Month: April 2025

Where Sustainability Meets Asset Performance

The Canadian housing market has become increasingly characterized by structural supply shortages and affordability challenges. While new construction is at the forefront of the discussion, there is a compelling case for revitalizing Canada’s existing multi-family dwellings. Compared to building new, retrofits offer a practical and timely solution, breathing new life into long-standing neighbourhoods while reducing environmental impact. There is merit for multi-family property owners to continue exploring the transformative power of large-scale retrofits in addressing the housing crisis, fostering a more sustainable future, and creating value for investors.

Extending the life of older properties

Many of today’s investors are looking for opportunities with purpose. They consider a company’s social and environmental impact before investing, seeking both return performance and sustainable, ethical options that align with their values. Forward-thinking investment funds offer this cohort of investors an investment option that balances these desires.

Investing in older properties and extending their useful life is an efficient and affordable way to create modern spaces with a reduced carbon footprint in desirable communities. The UN’s Global Status Report finds that “the buildings and construction sector contributes significantly to global climate change, accounting for about 21 per cent of global greenhouse gas emissions. In 2022, buildings were responsible for 34 per cent of global energy demand.” Other sources have found that retrofitting an existing building emits 50 to 75 per cent less carbon than constructing the same building new. Unlike new developments, where significant building resources and environmental disruption are required to create supporting infrastructure, shifting the focus to the sustainable retrofitting of existing buildings offers a more eco-conscious approach.

According to data compiled by the Canada Mortgage and Housing Corporation (CMHC), over 80 per cent of Canada’s rental buildings were built before the year 2000. With an aging housing stock, maintaining and upgrading these properties is the quickest path to addressing our nation’s housing crisis. Older buildings can be upgraded relatively quickly to improve energy efficiency and modernize living spaces while utilizing established infrastructure and minimizing external disruption. This strategy increases the long-term value of existing properties and aligns with investor priorities.

A collaborative approach

While there are benefits to transforming aging properties into modern, sustainable homes, bringing these large-scale retrofits to life requires innovation and collaboration between public and private entities. There is an opportunity for property owners to work closely with financial institutions and various levels of government, specifically where programs are offered that incentivize green building projects. Property owners capitalizing on the potential of this solution have been able to showcase how strategic investment in older buildings can deliver robust financial performance for investors, especially when partnering with government and exploring funding options.

Avenue Living has recently proven the benefits of this type of solution by successfully using programs offered by the Canada Infrastructure Bank (CIB) and Bank of Montreal (BMO) to access financing structures supporting energy-efficiency initiatives. These types of financing offerings can help to move ambitious, large-scale retrofitting projects through to completion. By securing favourable lending terms, property owners can implement sustainable renovations while maintaining market-competitive rental prices, without compromising investor returns.

Case Study: The SunRise property in Edmonton, Alberta

The transformation of The SunRise property in Edmonton is a recent example of how a housing provider can revitalize aging housing stock. Formerly known as Capital Tower, this 12-story, 179-unit building constructed in 1970 is situated in a prime location but was being underutilized in the local rental market because it needed extensive renovations. Rather than demolishing and rebuilding, Avenue Living gave the building new life through environmentally sustainable upgrades.

Significant renovations were undertaken with the goal of reducing the building’s carbon footprint while also showcasing the neighbourhood’s cultural heritage with a unique solar panel mural designed by local Indigenous artist Lance Cardinal. The solar panels generate energy used by the common areas of the building while doubling as a striking art installation. At 26 meters high, it is North America’s largest vertical solar panel art array.

Beneath the solar façade, new insulation on the building’s exterior walls improved the efficiency of the interior. Coupled with new triple-glazed windows, these measures help keep residents comfortable year-round and allow the heating and cooling systems to run more efficiently. The inside of the building was also extensively renovated, with in-suite updates to modernize the interior, improve heating, cooling and ventilation, and reduce overall greenhouse gas emissions.

Financing for the improvements at The SunRise was obtained through BMO’s offerings available for energy-efficiency initiatives.

By prioritizing sustainability, affordability, and community engagement, Avenue Living continues to build a portfolio that aligns with the values of today’s investors. This proven model seeks strong financial returns alongside long-term social and environmental benefits. Through strategic partnerships, innovative property revitalization, and a commitment to ESG principles, Avenue Living is paving the way for a more sustainable future — one building at a time.

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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.

Historically, the primary mechanism for impact investment was the provision of finance through private equity investment or debt issuance. This could be explained, at least in part, by the clear link to the additionality of the financing; alignment with the longer-term nature of impact goals; and simpler impact measurement for project-specific financing.

In more recent years, the narrative around impact investing has evolved, leading to a greater appreciation of public equities as an asset class within impact investment. We see two key reasons for this:

– Addressing global challenges requires leveraging public equities, as they provide access to the vast capital needed to drive meaningful change. The persistent shortfall in achieving frameworks like the UN’s Sustainable Development Goals (SDGs) exemplifies this urgency.

– There have been improvements in the ability to measure the impacts—both positive and negative—of public equity investments. Given the value placed on impact measurement by investors, this development has increased the feasibility of public equities as an impactful asset class.

While impact investment in public equities is still in its infancy, we believe these factors will be foundational in the continued growth of the impact investment market in the future. 

Impact-related assets under management globally are now USD 1.6 trillion, slightly more than one per cent of global AUM. As transparency has improved, public equity and public debt markets have experienced the fastest growth within the impact investing landscape. This rapid growth has not solely been due to a rise in altruistic investment; we, alongside other impact investors, believe that impact and financial performance can be positively interrelated.  

Companies that create impactful and innovative products that address unmet societal needs can access attractive growth opportunities afforded by public markets. Quality companies should attract additional capital, , with profit generation allowing for reinvestment to generate further impact and compound returns for shareholders.

Putting principles into practice

To truly balance the dual objective of positive impact and financial returns, there should be processes in place to establish a credible and authentic impact offering. The Global Impact Investing Network (GIIN) sets out four key characteristics of impact investing that we believe should frame any strategy, process or behaviour.

– Intentionality: We know that when investing, numerous biases and behaviours may lead to impact being de-emphasised in favour of chasing performance or reducing tracking error. To guard against this, there should be a clear mandate to invest in companies providing products or services that contribute towards an environmental or social objective, along with a theory of change for each investment. Impact should be a pre-condition for inclusion.

– Evidence and impact data in investment design: While we view intentionality as a precondition, this should be accompanied by analysis that sets out the impact the company is having in the real world. We believe that without a systematic approach to impact, one cannot provide evidence that holdings are relevant to the impact strategy and that they contribute to the impact objective.

– Manage impact performance: Once the presence of impact has been confirmed, its magnitude should be measured, encouraging accountability both for fund managers and the companies themselves creating tangible results to monitor and track. This can also be used to inform an engagement agenda for managers to accelerate the impact, a key additionality mechanism for public equity managers that could involve setting portfolio level or company level KPIs for reporting purposes.

– Contribute to the growth of impact investing: We advocate for an impact market with enough scale to deliver against the expectations of end investors. This could involve driving forward the impact investment market through innovation and best-practice sharing, acting as a long-term partner to investee companies and clients, and being transparent in approach, successes, and shortcomings.

These elements should not be totally new to investors. We regularly conduct detailed research and analysis. Looking through an impact lens is simply a new way of absorbing and processing company information, and we believe a methodical approach is important to avoid the above-mentioned biases.

Below, we set out a possible way of integrating impact into portfolio construction decision-making by weighing investment and impact conviction equally when determining position sizes. This ensures that a focus on impact is maintained, while working to maximize returns within the opportunity set of impactful investments.

At the portfolio level, this could be represented by the diagram below:

However investors decide to integrate impact into their analysis and decision making, investing in public equities can provide impact at a scale that can only be achieved in public markets. We recognize that the companies in which we invest are likely to touch millions of lives each day, and we believe that more people are becoming explicitly aware of this, too.

As end investors seek to better understand the real-world impacts of their investments, rather than considering them as simply prices on a screen, we expect to see the impact investing market continue to thrive—and along with it, progress towards overcoming some of the greatest challenges we are facing as a society.

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This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

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.

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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.

Over the past 15 years, Sarona Asset Management has navigated the complexities of investing in emerging markets, continuously refining its approach to balance financial returns with impact. Our experience has provided valuable insights into what works, what doesn’t, and the realities of responsible investing that are often overlooked. This article distils key lessons learned, focusing on actionable takeaways for investors looking to succeed in these dynamic markets.

1. The Challenge of First-Time Fund Managers

One of our core lessons is the difficulty of working with first-time fund managers. While these managers often bring innovative ideas and deep local knowledge, they also present higher execution risks due to limited track records and institutional weaknesses. We mitigate these risks by emphasising rigorous due diligence, governance support, and hands-on engagement. Investors should be prepared to provide strategic guidance and facilitate peer learning to enhance their partners’ capabilities.

2. Avoiding the Pitfalls of Mixed Investment Strategies

A common misstep in emerging market investing is blending multiple investment strategies without precise alignment. We have seen instances where funds attempt to combine venture capital with later-stage private equity or mix impact-driven capital with purely financial mandates, leading to conflicting incentives and suboptimal outcomes. Success in these markets requires strategic discipline—ensuring investment theses are well-defined, execution capabilities match the strategy, and alignment exists between investors and investees.

3. The Critical Role of Currency Risk Management

Currency fluctuations remain one of the most persistent challenges in emerging markets. Over the years, we have observed how poorly managed foreign exchange risks can erode returns, even in high-growth investment opportunities. While hedging instruments exist, they are often expensive or unavailable in frontier economies. Our approach has prioritised businesses with natural hedges—those generating revenues in hard currencies or with strong local supply chains. Investors must factor currency risk into their decision-making and consider structuring investments to mitigate exposure.

4. Realities of Successful Exits

Exiting investments in emerging markets is rarely as straightforward as in developed economies. Liquidity constraints, regulatory barriers, and political instability can all impact exit timing and valuations. Over our 15 years, we have seen the importance of planning exit strategies early – identifying multiple potential buyers, nurturing secondary market interest, and ensuring businesses are built with sustainable, long-term value creation in mind. A well-thought-out exit plan is just as crucial as the initial investment thesis.

5. Investing in Emerging Markets is Not as Risky as Perceived

A common misconception is that investing in emerging markets is inherently tricky and risky. However, these markets can offer strong returns and impactful opportunities with the right local partners, extensive due diligence, and a disciplined approach. Over 15 years, we have developed deep expertise and relationships to navigate these challenges effectively. Our experience has shown that local knowledge and partnerships are crucial in mitigating risks and unlocking value. Rather than seeing emerging markets as overly complex, investors should recognise the opportunities with the right strategy and execution.

6. Turning Setbacks into Opportunities

No investment strategy is without challenges, and emerging markets bring heightened risks, from economic downturns to geopolitical shifts. However, setbacks have often provided some of our most significant learning opportunities. For example, when faced with underperformance in certain portfolio funds, we leveraged these experiences to refine our selection criteria and strengthen portfolio monitoring. The key is resilience—adaptability and willingness to iterate based on real-world outcomes.

7. The Evolution of Impact Measurement

Fifteen years ago, impact measurement was primarily qualitative. Today, investors demand rigorous, data-driven metrics to assess financial and social performance. We have evolved our approach by integrating ESG and impact measurement into our investment decision-making, using frameworks that balance accountability with practicality. The future of responsible investing lies in finding the right balance between measurement complexity and actionable insights.

Looking Ahead

As we look to the next decade, the lessons from our journey will continue to inform our approach. Key priorities include deepening our focus on climate resilience, supporting fund managers with strong financial acumen and social impact, and leveraging technology to enhance investment efficiency. Emerging markets remain among the most promising yet challenging landscapes for investors, and long-term success requires both wisdom and action.

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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.

In recent proxy seasons, one area of continued activity has been the inclusion of environmental, social and governance (ESG) metrics within short- and long-term compensation plans of listed companies globally. Recent statistics based on 2024 disclosures indicate that more than 75% companies within the S&P500 Index constituents incorporate ESG metrics within their executive compensation plans, compared to two-thirds in 2021. On the shareholder proposal front, there has been continued activity related to the filing of shareholder proposals seeking the inclusion of environmental and/or social metrics into compensation plans for shareholder vote.

Executive compensation plays an important role in incentivizing management and influencing behaviour. So, structuring executive compensation plans to align with strategic priorities, including the management of material ESG risks, may be warranted to incentivize performance in these areas, especially when performance is lagging.

To this end, when investors assess whether and what ESG metrics should be included in a portfolio company’s executive compensation plans, a holistic framework approach to analyzing metric inclusion is most appropriate. While not exhaustive, outlined below are certain key relevant factors that investors should consider when assessing ESG metrics in compensation plans. Such factors include whether a metric is relevant and financially material, the company’s performance in relation to the metric, the degree of existing disclosures already made available in a company’s other filing materials, and whether a portfolio company’s plans related to the ESG issues linked with such ESG metrics in compensation arrangements have credibility. This approach should take into account the specific circumstances of the portfolio company to drive appropriate behaviours and outcomes. Overall, investor focus should remain grounded in the philosophy that management incentives should be tied to long-term value creation.

Metric Relevance, Materiality and Company Performance

The ESG metrics which are selected for inclusion in executive compensation plans should be relevant to the specific company’s circumstances or industry, and importantly, they should be financially material. When a company lags in performance vis-à-vis its peers in a particular area, ESG risks, including ESG metrics, in these areas, becomes more appropriate.

Existing Disclosures

Consideration may also be given to whether the company has already made robust disclosures in other publicly disclosed documents (such as information circulars, ESG reports and annual reports). The lack of disclosure from a company elsewhere may mean that including such environmental or social metrics in pay plans would at a minimum indicate that the company will now likely measure relevant metrics on an annual basis to account for performance. Such inclusion may also mean improved disclosures if the company incorporates additional details regarding the measured metrics in the Compensation Discussion and Analysis (CD&A). Measurement at the very least makes issues top of mind for management, which can incentivize behaviour. Disclosures in the CD&A, on the other hand, may mean that investors might have access to more timely and relevant metric data, whereas before such inclusion, updates in this regard may not have been as regular.

Plan Credibility

Assessing whether a specific ESG metric should be included in executive compensation plans starts with examining whether the portfolio company has credible plans to tackle the financially material issue at hand. From a compensation philosophy standpoint, companies should link executive compensation to areas that require management’s focus and attention. If the portfolio company is making good progress against a credible plan, ESG metric inclusion may not be required or appropriate, as investor preference may be for the portfolio company to focus its efforts (and pay plans) on more material and pressing issues, all else being equal. However, even when compensation plans include financially material ESG metrics, such as carbon emission reduction metrics, if the company lacks a well thought-out and credible plan to reduce overall carbon emissions, no degree of metric inclusion will create the conditions necessary to incentivize management, as the plan likely doesn’t contain achievable or appropriate targets.

Concluding Thoughts

It is important for investors to recognize that independent directors are often in the best position to design programs that best incentivize management to create long-term value. This is due to the fact that independent directors acting from within the tent are far more familiar with the unique circumstances of a company than outside observers are. However, while deferring to the board and entrusting it to do what is best for shareholders, investors should take an active role in verifying whether their fiduciaries are properly discharged. As portfolio companies continue to consider ESG performance metrics in their compensation plans, investors must regularly engage with compensation committees on these topics, using the framework approach such as the one outlined above to remain active and responsive stewards of capital.

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The information contained herein is for information purposes only. The information has been drawn from sources believed to be reliable. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax or investment advice. Particular investment, tax or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance.

This material is not an offer to any person in any jurisdiction where unlawful or unauthorized. These materials have not been reviewed by and are not registered with any securities or other regulatory authority in jurisdictions where we operate.

Any general discussion or opinions contained within these materials regarding securities or market conditions represent our view or the view of the source cited. Unless otherwise indicated, such view is as of the date noted and is subject to change. Information about the portfolio holdings, asset allocation or diversification is historical and is subject to change

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.

TD Asset Management Inc. is a wholly-owned subsidiary of The Toronto-Dominion Bank.

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.

Climate change presents a systemic risk to economies, financial markets, and investments. To spur the action required to mitigate its most severe impacts, the owners and managers of trillions of US dollars have committed to net-zero emissions by 2050 or sooner. Yet global emissions continue to rise.

While investors alone cannot bend the trajectory of emissions, the most common approach to net-zero investing – imposing targets to reduce portfolio emissions over time – is clearly not helping:

– Portfolio emissions reductions are often achieved by divesting from high-emission assets or regions. This reduces a portfolio’s carbon footprint on paper, but does nothing to actually lower emissions.

– Excluding high-emitting assets and regions often means cutting allocations to emerging markets. This limits the availability of capital where it is most needed to effect the energy transition.

– Shrinking the investment universe by excluding industries and regions on emissions grounds may result in suboptimal allocations and lower returns.

Our discussions with asset owners indicate a lack of confidence in the traditional approach to constructing net-zero portfolios. A survey we conducted in 2023 revealed that one-third of asset owners are unsure if their approach to transitioning their assets to net zero is actually helping to reduce emissions in the real world.

We believe there are ways to construct portfolios that do not compromise returns, fiduciary responsibilities, or progress towards a low-carbon future. But they require a shift away from approaches built around targets to reduce portfolio emissions over time.

From reducing financed emissions to financing reduced emissions

The starting point for getting net-zero investing on track is redefining what a net-zero investor is. We propose: one who acts to maximise their contribution to real-world emissions reduction and a socially responsible transition, without compromising investor returns or fiduciary responsibilities.

This means not seeking to reduce financed emissions (emissions linked to investment activities), but rather aiming to finance reduced emissions. This is particularly important in the current political climate – with potentially less supportive policy and fewer companies pushing hard for net zero and hence a slower pace of decarbonization – which may make it harder to construct a portfolio of lower carbon assets without substantially restricting the investment universe. At the same time, supporting real-world carbon reduction to help mitigate climate risk has become even more important.

While one size cannot fit all, an effective net-zero investment approach should include the following five components. Each of them plays a different role in supporting net-zero alignment:

1. Dedicated allocations to climate solutions equities and fixed income. These include investments in businesses that enable decarbonization, such as those focused on renewable energy, battery storage, electric-vehicle and energy-efficiency technologies, and green hydrogen. We believe this group of companies can achieve above-market structural growth as the world decarbonizes, potentially adding a differentiated source of returns to a portfolio.

2. Dedicated allocations to transition equities and debt. These investments include financing for companies or issuers in high-emitting sectors with credible transition plans, and companies providing products that enable the transition, like critical minerals. Such companies may often not fit in a typical net-zero portfolio, given their high emissions. But we see significant return and impact potential if they successfully implement their transition strategies.

3. Other equity and fixed income investments. For the bulk of a portfolio, we recommend prioritizing engagement to accelerate the work portfolio companies are doing to decarbonize their operations and value chains, rather than exclusion. Where engagement is not possible or unlikely to be effective, then investors may adopt a ‘positive inclusion’ tilt, directing investment towards companies with credible transition plans or potential.

4. Sovereign fixed income investments. For domestic government bonds and other assets with limited options for adjusting allocations (such as those held for regulatory reasons), the main net-zero tool is advocacy. For international sovereign bonds, there is significant opportunity to allocate towards countries making progress towards net zero – for example, by using the Ninety One Net Zero Sovereign Index to measure alignment. Investors can also allocate directly to climate solutions and transition via sovereign green and sustainability-linked bonds, where available.

5. Private markets and real assets. Investors can have significant influence via private investments. Investing in real assets can also be a way to contribute directly to the construction of low-carbon infrastructure and buildings, or to influence the management of these assets to reduce their carbon impact.

For good measure

A revised net-zero approach requires different metrics to appraise investments and measure progress, beyond simply measuring financed emissions.

– Climate solutions: use ‘carbon avoided’ – emissions avoided by the use of a product with lower emissions than the status quo.

– Transition investments: use ‘carbon reduced’ – the amount by which emissions have been lowered by a company or country.

– All investments: use ‘asset-alignment’ – the proportion of companies with science-based net-zero targets and credible transition plans; and ‘net-zero engagement’ – the proportion of emissions covered by strategic engagements aimed at influencing carbon reduction, ideally measuring engagement outcomes.

A new approach

The global economy is significantly off course to hit net-zero emissions by 2050. Yet the typical approach to building a net-zero portfolio is unlikely to be helping, and may even be hindering.

By focusing allocations on financing real-world emissions reduction and using engagement to encourage net-zero alignment, we think investors can help to shift the economy toward a credible decarbonization pathway, while optimizing returns for clients and beneficiaries.

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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.