Are Canadian Pensions on the ESG Bandwagon?

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Natixis Investment Managers put out a press release highlighting results of a survey showing that ESG investing has reached critical mass but ongoing momentum depends on what's driving the demand:

  • The number of professional investors implementing ESG grew by 18% since 2018, primarily to better align private capital with investor and organizational values
  • Three-quarters of professional investors consider ESG factors to be an integral part of sound investing
  • Natixis surveys show a 51% increase in institutional investors exercising active ownership influence over corporate behavior

BOSTON — More financial institutions are deploying a broader range of environmental, social and governance (ESG) strategies1 to meet rising demand for more sustainable investments, according to survey findings released today by Natixis Investment Managers. Approximately three-quarters of professional investors, including 72% of institutional investors and 77% of the gatekeepers who select funds for their firm’s investment advisory platform, are now implementing ESG strategies, up from 61% and 65%, respectively, in 2018. 

The pace of growth accelerated in 2020, amid record inflows into ESG funds and an unprecedented number of ESG product launches.2 This year, 68% of professional fund selectors plan to further expand their firm’s ESG offerings. Their primary reason for doing so is because of investor demand, which fund selectors believe stems from investors’ heightened social awareness (75%) and the fact that ESG investing has now reached critical mass among mainstream investors (50%). Other factors they say are driving demand for ESG include investors’ desire to be part of a greener economy (42%) and concerns about climate change (36%).

“The rapid global adoption of ESG has raised questions about whether the momentum building around ESG will continue or if it’s building toward a bubble,” said Harald Walkate, Head of ESG for Natixis Investment Managers. “The answer lies in greater clarity about what investors ultimately want to achieve, not only to deploy ESG strategies that align with their values but also to set realistic expectations for both financial results and societal impact.”

Natixis analyzed previously unpublished findings from a series of global surveys of institutional investors, professional fund selectors and financial advisors about how they are implementing ESG. When viewed through the lens of Natixis’ most recently published survey of individual investors, key questions emerge about ESG investing and whether professional investors, individual investors and their advisors are on the same page.

Stronger narrative of financial performance

Natixis found that 77% of professional fund selectors and 75% of institutional investors now consider ESG factors an integral part of sound investing. Financial advisors concur. Five years from now, nearly six in 10 (59%) financial advisors expect ESG investing to be standard practice across the industry.

Though a lack of consensus on ESG measurement has been a challenge for investors, 83% of fund selectors and 79% of institutional investors say it’s gotten easier to benchmark performance. As better ESG data has become available and reporting is standardized, Natixis sees a stronger narrative emerging on the financial merits of ESG investing.

  • More than half of professional investors surveyed by Natixis, including 53% of institutional investors and 55% of fund selectors, now agree that companies with better ESG track records generate better investment returns.
  • Seven in 10 fund selectors and 62% of institutional investors think alpha can be found by incorporating ESG factors into investment analysis. More than six in 10 (63%) advisors also agree that ESG strategies may offer potential to outperform the markets.

When it comes to evaluating a company or industry, nearly half (48%) of professional fund selectors consider nonfinancial ESG factors to be as important as fundamental financial factors. Yet 67% of fund selectors and 74% of institutional investors say it is still hard to know which nonfinancial measures are material to investment analysis.

Multiple paths to ESG: Matching motives with methods

Institutional investors’ top motivation for implementing ESG is to ensure assets better represent organizational values, which has been their top motivation since 2017. Aligning assets and values also is a top motivation for fund selectors, second only to client demand.

Three-quarters of individual investors (77%) previously surveyed by Natixis say it’s important that their investments and values are aligned. Moreover, what investors say they want most out of a relationship with a professional advisor is to have them identify investments that match their personal values. What they mean by that, exactly, is important for financial firms to understand as they expand their ESG offerings and tailor their strategies to best meet clients’ goals – both financial and nonfinancial.

“For advisors, it’s not always clear what clients mean by personal values or whether ESG investors are primarily motivated by a desire to make a better world or better financial returns, or both,” said Dave Goodsell, Executive Director, Natixis Center for Investor Insight. “Ultimately, more concrete evidence of financial and nonfinancial results is needed, but questions and conversations about clients’ motives could go a long way toward helping advisors tailor the best ESG strategies to meet their clients’ objectives.” 

Natixis’s research found no single consensus approach to ESG investing. Rather, firms are employing multiple approaches, with distinct risk-return features, that allow them to tailor strategies and address different financial and nonfinancial objectives.

The survey shows the approaches professional investors are taking include:

  • Integration: The most widely used approach, taken by 54% of fund selectors and 48% of institutional investors, is to integrate ESG factor analysis into the overall investment process, accounting for issues that with potential to materially affect company performance.
  • Negative screening: Four in 10 fund selectors (42%) and institutional investors (40%) rely on negative screening. The exclusion of companies or industries deemed as unethical or harmful, an approach taken by early adopters of socially responsible investing in the 1970’s, fell out of favor with many investors for lack of compelling evidence that it produced either a financial or societal benefit. The number of fund selectors employing negative screening declined by 15% from 2019 to 2020.
  • Active ownership: More than one-third of professional investors, including 35% of fund selectors and 34% of institutional investors, are addressing ESG issues by exercising their ownership rights and voice to effect change, an increase by 45% and 51%, respectively, in 2020 from 2019. Meanwhile, 35% of institutional investors say one of the primary reasons they implement ESG strategies is to influence corporate behavior.
  • Impact investing: 42% of fund selectors, but just 34% of institutional investors, are engaged in impact investing, with an intent to generate and measure social and environmental benefits alongside financial returns.
  • Thematic investing: 43% of fund selectors and 28% of institutional investors focus on thematic investing, which seeks opportunities in emerging trends such as those driven by demographic shifts, innovation and social or policy priorities.

Methodology

Natixis Investment Managers surveyed 3,600 professional investors globally, including 500 institutional investors, 400 fund selectors and 2,700 financial professionals, about the issues that drive their decisions on ESG investing. Data were gathered in 2020 by the research firm CoreData, with supporting data points from prior-year surveys, including 9,100 individual investors from around the world who were surveyed in 2018 and 2019 about aligning investments with their personal values. 

To view the full report, “ESG Investing: Everyone’s on the bandwagon,” including the methodology related to each survey conducted, a download of the report is available here: www.im.natixis.com/us/research/esg-investing-survey-insights-report.

About the Natixis Investment Institute

The Natixis Investment Institute applies Active Thinking® to critical issues shaping the investment landscape. A global effort, the Institute combines expertise in the areas of investor sentiment, macroeconomics, and portfolio construction within Natixis Investment Managers, along with the unique perspectives of our affiliated investment managers and experts outside the greater Natixis organization. Our goal is to fuel a more substantive discussion of issues with a 360° view of markets and insightful analysis of investment trends.

About Natixis Investment Managers

Natixis Investment Managers serves financial professionals with more insightful ways to construct portfolios. Powered by the expertise of more than 20 specialized investment managers globally, we apply Active Thinking® to deliver proactive solutions that help clients pursue better outcomes in all markets. Natixis Investment Managers ranks among the world’s largest asset management firms1 with nearly $1,389.7 billion assets under management2 (€1,135.5 billion).

Headquartered in Paris and Boston, Natixis Investment Managers is a subsidiary of Natixis. Listed on the Paris Stock Exchange, Natixis is a subsidiary of BPCE, the second-largest banking group in France. Natixis Investment Managers’ affiliated investment management firms include AEW; Alliance Entreprendre; AlphaSimplex Group; DNCA Investments;3 Dorval Asset Management; Flexstone Partners; Gateway Investment Advisers; H2O Asset Management; Harris Associates; Investors Mutual Limited; Loomis, Sayles & Company; Mirova; MV Credit; Naxicap Partners; Ossiam; Ostrum Asset Management; Seeyond; Seventure Partners; Thematics Asset Management; Vauban Infrastructure Partners;Vaughan Nelson Investment Management; Vega Investment Managers;4 and WCM Investment Management. Additionally, investment solutions are offered through Natixis Investment Managers Solutions, and Natixis Advisors offers other investment services through its AIA and MPA division. Not all offerings available in all jurisdictions. For additional information, please visit Natixis Investment Managers’ website at im.natixis.com | LinkedIn: linkedin.com/company/natixis-investment-managers. 

Let me begin by thanking Caryn Brownell of the Hubbell Group for sending me the press release, survey and highlights.

Take the time to view the survey here, it's actually an easy read and very informative.

One of the questions I get a lot is why are investors so focused on ESG? There are a lot of reasons:

The top five are:

  1. To align investment strategies with organizational values
  2. To influence corporate behavior
  3. To minimize headline risk
  4. To generate higher risk-adjusted returns over the long-term
  5. To make a better world

Notice I highlighted number 4, because that is ultimately what pension fund managers and their beneficiaries care about, not that organizational values, corporate engagement, minimizing headline risk and making this a better world aren't important (of course they are).

At the end of the day, implementing ESG -- and implementing it right with a lot of thought -- is about enhancing risk-adjusted returns over the long run.

Earlier this week, I discussed how CDPQ's massive real estate subsidiary, IvanhoƩ Cambridge, is committing to achieving net zero carbon by 2040.

Fantastic, the CEO of CDPQ, Charles Emond, is urging large investors to follow his organization and invest more in climate action. 

But behind the hoopla is a lot of work and don't kid yourselves, the ultimate goal here is to enhance risk-adjusted returns.

I remember a conversation I once had with Jim Keohane where we discussed how their new office at 1 York Street is LEED Platimum and he told me: "New buildings are significantly more energy efficient which means HOOPP will collect more rent per square foot and the tenants will benefit from less common costs."

So, yes, apart from feeling good and doing the right thing, it's a matter of dollars and sense.

If your building is environmentally in the lead, you will attract better tenants, they will sign longer leases and you will save significant energy costs. 

As Blake Hutcheson, CEO of OMERS told me on why the organization he leads is targeting a 20% carbon intensity reduction by 2025: "It's a win, win win for all stakeholders and it pays long-term dividends."

Jo Taylor, CEO of OTPP, is also committed to achieving net zero by 2050 and he has written a comment on the winding road to net-zero, providing a road map and food for thought to all investors (learn more about OTPP's responsible investing approach here).

For his part, Gordon Fyfe, BCI's CEO, is also committed to their climate-related targets for public markets and they are also adopting ESG investing in private markets.

But like his peers, Gordon told me they believe in engagement, not divestment and he added: "Divesting only transfers the carbon to someone else's balance sheet and it's typically investors who are not practicing ESG."

In his letter to Canadians, CPP Investments' CEO, John Graham was unequivocal stating:

[..] climate change is arguably the most pressing factor affecting the investment landscape today. As the global economy moves towards net-zero, our goal is to capture the opportunities and hedge the undue risks that will arrive as society works to reduce and remove greenhouse gases from the real economy. 

He's also on record stating  that divestment is off the table under his watch:

“Simple divestment is essentially a short on human ingenuity,” John Graham told the Financial Post in a recent interview, adding that there are “incredibly bright, talented” scientists and engineers in the oil and gas industry.

“We’ve taken the position that we invest in the entire energy ecosystem, and we do not pursue a path of blanket divestment,” he said.

To do this, CPP Investments recently created a new Sustainable Energy Group (SEG) headed by Bruce Hogg, looking at all the risks and opportunities across the energy spectrum.

Ed Cass, their CIO who allocates capital across strategies will play a part in this as will Deborah Orida, senior managing director and head of real assets of CPP Investments, the person Bruce Hogg reports to.

For its part, PSP Investments reiterated its commitment to the Investor Leadership Network (ILN) and the actions it is taking to combat climate change. 

OPTrust has done a lot to bring climate change risk front and center in all its investments. Last year, Alison Loat, managing director for sustainable investing and innovation for OPTrust was quoted stating: 

"COVID has underscored where we all knew we were vulnerable, and we can see some companies doing well," she said. "Social issues have always been one of the top priorities for us, as a labor organization. There have been numerous examples over the past three months of companies not taking it seriously," and engagement with them "I anticipate will accelerate," she said. "Overall, I feel that this might provide an opportunity to accelerate some of the good work that ESG investors are doing." 

I'm a big believer in the "S" in ESG. Climate risk is obviously front and center, but social or what I call "humanity risk" is equally if not more important.

Why? Before we can collectively take care of planet Earth, we must all learn to co-exist in harmony respecting what unites us but also respecting diversity in all its forms.

In particular, I've long been harping on taking care of people with disabilities, offering them the same opportunities that others take for granted.

Importantly, ignoring a problem isn't addressing it, it's actually perpetuating the injustice at your own organization even if that's not your intent. 

That's why I'm tough on leaders when I ask them to reflect carefully on whether their organization is truly taking diversity and inclusion seriously at all all levels and backing it up with publicly available data.

Let me be blunt: it's easy to talk up a storm on diversity and inclusion, much harder to quietly but resolutely take meaningful action, making sure no group is left behind.

Lastly, let me congratulate Alison Schneider, Vice-President, Responsible Investment, Alberta Investment Management Corporation (AIMCo), for being been recognized for a 2021 Clean50 Award in the Financial & Services Organizations category from Delta Management Group - founders of Canada's Clean50 Awards. You can read Alison's profile here (congratulations). 

Mark Wiseman, AIMCo's chair, has explained the organization's next move and why he thinks it can play a critical role in the energy transition to a lower carbon economy. I'm certain Evan Siddall, AIMCo's new CEO, agrees and will take sustainable investing very seriously.

And since it is Earth Day today (it should be every day!), let me end with a couple of interesting things.

First, learn about Denis Hayes, the man who started Earth Day over 50 years ago:

And second, keep in mind Mother Nature is always two steps ahead of us and new and dangerous variants of COVID-19 can pop up anywhere, not just Brazil and India:

I tell everyone to continue with all public health protocols even if you have received one or two doses of a vaccine (they're all good but none protect you 100%).

I know, it's tough, everyone is itching to resume their life as if we can magically go back to pre-pandemic times, but that's not realistic, it's shortsighted and not considerate to those waiting for their first jab. 

I leave you with a great clip I found on Earth Day which captures the importance of why we all need to do our part to make this a better world for future generations. Enjoy and Happy Earth Day!

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