ESG growing pains

Responsible investing is down among financial institutions, but as RBC's Melanie Adams explains, the market may just be maturing

Ruth Saldanha 6 November, 2019 | 1:48AM

 

 

Ruth Saldanha: ESG investing seems to be a strong theme for many investors and asset managers. And at first sight it appears that RBC Global Asset Management's annual responsible investment survey finds that to be the case, with 70% of institutional investors using ESG principles as a part of their investment approach and decision-making process. However, this number is actually down from 72% last year, and the report also finds that there are divergent views with those who have not yet committed to responsible investing staying away. Melanie Adams, RBC Global Asset Management's Head of Corporate Governance and Responsible Investment, is here with us today to discuss these findings.

Melanie, thank you so much for being here today.

Melanie Adams: Thank you for having me.

Saldanha: Why has the growth of ESG implementation slowed down?

Adams: Well, first of all, I think the first important factor is that 70% is still a very large number of investors who are integrating ESG. We have seen a rapid increase over the last number of years. And so, now perhaps we're seeing a bit of a maturation of the market where investors are perhaps understanding that ESG integration is not as easy as it may seem, that it in fact involves investment teams committing to integrating ESG as a part of their process. And that can be very challenging. But it is also important that when we look at the survey, we look at the regional breakdown. And when we do it by region, we see that Canada has actually trended upwards and Canadians are 80% integrating ESG as opposed to 74% last year.

Saldanha: For those that do choose responsible investment, they prefer active management with negative screens. Is this in line with your process as well?

Adams: So, what we see is a preference towards ESG integration. This is really a question of value versus values. So, ESG integration is looking at the risks and opportunities that various companies face and how they're addressing them and whether or not this is being priced into the stock price. Screens, on the other hand, are when investors are looking at their values and deciding that they don't want to invest in a particular company or a particular sector because of their own values. So, for example, we see this in – we see tobacco screens, screens against guns, we see screens against fossil fuels. And so, what we are seeing is a lot of momentum in ESG integration. This is, you know, actively managed funds that do a deep ESG integration process seems to be what investors are looking for right now.

Saldanha: Is this in line with your process as well?

Adams: It is. All of our investment teams at RBC Global Asset Management integrate ESG into their process. Now, they all do it in a way that complements how they invest. So, for example, our emerging markets team has a particular strategy where they go out and not only do they meet with their investee companies, but they meet with the suppliers of their investee companies because of the supply chain risk there. There are certain issues that, for example, small and mid-cap teams have because there's not as much ESG data available for their investee companies. So, each one of our teams has its own process for looking at ESG factors and integration.

Saldanha: Going back to the negative screen aspect, what are some of the changing trends in this that you're seeing now?

Adams: We are seeing some different screens that are coming up. We have a number across our portfolio. We have our Vision Funds that screen out for a number of different values, but we are seeing diversity screens coming up more and more. And I think this is very interesting. We have a diversity ETF ourselves, and this seems to be becoming more important to investors. Fossil fuel screens are also a trend that continues to grow across industry.

Saldanha: Speaking about fossil fuels, Canada is heavily reliant on energy. How do you see the road ahead for Canadians in terms of responsible investing?

Adams: Well, it's important to know that we are reliant on the fossil fuel industry and we will be for many years to come. Canada is one of the more evolved countries in this area in terms of clean energy and investing in our oil and gas companies to help them with their research and development, looking into areas that they can capture carbon and they can make changes to their processes along these lines. And so, we are monitoring, we are engaging with our investee companies. We're always looking at these issues and how this is being addressed by the industry. But we do recognize that we will be dependent on this industry for some time.

Saldanha: Thank you so much for joining us today with your perspectives, Melanie.

Adams: Thank you. It's my pleasure.

Saldanha: For Morningstar, I'm Ruth Saldanha.

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Ruth Saldanha

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca