The growing reward of being a responsible investor

By: Martin Grosskopf and David Stonehouse • December 12, 2018
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Building a more sustainable economy is creating opportunities while bestowing new powers on investors

Responsible investing has reached a critical juncture. A number of shifts are currently underway as the once nascent trend goes mainstream, including demands for better data and measurement to thwart ‘’greenwashing,” and the creation of more customized products as a growing chorus of investors call for progress on environmental, social and governance (ESG) issues.

Looking ahead, we believe investors will be keeping a watchful eye as the rise of populism in developed markets undermines the drive to find global consensus on issues like climate change, and governments retreat to focus on local concerns.

Still, there’s no denying that the velocity of growth over these past few years is nothing short of staggering. What began as a niche desire by investors to put their money where their heart was, has matured into growing agreement that the integration of ESG risks into investment strategies can improve the planet as well as social outcomes, while driving long-term value. In fact, ESG integration is increasingly seen as a fiduciary duty.

The United Nations-supported Principles for Responsible Investment, an international network representing some US$80-trillion worth of investment (according to its own 2018 data) has helped lend credibility to the investment strategy, helping to build trust with everyone from foundations and endowments, to retail investors. In Canada alone, there are now $2.1 trillion in responsible assets under management, representing 42% growth over the past two years and 51% of Canada’s investment industry, according to the Responsible Investment Association’s 2018 trends report.

Populism’s overhang

While geopolitics has traditionally been the preserve of emerging markets, the sweep of populism, arising from growing social fissures, has resulted in Brexit, turmoil in countries like Italy, and the election of U.S. President Donald Trump, and is likely to shift ESG considerations in the coming years. Because many large environmental initiatives are undertaken at a national level, both political support and important subsidies could be at risk in some countries that have helped fuel global action on issues like climate change.

Consider that the U.S. government has opted out of the Paris Agreement, largely dismantled the EPA, and rolled back environmental regulations. In Canada, meanwhile, Ontario is pulling out of the cap-and-trade plan with Quebec and California and is now also challenging the Canadian federal government’s jurisdiction to impose a carbon tax on provinces. The federal Conservative Party has also not only vowed to fight cap-and-trade, but to dismantle the carbon tax should the party win the election next fall.

What does this mean for investors? In the wake of less concerted action on a global level, we believe many will increasingly be looking to solve their ESG concerns closer to home.

The need for verification: no small measure

Just as the organics industry faced growing scorn over ‘’greenwashing” with consumers demanding both better standards and labelling to protect the integrity of the organic designation, there has also been increasing scrutiny over ESG investment measurement. While corporate disclosure on ESG issues has steadily improved since the launch of the Global Reporting Initiative (GRI) in 2000, measurement and the verification of outcomes is still evolving. Big data and machine learning will undoubtedly help to improve ratings methodology, but there will be costs associated with improved measurement and they will either have to be borne by investors or companies themselves. Still, we know there’s good reason to do so. A growing body of academic evidence shows that companies that effectively manage and integrate sustainability issues reap a range of reputational and competitive advantages – including better governance and positive social impact, resource and cost efficiencies, productivity gains, as well as new revenue and product opportunities.

Custom-designed versus off-the-rack

As the industry matures, more investors are likely to be clamouring for customized products. The objectives of one major pension fund, for example, may be quite different from another’s. One may focus more on air quality or energy use, while another could be more focused on health, safety and workers’ rights.

Sophisticated asset managers will continue to innovate, finding new ways for investors to satisfy both their ESG and financial goals.

Commentaries contained herein are provided as a general source of information based on information available as of December 7, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

Publication date: December 12, 2018

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