The evolution of ESG: inside Canada Life’s fresh approach to responsible investing

New report provides an eye-opening look at the growth of ESG

The evolution of ESG: inside Canada Life’s fresh approach to responsible investing

Think responsible investing is a niche concern? It’s time to think again.

It’s been a slow evolution – picking up pace over the last 50 years or so – but the wealth sector has now reached the point at which responsible investing is now seen as a critical component of the investment process. Catalysts such as climate change risks, a shifting regulatory environment and growing awareness of social inequities mean that investor demand for environmental, social and corporate governance (ESG) is at its highest ever.

News to some? Possibly. But it’s certainly not a surprise to Canada Life. It’s something they’ve put in the spotlight in their new report ‘No Longer Niche’, which is an eye-opening look at the increased popularity of ESG.

“Over the last few years, we’ve seen a migration from merely fund managers paying lip service to ESG and maybe having a few ESG factors integrated,” reflects Tyler Wiley, Canada Life’s Assistant Vice President of Investment Funds. “We’ve really seen  an increase in the number of fund managers adding ESG into their investment process. A few years ago, there wasn't much – but as ESG has become more prevalent in the industry, we're seeing more dedicated ESG teams, more people with ESG responsibilities embedded within their investment teams and more ESG systems and processes being put in place.”

This growing interest is certainly reflected in the stats. One of many impressive figures listed in the report reveals that net assets in ESG mutual funds and ETFs in Canada alone have quadrupled since 2011, reaching over $20 billion in 2020. And the benefits are plain to see: research suggests that companies with strong responsible investing credentials tend to be more resilient during market crises, and it also enhances the investment process to create the potential for stronger and more stable returns.

All of which means that ESG has become an integral part of Canada Life’s investment review process.

“ESG integration is really something that we've always looked at as part of our qualitative review of our fund managers and funds,” explains Brent MacLellan, Vice President, Portfolio Construction & Analysis. “In fact, we've had a semi-annual proprietary ESG questionnaire that we send out to our fund managers for a few years now.

“There are a few reasons why we recently enhanced our ESG review specifically. First, we're seeing increasing demand from advisors, consultants and clients to have a better understanding of how ESG analysis is used within our funds. They want to know who's best in class and who's not incorporating ESG that they may want to avoid.”

“There are lots of different definitions, obviously, of responsible investing,” adds Wiley. “One of them is ESG integration. This is where the funds integrate ESG factors into their traditional investment process to seek financial returns. This is the focus of our proprietary ESG review. We want to make sure that our fund managers are analyzing all relevant factors as part of the investment process and risk management. Funds don't need to be labelled sustainable or ESG to incorporate ESG factors. In fact, all the fund managers on Canada Life's curated platform incorporate ESG into their investment process in some way. But it's on us to determine who does it best and the degrees of efficacy of their ESG integration.”

With the growing demand for responsible investing Canada Life is focused on providing Canadians with the financial solutions that meet their needs, including enhancing their managed solutions offering by adding Canada Life Sustainable Portfolios – three sophisticated strategies designed to help clients responsibly invest in a way that aligns with their values.

The Canada Life Sustainable Portfolios look to invest in companies with strong ESG practices that align with investors’ values, maintain performance focus by drawing on multiple sources of return, and leverage the strength of powerful partnerships with investment experts who navigate the portfolios through changing markets, while also ensuring they stay in sync with investors’ objectives, risk tolerance and values”.

It’s a progressive and forward-thinking move in a world where ESG is not only becoming more desirable but increasingly essential. As MacLellan puts it: “not all risk factors are on the financial statements. There are other risk factors that ESG can provide the fund manager the lens to be able to identify.”

Indeed, a look through the report reveals some wince-inducing examples of how ignoring ESG can put investors in peril. Companies can incur financial and legal penalties, loss of valuable equipment and licenses, brand damage and supply chain disruption – such as Rio Tinto, who received a blow to their reputation in 2020 when they knowingly destroyed sacred Aboriginal rock shelters in Western Australia in order to mine iron ore. This led to them underperforming their peers by more than 6% in the months that followed – a figure that no investor wants to see.

Back to a more optimistic note, however – what future developments can we expect in the field of responsible investing?

“Europe has really led the way on ESG regulation since the signing of the Paris agreement,” says Wiley. “Industry bodies in Europe have been working to develop guidance for firms who want to engage with sustainable investments or other financial instruments.”

“But there's stuff happening in the US too. President Biden has an ambitious policy platform on climate supported by the Federal Reserve, which recently joined the global Central Banks Network for greening the financial system. ESG regulatory changes will be necessary to support that.”

“Closer to home and in Canada, we can expect similar regulations to come here as well. Key players are already asking for the industry to measure and disclose their ESG factors by leveraging existing standards. So we’re expecting those standards to come to Canada – and we want to be ready and waiting for them.”

The ‘No Longer Niche’ report from Canada Life is available here.

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