survey of 1,000 retail investors, Canadians want to hear more about responsible investment, but 42% of investors who are interested in RI are not receiving information about it from advisors.

What are the risks for advisors and investors?

This service gap is not without consequences and can lead to undesirable situations.

Solutions not meeting clients’ needs

Another survey by the RIA found that advisors tend to overestimate their knowledge of responsible investment. An internal survey conducted at National Bank shows that they are aware of their own knowledge gap but are nevertheless interested and would like to improve their service offering with discussion about RI. 

To ensure that the products are properly positioned, a good knowledge of the industry is required. Advisors must also be able to initiate discussion on responsible investment in order to fully understand  the subtleties of their clients’ needs and to offer them appropriate solutions.

Clients may go elsewhere to have their needs met

Significant business opportunities can open up for advisors who are able to discuss RI preferences with their clients, inform them on the subject, and offer them solutions tailored to their needs.

Alternatively, clients who are dissatisfied with their advisor’s level of knowledge may seek expertise elsewhere.

What are some potential solutions?

As we have seen, the talent shortage is keeping knowledge from being transmitted and, consequently, training from being provided. There are, however, solutions to reduce this knowledge gap, for example:

Academic and professional training

An increasing number of RI organizations and associations, (RIA, PRI), universities, (John Molson School of Business, Queens) and professional groups (Finance Montréal, CFA, CSI) offer training programs to industry professionals seeking to deepen their understanding of responsible investment.  

Education4sustainability has a tool that filters training provided by various organizations based on duration, price, and focus. 

In addition, many organizations, including National Bank, have developed internal training courses focused on responsible investment for their employees. Some even provide such training to their clients.

Tools for greater transparency 

To address the current confusion in the industry and make it easier for clients and advisors to understand, a few organizations such as the Canadian Securities Administrators are working to develop clearer frameworks. However, there is still work to be done to make content more accessible to all advisors and investors. 

Support for advisors 

Considering how quickly products, portfolio solutions and RI terminology are evolving, it’s difficult to provide in-depth, sustained, and relevant training to all advisors.

Advisors can always integrate questions relating to responsible investment into their KYC, and the market would do well to acquire digital solutions. Tools that support automated decision-making could be useful for advisors and would standardize questions specific to responsible investment. Such a tool would help advisors gain confidence and be better prepared to support clients.

Conclusion

The service gap resulting from the shortage of expertise in sustainable finance, among other things, is a complex problem that requires solutions on several fronts. However, by making it a priority to hire and retain skilled ESG professionals, by helping today’s workforce develop skills, and by providing tools to facilitate learning, the industry is making progress in closing this gap.

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The information and the data supplied in the present document, including those supplied by third parties, are considered accurate at the time of their printing and were obtained from sources which we considered reliable. We reserve the right to modify them without advance notice. This information and data are supplied as informative content only. No representation or guarantee, explicit or implicit, is made as for the exactness, the quality and the complete character of this information and these data. The opinions expressed are not to be construed as solicitation or offer to buy or sell shares mentioned herein and should not be considered as recommendations.

The information and opinions herein are provided for information purposes only and are subject to change without notice. The opinions are not intended as investment advice nor are they provided to promote any particular investments and should in no way form the basis for your investment decisions. National Bank Investments Inc. has taken the necessary measures to ensure the quality and accuracy of the information contained herein at the time of publication. It does not, however, guarantee that the information is accurate or complete, and this communication creates no legal or contractual obligation on the part of National Bank Investments Inc.

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National Bank Investments is a signatory of the United Nations-supported Principles for Responsible Investment, a member of Canada’s Responsible Investment Association, and a founding participant in the Climate Engagement Canada initiative.

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The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

If we wind back the clock just a decade or so ago, very seldomly did sustainability have a place in advisor-client interactions. Fast forward to today, and the realization that ESG factors are material has become a driving force for clients prioritizing more than just financial considerations in their investment decisions.

Shouldering part of this “global responsibility” is a key component of our commitment to sustainability. In our efforts to put stewardship at the heart of our active ownership practices, our focus is not only centered around driving strong risk-adjusted return potential, but on making a positive impact on our environment and the world around us. But how exactly do we do this?

Promoting sustainability through concrete action

Weaving responsible investing practices into our operating activities involves actively engaging with stakeholders to mitigate ESG-related challenges and capitalize on ESG-related opportunities.

Case Study: Engaging on gender diversity without using proxy voting

As one of the founding members of the Board Diversity Hong Kong Initiative, we champion gender diversity on boards for better leadership and improved corporate governance. Ultimately, we believe diversity increases performance and competitiveness for both companies and their shareholders.

Bearing this in mind, we engaged with a Chinese consumer staples company on both gender diversity and environmental topics. The company had a large female customer base but no women on the board. It’s rare to see a consumer staples company with zero female representation among its directors since gender diversity of consumer-related boards is often the highest for all primary sectors.

Initially, we shared academic studies justifying the positive correlation between the board gender diversity ratio and financial returns. In addition, we highlighted the company’s lack of board gender diversity compared with other Chinese and global consumer peers and asked the company to add at least one female director to its all-male board. These findings were shared with other investors in the Board Diversity Hong Kong Initiative, and we encouraged them to raise the same issue with the company, a key issuer in the market due to its size, sector, and potential for impact.

We also leveraged pending regulatory requirements and contributed to the Hong Kong Exchanges and Clearing Limited (HKEX) consultation paper, which proposed to end single-gender boards with a three-year transition period. We explained how this would require companies to set targets and timelines for gender diversity at the board level and across the workforce, and this consultation was subsequently passed. We engaged with the company to reiterate the importance of increasing the number of female directors on its board, offering coordination with the 30% Club Hong Kong to help search for qualified candidates. The company later added its first female director to the board in 2022.

Case Study: Acquiring a forest in Maine for carbon sequestration

In 2021, on behalf of our Manulife general account, we acquired an 89,000-acre forest in the U.S. state of Maine. The property, named Blueback for the highly sought-after subspecies of Arctic char native to this region, is a contiguous block of timberlands with a diverse mix of naturally regenerated spruce fir and northern hardwood tree species. Blueback is managed for Manulife’s general account as a carbon-focused investment underpinning our net zero journey. The core of the investment thesis is centered on the timberlands being used primarily to store carbon and to generate high-quality, high-integrity carbon credits.

Manulife reserves the option to sell the carbon credits as offsets or use the carbon removals as insets (applying the carbon credits generated by forests owned by the company in order to offset our own emissions) to help meet net zero commitments. Additionally, the lands are subject to a working forest conservation easement and offer unique recreation opportunities given the scenic lakes, rivers, and ecological features of the region. A portion of the lands will also be used for sustainable stewardship practices as a working forest.

Looking ahead

Our planet is facing a myriad of challenges, and the time to address them is now. As long as the world continues on its current path, the risks of devastating losses from both a financial and non-financial standpoint will remain elevated. Forging a new sense of shared responsibility for managing systemic environmental and social risks as well as their related effects and causes, is therefore critical for humanity going forward.

From an investing standpoint, seeking to communicate the benefits of a sustainable investing focus for every investor’s portfolio should be on any advisor’s radar—especially in terms of potential resiliency to these systemic risks and the opportunities for potential long-term value creation. After all, governments, corporations, investors, and consumers all have the obligation to take collective action—in whichever way they can!

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Contributor Disclaimer
The case studies shown here are for illustrative purposes only, do not represent all of the investments made, sold, or recommended for client accounts, and should not be considered an indication of the ESG integration, performance, or characteristics of any current or future Manulife Investment Management product or investment strategy.  

Manulife Investment Management conducts hundreds of ESG engagements each year but does not engage on all issues or with all issuers in our portfolios. We also frequently conduct collaborative engagements in which we do not set the terms of engagement but lend our support in order to achieve a desired outcome. Where we own and operate physical assets, we seek to weave sustainability into our operational strategies and execution. The case studies shown are illustrative of different types of engagements across our in-house investment teams, asset classes and geographies in which we operate. While we conduct outcome-based engagements to enhance long term-financial value for our clients, we recognize that our engagements may not necessarily result in outcomes which are significant or quantifiable.  In addition, we acknowledge that any observed outcomes may be attributable to factors and influences independent of our engagement activities.  Our approach to ESG investing and incorporation of ESG principles into the investment process differs by investment strategy and investment team. It should not be assumed that an investment in the company discussed herein was or will be profitable. Actual investments will vary and there is no guarantee that a particular fund or client account will hold the investments or reflect the characteristics identified herein. Please see our ESG policies for details.

We consider that the integration of sustainability risks in the decision-making process is an important element in determining long-term performance outcomes and is an effective risk mitigation technique. Our approach to sustainability provides a flexible framework that supports implementation across different asset classes and investment teams. While we believe that sustainable investing will lead to better long-term investment outcomes, there is no guarantee that sustainable investing will ensure better returns in the longer term. In particular, by limiting the range of investable assets through the exclusionary framework, positive screening and thematic investment, we may forego the opportunity to invest in an investment which we otherwise believe likely to outperform over time.

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments.  These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.

The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.

This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management or its affiliates. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.

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RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

Building a portfolio of companies with strong environmental, social and governance (ESG) practices is foundational to any sound approach to responsible investing. But good security-selection decisions are only half the battle. To drive meaningful and lasting progress towards our ESG goals, investors must adopt an active ownership mindset, which means engaging with companies on an ongoing basis to ensure they continuously strive to elevate their ESG performance.

Shareholder Resolutions

Engagement can take a variety of forms, but one of the most important and effective is the use of shareholder resolutions. A shareholder resolution is a proposal, put forward by a qualifying shareholder, requesting that the company adopt a specific policy or take a specific course of action. Strictly speaking, the proposal is a formal resolution to be voted on by all shareholders at the company’s annual general meeting. In practice, however, the aim is to convince management, through formal discussions, to adopt most or all of the proposal without having to hold a vote. When this happens, the resolution is withdrawn.  

In cases where management does not agree to adopt the proposal, the resolution is brought to a vote. Companies typically pay close attention to the results, and a strong vote in favour could spur management to change course and implement the requested changes.   

The ESG team at Vancity Investment Management Ltd. has a very active program of shareholder engagement, so we frequently deal with both of these scenarios. Let’s look at one example of each.  

Engaging Costco on Biodiversity Loss

Costco Wholesale Corp. (Costco) has a very strong ESG record. But one area where we would like to see improvement is on the issue of supply chain-driven biodiversity loss.  

Biodiversity and ecosystems touch every element of human life. From the food we eat to the medicine we take, humans – and economies – are heavily reliant on properly functioning ecosystems. For example, about 70% of medicines used to treat cancer are natural (or synthetic products made possible by nature), and more than 75% of global food crops rely on animal pollination. Annually, the global economy derives roughly $125 trillion of value from natural ecosystems, and according to the Convention on Biodiversity, 40% of the world’s economy relies on biodiversity.

Because of these interdependencies, the rate at which biodiversity is being destroyed is particularly concerning: one quarter of the world’s plants and animals, meaning roughly one million species, are at risk of extinction. 

The production of food, energy, infrastructure, and fashion drives 90% of human-caused pressure on biodiversity, and these four elements account for approximately 46% of Costco’s revenue, with food alone accounting for 35%. This heavy reliance on declining ecosystems presents a material risk to the company and its shareholders. Specifically, the loss of, or decreased access to, materials and products due to depleting natural capital can drastically impact profits.

Costco does have a pollinator policy, and it represents a critical step towards addressing key biodiversity risks in the company’s supply chains. However, in our view, the risks associated with biodiversity require a broader assessment of dependencies and impacts. Following a series of conversations, Costco acknowledged our position and agreed to identify, assess, and report on at least one significant supply chain. The company also agreed to consult guidelines from the Task Force for Nature-related Financial Disclosures, which provide a framework for evaluating the financial risk of biodiversity loss. 

As a result of these positive steps, we withdrew our shareholder resolution but will continue our dialogue with Costco’s management to monitor their progress and assist with feedback.

Engaging Amazon on Transparency 

Amazon.com Inc. (Amazon) is the world’s largest e-commerce platform. Its market dominance makes it not only a key source for day-to-day purchases, but also a primary platform for distributing and accessing information and ideas in print and other media.  

Numerous reports have suggested that Amazon has complied with demands from authoritarian regimes to restrict access to or remove products from its online store. The company has also been pressured into disabling website features that allow customers to share opinions on products. For example, in December 2021, Reuters reported that Amazon yielded to demands from the Chinese government to disable the review option on the product page for a book made up of President Xi Jinping’s speeches and writings.

Unlike peers such as Meta and Google, Amazon does not provide specific disclosures related to government-requested content removal. We view this lack of transparency as a material risk to investors, so we co-filed a shareholder resolution requesting that the company align its reporting regime with established best practices. 

After receiving our proposal, Amazon did not reach out to engage in dialogue. Instead, they noted that the company complies with all laws and regulations of the countries in which they operate, and that the resolution would go straight to a vote at the annual general meeting. Together with our co-filers, our task now is to educate other shareholders to build support for a strong vote in favour of the resolution. 

It may be tempting to suggest that Amazon should be excluded from a responsible investment portfolio given this and other ESG shortcomings. Our view is that, when dealing with a company of this magnitude, the crucial work of advocating for positive change is more effectively done from within – as a shareholder with a voice and a vote – than from the outside. Industry giants like Amazon have an outsized influence on our economy and society, making it critical that we do our part to bring it closer to being an exemplary corporate citizen. 

Vancity Investment Management Ltd. is the sub-advisor of the IA Clarington Inhance SRI funds and portfolios.

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The information provided herein does not constitute financial, tax or legal advice. Always consult with a qualified advisor prior to making any investment decision. Statements by the portfolio manager or sub-advisor responsible for the management of the fund’s investment portfolio, as specified in the applicable fund’s prospectus (“portfolio manager”) represent their professional opinion, do not necessarily reflect the views of iA Clarington, and should not be relied upon for any other purpose. Information presented should not be considered a recommendation to buy or sell a particular security. Specific securities discussed are for illustrative purposes only. Mutual funds may purchase and sell securities at any time and securities held by a fund may increase or decrease in value. Past investment performance of a security may not be repeated. Unless otherwise stated, the source for information provided is the portfolio manager. Statements that pertain to the future represent the portfolio manager’s current view regarding future events. Actual future events may differ. iA Clarington does not undertake any obligation to update the information provided herein. The information presented herein may not encompass all risks associated with mutual funds. Please read the prospectus for a more detailed discussion on specific risks of investing in mutual funds.

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The iA Clarington Funds are managed by IA Clarington Investments Inc. iA Clarington and the iA Clarington logo, and iA Wealth and the iA Wealth logo, are trademarks of Industrial Alliance Insurance and Financial Services Inc. and are used under license.

RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.