WP award nominee explains client-driven shift toward ESG focus, and commonly held myths that must be dispelled
It has been just over a year since 181 CEOs from the U.S.-based corporate coalition Business Roundtable released their statement of corporate purpose, marking a shift away from shareholder primacy to a more multi-stakeholder point of view. By taking into account the interests of other stakeholders such as their customers, employees, and the communities they operate in, the signatories said corporations would be better able to deliver on their promise of delivering long-term value.
That kind of thinking has helped drive Matteo Tino, investment counsellor at RBC PH&N Investment Counsel, to make ESG a cornerstone of his practice.
“Ultimately responsible investing, or investing with ESG principles, is really just about investing in good businesses that tend to operate with a purpose greater than profit,” Tino told Wealth Professional. “I think it's always been part of my practice but really, what made it a focus was client- driven.”
Tino is among a handful of other advisors that have been nominated for Advisor of the Year – Responsible Investments at the WP Awards this Thursday. An annual industry affair, the awards will be held for the first time ever in a virtual format, giving attendees an opportunity to experience the event’s glitz and glamour in a fully digital fashion.
“Around three or four years ago, we had some very large, ultra-high-net-worth families that were looking for ESG-specific strategies,” Tino said. “As we started to build those out for those individuals and families, we started to understand more about the merits and the benefits of responsible investing strategies.”
That also provided an opportunity for Tino to appreciate what his institution was doing to incorporate responsible investing across the platform. With that awareness, he and his team started to gravitate towards those strategies, making them a larger part of their business over time.
Currently, he said there are two motivational buckets into which his clients can be classified. The first category, which falls squarely under the socially responsible investing umbrella, includes clients who don’t want to touch certain investment categories associated with certain negative impacts. Most top-of-mind among the majority of investors are environmental themes like global warming, which has informed their convictions to avoid sectors like fossil fuels, mining, and materials.
“More recently, social issues seem to be gathering a lot more attention, and so clients are interested to learn about how companies are investing in things like employee health and safety, policies around workplace equality, tackling racism,” he said. Certain clients are also keen to purge their portfolios of sin stocks with exposure to themes and industries such as tobacco, firearms, gambling, and adult entertainment.
More broadly, he said many clients look at ESG investing as simply a way to take a long-term view. These clients, he said, don’t necessarily hold specific values or convictions with respect to ESG, but just want to ensure that they’re investing in good, quality companies that will be around decades from now and are aligned with their own ethics and morals.
He said clients who are active in ESG investing tend to also have philanthropic interests, though they aren’t out to lose money. Rather, they seek to ensure the companies in their portfolio exhibit sustainable success and mitigating key risks, while making sure they do the right thing.
“It’s estimated that US$534 billion of market cap in the S&P 500 was lost to ESG controversies over a five-year period,” he said, citing an analysis from Bank of America Merrill Lynch. “It's not just about values and convictions; it's also about making money, to be fair. It’s about balancing both sides.”
Beyond fulfilling their own financial goals, ESG investment is also supremely satisfying for clients who hear about companies being driven to change as investors, including themselves, use their dollar-voting power to engage with or divest from them. And because of the strong focus on sustainable investing at RBC PH&N, Tino said almost every one of his clients has strategies that very actively incorporate ESG, whether or not they themselves are aware of and intentional about responsible investment.
“We have a team and we have policies around sustainable investing and incorporating ESG integration across our entire asset management platform,” he said, noting efforts toward integration on both the fixed-income and equities sides. “When it comes to helping clients engage with ESG, it's really about integrating strategies in their portfolio or incorporating strategies in their portfolio, where the management team is very active in the incorporation of screening for ESG-based criteria.”
This is where one widespread myth around ESG investing gets dispelled. While the exploding popularity and media coverage of ESG might give people the impression that it’s easy, Tino said it’s a very involved process. It entails looking not just at traditional quantitative financial measures of success, but also examining qualitative characteristics that define companies’ view on overall stakeholder capital.
“There are a number of ESG index providers and they all do a decent job, but there's inconsistency,” he said. “I think to really understand the environmental, social and corporate governance criteria of any one company requires in-depth, thoughtful analysis. Through things like speaking to management, site visits, speaking with customers and vendors, talking to local communities … that's where you really start to understand the business.”
Another misconception, Tino said, is the idea that ESG investing is an exclusionary process that leads to lost investment opportunities. While that might be true of socially responsible investing, he emphasized that their goal in ESG investing is to find good companies that don’t just pass muster based on quantitative data, but also reflect well on a range of qualitative factors. He said that requires intensive work and research performed by a lot of people, all of which bears fruit in the form of good returns, strong risk management and client satisfaction.
“To us, it makes sense. Our clients are wealthier. They also tend to be older, retirement saving, and long-term investing is one of their goals,” Tino said. “The sustainability of the business itself becomes very important, so I think if you're not paying attention to that, in my opinion... Then you're not really investing.”
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