For most investors, returns are purely financial — how much better off they are at the end of one period compared with an earlier period.
But for another group, returns are a mix, a combination of the straight financial return and the societal return, with the latter being the economic benefits generated from such an investment.
While those benefits flow and can be measured — even if the investor can’t capture them — some large investors now make environmental, social and governance (ESG) factors a core part of the investment decision.
Last October, for instance, the Caisse de dépôt et placement du Québec, which manages almost $300 billion of net assets, announced an investment strategy to address climate change. It covers its entire portfolio, part of a plan to make a contribution “toward a low carbon global economy and to seize profitable investment opportunities.” Some have described that approach as a triple bottom line: people, profits and planet.
Other investment managers have also put ESG factors at the centre of their investment decision: Addenda Capital, formed in 1996 and which at one stage was 100 per cent owned by the Caisse and is now part of the Co-operators, is one such manager. (There are others, many associated with insurance companies, that write and price policies that include climate change risks.)
Now Addenda has taken that focus one step further: the launch of an impact fixed income fund, its first and one of the first in Canada, with the goal to generate positive impacts while delivering market-like returns. It starts from the basis that “impact metrics are essential and can be measured.”
The fund, which holds about $8 million of investments, was set up last year when the client, a foundation spun off part of the portfolio, to focus on the themes of climate change, health and wellness, education and community development.
And it’s well-diversified, holding stakes in hospitals, in universities, in solar projects, in cities and provinces, that have issued green bonds, and in renewable energy companies. That portfolio generates a slightly higher yield than from the DEX Universe index, the local industry standard.
The immediate goal is to get other like-minded investors to pony up. Other foundations, union-based pension funds, public sector pension funds (such as universities and hospitals) and high net worth individuals — all of which have a broader investment mandate than financial returns — are the most likely.
“Investors want their dollars to effect good outcomes,” Roger Beauchemin, Toronto-based Addenda’s chief executive, said, adding “this approach gets asset allocation to the right places.”
But Beauchemin would like some help from the regulators, help that starts from his view that the “sustainability of an investment” is within the scope of fiduciary duty, a term used to describe the responsibility to act in the client’s best interests.
At Addenda, all investments are considered on their financial merits and on their ESG “risks and opportunities,” an approach which “makes us better investors,” Beauchemin said.
“That meets our fiduciary standard. We should broaden that fiduciary to include the ESG metric,” he added, noting for an investor with a long-term perspective the focus would be on those companies that have “a better attention to those details usually have a better outcome. They are all linked.”
Two years back, the Financial Services Commission of Ontario, which regulates pension plans, issued a report on whether — and how — ESG factors were included in investment decisions. It added this note: “An administrator should be cautious to ensure that its approach to incorporating ESG factors does not conflict with its fiduciary duties as may be the case with the use of ethical screens.”