The entry of major institutional investors, such as pension funds, into the realm of social responsible investment is having an impact on the behavior of some companies.
In the 20th century big business was strictly business. But in the 21st century companies can’t stay in business if they’re ignoring the environment, hushing talk of human and labour rights or not returning calls from shareholders who want to know what the board is doing and why.
Socially responsible investors are no longer on the fringe of the investment world. Where 10 years ago talk of ethical investing drew smirks and rolling eyeballs, today it’s a top-line concern of boards, CEOs and CFOs.
“The huge difference (compared to 10 years ago) is that we’ve seen acceptance in the mainstream,” said Michael Jantzi, CEO and founder of Jantzi Sustainalytics.
On the environment, social issues and governance, corporations now see non-financial issues, once considered “externalities,” central to running a successful business in the long term, said Jantzi, who established Canada’s socially responsible investing (SRI) stock index — the Jantzi Social Index — in 2000.
“We’re only going to see an increased level of interest in these issues.”
Particularly on the environment, corporations now regard the risks as anything but external, said Social Investment Organization executive director Eugene Ellmen.
“The BP disaster really was a wake-up call. It was a wake-up call for the mainstream industry,” said Ellmen.
SRI investors knew BP was running risks in the Gulf of Mexico long before it happened and avoided the stock. Investors who ignored the environmental risks paid the price.
The investment industry in Canada is not the world leader in sustainable, socially responsible investment.
With 13 separate jurisdictions and regulators at the federal level opting for voluntary codes of conduct and optional enforcement, the global investment industry is setting the tone.
Two international covenants have become central pillars in the world of ESG (environment, social and governance) investing.
The Carbon Disclosure Project includes 534 institutional investors around the world representing $64 trillion in assets. The corporations and investment funds that subscribe to the London-based CDP are committed to researching and publishing the amount of carbon their business operations release into the atmosphere.
Four-hundred-and-eighty-five investment managers, 220 asset owners and 168 professional service partners with $22 trillion in assets under management have signed the United Nations-backed Principles for Responsible Investment. The stock market meltdown of fall 2008 didn’t drive the big investors away from ESG. The largest number of UNPRI signatories came on board after the crisis.
In Canada, the big public pension funds are leading the way. The Caisse de dépot et placement du Quebec, OPSEU Pension Trust, British Columbia Municipal Pension Plan and Canada Pension Plan Investment Board are all signatories to the UNPRI.
“On the Canadian scene specifically, I think we’ve got some great leadership in the pension community,” said Jantzi.
When the big pension funds call up asking about future environmental liabilities, Canada’s publicly traded companies respond.
“Institutional investors are continuing to press for more disclosure on environmental, social and governance issues,” said Jantzi. “And the companies are having to respond.”
Canadian regulators, particularly the Ontario Securities Commission, are beginning to set conditions that will make SRI standard practice. The OSC may soon require publicly traded companies to “say-on-pay.” The SRI community has long demanded that boards reveal how much CEOs and other senior management make — and disclose what incentives are built into their compensation.
Even without enforceable say-on-pay rules, ESG Services, working for Ethical Funds and its parent NEI Investments, has been researching how oilsands company CEOs are paid, and whether their pay is tied to reductions in environmental liabilities.
They’ve found that the oilsands bosses get paid even if nobody knows how much it will cost shareholders to clean up vast tailing ponds or compensate native communities for downstream health outcomes.
For private investors — people who typically buy mutual funds at tax time — the chance to influence corporate Canada on the environment, social issues and governance has expanded exponentially in a decade. Where once persistence was required to persuade a financial advisor to sell an SRI mutual fund, now all the big banks offer socially responsible funds.
There’s also been a series of buy-outs of smaller SRI mutual fund companies that have made the funds more easily available. Where Ethical Funds were once only available at some credit unions, they’re now sold through Desjardins Bank and the independent brokers that deal with Northwest and Ethical Investments (NEI).
Acuity mutual funds are now similarly available through the much larger distribution network of AGF Management Limited.
“It puts the socially responsible mutual fund companies on more equal footing,” said Jantzi.
While the funds are more available, it doesn’t mean that they’ve been impressing investors with great results.
“The industry has been somewhat disappointed,” said Ellmen.
The JSI has struggled to keep pace with conventional stock indices since the 2008 meltdown.
“I don’t put too much stock in short-term results,” said Jantzi. “The financial sector continues to struggle and we’re heavily weighted in the financial stocks.”
Holding considerable bank and insurance stocks means holding less in oil or gold mining — the resource sectors that have kept Canadian stock exchanges afloat the past two years.
Even with disappointing recent results, Canadians continue to be interested in ESG factors in their investments.
Social Investment Organization polling suggest 70 per cent of Canadian investors want more information about socially responsible investing, said Ellmen. With between two and three per cent of Canada’s pool of mutual fund money invested in SRI funds, there’s “huge room for growth,” he said.