ESG integration gaining steam as institutional investors challenge myths

Those that fail to see the opportunities in ESG will be left behind, says Kathrin Forrest, equity investment specialist at Capital Group Canada. “It’s part of every conversation now and I would say that [most plan sponsor] clients understand ESG integration is not a nice-to-have anymore; it’s core to how we, as an industry, operate.”

Read: Institutional investors increasingly interested in ESG factors: survey

But despite the fact that ESG has become a core consideration for many organizations, persistent myths still exist.

Myth #1: Focusing on ESG is bad for the bottom line

One common myth is that institutional investors can’t make money from integrating ESG into their investment decisions.

“Yes you can,” says Tom Keenleyside, associate director of investments at Western University. “You can be opportunistic and make money at it. Or, if you’re not conscientious of the heightened risk in companies that are abusing the environment or abusing some social aspect, if you’re not aware of those risks and managing those risks, . . . profits will eventually start to erode if they don’t get their sh@!t together.”

Read: Panel: Bâtirente, KPMG and Western University share DC plan journey to ESG

Many investments that check the ‘E’ or the ‘S’ boxes are highly profitable, he says, noting investors can be opportunistic in this space. One way the university’s pension plan is doing so is by investing in Brookfield Asset Management Inc.’s global transition fund, which focuses on investments that are “designed to capitalize on these trends” by helping companies meet increasing regulatory demands and improve operations, says Keenleyside.

Myth #2: ESG integration is a nice-to-have, not a must-have strategy

Experts agree it’s time for pension plan sponsors and institutional investors to focus more seriously and consistently on ESG issues.

“It’s a better way to inform investment analysis and decision-making,” says Forrest, adding that looking at investments through an ESG lens is “a way to strengthen and refine investment views. . . . [It’s] not just a risk management tool, it can also identify investment opportunities.”

Read: Investors cite returns, risk management as drivers for ESG integration

Glen Yelton, head of ESG client strategies at Invesco Ltd., agrees. “If you wait too long, it’s going to be difficult to get started. Right now, there’s still a dynamic quality to ESG. . . . The laggards will be as laggards in other macro trends and will lose out on the opportunity here.”

Myth #3: Only younger generations care about ESG issues

The integration of ESG factors into investment decisions offers a significant opportunity for pension plan sponsors to engage members of all ages.

The myth that only younger plan members care about ESG issues isn’t true, says Yelton, noting baby boomers, generation X, millennials and generation Z all care about ESG issues. In addition, as Canada enters a difficult market for recruitment and retention, plan sponsors can demonstrate they care about a range of issues to retain top talent, says Kenndal McArdle, a principal at Pender Ventures.

At Western, its more than 7,000 pension plan members — which run the gamut from gen-Z administrative employees to baby boomer professors on the cusp of retiring — certainly care about a range of issues, says Keenleyside.

Read: 74% of institutional investors likely to divest from companies with poor ESG records: survey

While the university’s investment team has long focused on ESG factors, it hasn’t always publicly shared the nitty-gritty details of those efforts, he adds. But after some plan members asked for more transparency, a section on responsible investing was added to the pension plans’ annual commentary for the first time this year.

“They wanted a bit more transparency with the plan, so that’s one thing we’ve been working on — just how to communicate.”

Myth #4: ESG investing is only about the ‘E’

As climate-related disasters regularly make headlines, many institutional investors and pension plan sponsors are becoming more transparent with big public statements related to the ‘E’ in ESG.

In 2020, Western signed on to the Investing to Address Climate Change: Charter for Canadian Universities. And Canada’s big institutional investors, including the Caisse de dépôt et placement du Québec, the Canada Pension Plan Investment Board and the Investment Management Corp. of Ontario, have set out moves related to climate change in recent years.

Read: A third of investors making formal commitment to net-zero goals: survey

While efforts related to social and governance issues have been softer and less public, McArdle argues that the ‘S,’ in particular, deserves more focus, even if it’s more difficult to come up with ways to measure social factors.

“It’s no coincidence that environmental gets the majority of air time because its metrics are easier to quantify. . . . As part of the due diligence process, [plan sponsors] should dive into the ‘S’ and the ‘G’ just as much as they do for the environmental or have mandates to find managers that have gold standard indicators across social and governance.”

David Sheasby, head of stewardship and ESG at Martin Currie Ltd. in the U.K., agrees. “The social side of things has been lost in the huge focus we’ve seen on the environment and the focus on climate change. There’s an increasing focus on human rights, modern slavery and these are really beginning to come to the fore. . . . Things around #MeToo and Black Lives Matter and these things have all come on to investors’ radar and into the boardroom [and it’s] an area we expect to see coming down the pike over the next couple of years.”

Myth #5: ESG-related data is unreliable

As the focus on ESG grows, the way these factors are measured and the reliability of that data has come under scrutiny.

There’s been a push to improve how data is analyzed, communicated and reported, but experts admit there’s still work to be done. “Data accuracy has been an issue, [but] it’s continuing to improve,” says Michael Peck, senior vice-president and head of institutional at Invesco Canada. “The fiduciary duty — the legal side — has been cleared up on this in numerous places around the world.”

Read: More standards required for pension funds using ESG data, indices and scores

Forrest agrees data is still an issue, but also notes it’s steadily improving. “There’s lack of consistent data. We’re swamped with ESG data and information . . . and that lack of consistency can be more confusing than helpful — ratings can be helpful, but they don’t paint the full picture.”

Myth #6: The ESG focus is a short-term fad

Even though a fuller picture of the importance of ESG factors has been emerging for years, some in the institutional investing community still believe it’s only a fad.

This isn’t a trend, says Sheasby, as ESG issues are becoming an integral part of the decision-making process for investors. McArdle agrees. “In the world of readily available information and social media, it just makes sense that all stakeholders are going to care about the impact they have on the world — this isn’t just happenstance. ESG investing is becoming more important and I think it’s here to stay.”

For more than a decade, Western has considered a range of ESG issues when making investment decisions. Getting out ahead of legislation and trends just makes good business sense, says Keenleyside, noting companies that have already switched to greener practices “are at a competitive advantage, as long as they’re competitively priced. It’s a better position to be in.”

Melissa Dunne is the former managing editor of Benefits Canada.