A reset on responsible investing?

Some companies have fallen out of favour, but ESG specialists NEI Investments says these themes will survive 

Ruth Saldanha 20 April, 2020 | 1:48AM
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This video is part of our Earth Week special report

Ruth Saldanha: All this week we're talking about environment, social and governance concerns in Morningstar Canada. You might ask why in the middle of all this volatility we talk about responsible investing? It's because we believe that in the long run, companies that adhere to ESG considerations tend to do better. NEI Investments releases an annual focus list each year to indicate the companies that the firm engages with on ESG considerations. This year, the focus list has 26 names, including energy companies. Jamie Bonham, Director of Corporate Engagement at NEI Investments is here today to discuss the list.

Jamie, thank you so much for being with us today.

Jamie Bonham: Thank you, Ruth. I'm happy to be here.

Saldanha: The list was released in early March before the full impact of the COVID-19 pandemic. Has this pandemic in any way changed the list or how you're approaching and engaging with companies?

Bonham: Yeah, sure. I mean, we're truly in uncharted territory right here. And so, like everyone else, we've had to take a step back and reset and look at this from a strategic perspective. That said, a lot of the themes that we were talking about in our focus list are still relevant. If you look at human rights in the tech world, that's still something that's very germane to the situation we're in right now. Health and well-being, another topic on our focus list. Obviously, that is another critical issue we're dealing with. However, we will be looking to all of that through a different lens because of COVID-19.

And I think our initial – and that will mean some of the names will change, some of the topics that we raise will be different, definitely. I think our initial focus is really going to be on the company and corporate response to COVID-19. And are they taking the initial steps that we want to see them take to address their key stakeholders, so their employees, their communities, their clients, their suppliers, all that. Hopefully, what we'll be able to build on after we get past this initial response is how are these changes going to be built into the long-term response from these companies? Because I do think if you look at some of these companies that are offering now paid leaves to some of their frontline workers who are we're all really relying on right now. You do have to ask yourself why didn't they have paid leave – paid sick leave to start with, right? Were they being paid appropriately for the risk that they take on? So, I'm hoping that this will lead us to some deeper conversations around the purpose of the firm and to really shift some of the focus for these companies. So, that conversation is kind of going to rise to the front for us in a way that we didn't really anticipate at the start of the year.

Saldanha: Let's talk about a few sectors now. You originally had four Canadian oil companies on the list. Apart from climate change, Canadian oil is a bit problematic. It has been beaten down quite a bit thanks to the delays in pipeline, volatility in stocks. How are you playing this sector and what is likely to be the areas of engagement here going ahead?

Bonham: Our take around the energy companies in Canada is that we think they are a key part of our energy transition and that they have a role to play, absolutely. And I think that looks different for different companies. And so, I think this – all the companies are taking a step back on their CapEx right now and cutting a lot of spending. And some of those projects were projects that would have led to a reduced ESG footprint, for example, greater efficiencies. I think those projects will come back. They'll still be in favor once the time is right.

But I think what this gives us is companies a chance to really take a step back and think about their capital spending and is it really going to the places where it should be. And in some ways, it's really forcing to put a foot on the gas pedal – or foot off the gas pedal, put on the brakes and say, is our strategy really aligned with where we need to be. And it maybe eases some of the pressure that was felt before about being locked into certain decisions to say, well, actually, maybe the return there isn't that great and maybe we should be looking at something like diversification.

So, I think, some companies, that is a distinct possibility. There's opportunities to diversify, whether it's getting into biofuels, whether it's looking at renewables in a serious way, whether it's some stuff that's further out there, but a real advantage to our industry, things like hydrogen, things like building a lithium industry out of the existing infrastructure that we have, ideas that oil sands companies are working on around bitumen beyond the barrel, what can you do with bitumen that doesn't involve burning things like carbon fiber? These are all opportunities that can be, I think, explored as we move forward in a more substantive way because I think there is – with the – this volatility is not going away. And so, hopefully these ideas get a bit more time.

Saldanha: Let's talk about financial services. Now, with a lockdown in place already indebted Canadians are finding it hard to make ends meet. What role will lenders play in the recovery? And how will you engage with the big five Canadian banks that are on your list?

Bonham: Yeah. So, we've actually already reached out to all five of those to start our engagement. And really what we did was to reach out to support some of the great actions that we've seen taken already. So, we have seen some of the banks step up, and really put some of their employees first to collaborate with each other around branch closures to ensure that rural communities have access to services. We've seen them talking about – talking to their more vulnerable clients, whether they're small business or whether individuals offering, say, deferrals on mortgages. And I think a lot of positive actions that they've taken that we want to support. That's another role to play is to ensure when we do something we like that we encourage the companies to continue. And so, that's already underway. I think where we want to go with that conversation is to ensure that they really do keep their focus on stakeholders throughout this.

Saldanha: We've talked a lot about the risks here. But are you seeing any leaders emerge in the ESG space? And are there any opportunities that you can see from an ESG standpoint in this pandemic?

Bonham: There are definitely leaders and they are noticeable. Like I think the companies that had a real culture, that empower their employees to think about stakeholders first and to really feel empowered to make decisions in the best interests of their clients, of their suppliers. Those companies, the response has been quite natural. They moved very quickly. They were able to move quite quickly. Another aspect is they've been providing very clear – communicating often and early. And I think that is another sign of companies that are just – they are ready for this. They're already leaders and we're learning a lot about corporate culture from how companies are responding to this.

So, I do think that the opportunity side of this is around what I mentioned previously, in that, we're starting to see some of the vulnerabilities of certain business models in our system around, again, low-paid workers who don't have paid sick leave, who don't have medical benefits. And that is now proven to be actually quite a vulnerability to the company and more broadly to society. And I think what comes out of this, hopefully, is a recognition that that kind of work for a while but we all knew that there was something maybe not quite right around just the great inequalities that we have in our system. And ideally, on the other side of this, we actually address those in a substantive way and start to think about what models look like that actually provide for the well-being of employees that aren't necessarily as much at risk as we suddenly found them to be during this crisis.

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

Bonham: Thank you. Appreciate the time.

Saldanha: For Morningstar, I'm Ruth Saldanha.

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Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.


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