Trends in sustainable investing in 2023

Ashleay: Welcome to “In Your Interest!” podcast by iA Financial Group. My name is Ashleay, and today we're diving into a hot subject, ESG. We actually did a podcast on this on July 5, and we got a lot of questions. So, we are going to try and answer as many of them as we can with a very special guest we have today, Maggie Childe, who is VP, Head of Sustainable Investing. We also have Sébastien Mc Mahon, our Chief Strategist and Senior Economist here at iA Financial Group. So hi, Maggie. Hi, Sébastien. Happy to have you guys here.

Maggie: Hi, Ashleay. Nice to be here. And just so you know, I think you're special, too.

Ashleay: So, Maggie, tell us a bit more about your background. What does the Head of ESG do on a daily basis?

Maggie: Yeah, sure. So, I arrived at iA last year, and my role is Head of Sustainable Investing, which really means that I'm building out a program of ESG within the investment team at iA, and I'm a specialist in ESG. I've been doing this for ten years plus, and that's on a background of a career in finance as well.

Sébastien: So, maybe for the laymen out there, the ESG, they’re criteria. So, they’re things that we'll look at to, for responsible investment. So, we're asset managers. So, we want to invest in a sustainable way and have a positive impact on the planet and society. And ESG, they are criteria that we look at. So, people think ESG often like the “E”, the environment part. How important are the “S” and the “G”, the social impacts and the governance impacts according to you?

Maggie: To be honest, I don't see them really as being separate. I think that they're very much intertwined. So, if there is strong governance at a company, chances are it has strong human capital practices; it has strong practices for its environmental footprint as well as well. So, these issues are very much intertwined, and I think that they're all equally important. At the end of the day, you can have risks and opportunities that can appear over time within a company on any one of those areas.

Ashleay: Absolutely. And I think that these are things that we might not see at the end of the day on our charts and whatnot. But they are just so important, though, for the company in general and for the planet in general. So, these are things that we must take into account. Maybe you could explain a little bit more about sustainable investing and why it's so important.

Maggie: Sure. It's a complicated question, but maybe what we could do is start with a definition of sustainable development. And one of the reference points for defining that comes from the Brundtland Commission. They had a report in 1987 that basically said sustainable development is really about ensuring that the needs of today's generation don't compromise the needs of future generations to really get what they need as well. But that's where it becomes complicated, and I'll tell you why and I'll bring it back to sustainable finance and why that's an important part of the puzzle here. So, if you think about, and Sébastien, this is something you're going to be familiar with. If you think about two really important fundamental concepts within finance is this idea of stock and flow. And we're really good at measuring flow. GDP is a measure of flow.

Ashleay: And what would GDP be for our listeners that don't, that aren't familiar maybe with the. term?

Sébastien: Gross domestic product. So, the value of everything that's produced in the region in a given period.

Ashleay: Right, right.

Maggie: Whereas we're less good at measuring stocks, what is the natural capital stock that we have, human capital stock that we have? And so, when it comes time to measuring all of the value that comes with ecosystem services, for example, we're missing those signals that we have from the financial system. You know, the supply and demand signals, the buy-sell offer that we have, which makes it very challenging to quantify and measure stocks. So, that's really where finance and sustainable finance more specifically comes in in that it's an effort to try and measure the sustainability of those flows over time, including all flows—which right now we're not doing. So, we're not really including things that are considered to be externalities to our financial system, like natural capital, like human capital, like intangible goods.

Ashleay: I see. There's a term that keeps coming back: greenwashing. What is greenwashing? Can you define that for us?

Maggie: Sure. So greenwashing is definitely one that has come to the fore over the past couple of years. And I think it's partly because there's such a big interest in demand for sustainable development or investment that has grown. There's many, many different approaches for sustainable investing, and there's a lot of different terminology out there. And what we see is that the offering documents or the marketing documents from investment managers, for example, can get confusing for the investor and they can be tagged as greenwashing whereby they are giving information that is incorrect or unclear, is misleading. For example, on the practices that they're employing, on the type of return or the product itself, the criteria that they use and so on. So, that's really kind of what this greenwashing term means in our space. I think that it's really important to understand that it's very challenging to address some of these ideas that we just talked about to try and properly evaluate and consider externalities and to make changes towards a more sustainable development practice. So, it's not like ESG is going to be a quick fix when it comes to making all of this happen. But I think we definitely need more transparency, which is why the regulatory focus on greenwashing is a good thing.

Sébastien: So, sustainable investing is investing responsibly, thinking about the future, thinking about the impact of our activities on other firms, on other people on the planet. So, this is important enough that there are now heads of ESG. There's one here at iA, yourself. Is it a common practice to have heads of ESG in the industry?

Maggie: Absolutely. Yeah. I would say that all of the big investment firms nowadays have a head of ESG. And what does a head of ESG do on a daily basis? So, my job really from a day to day, consists of working directly with the investment teams. We are one team and I am really trying to help elevate their knowledge and understanding of these issues. So, that can be through giving them the tools that they need, to give them the references that they need to properly integrate ESG factors into their investment program.

Sébastien: When you mentioned the tools, what kind of tools are you talking about?

Maggie: So, for example, if you're looking at your investable universe and you want to easily kind of identify the red flags, you can use different data, the ESG data, to help you screen or analyze your investable universe. That would be a tool you could use.

Sébastien: Okay. So, your job is to establish, let's say, the how to make the vision of the company a reality so that it's not just, you know, principle. Let's say we're you know, we're sensitive to this and that, but we're actually doing something about it. Then you're laying out the program. Is that the correct way to put it together?

Maggie: Yeah, I would kind of describe it basically as a three-pronged approach. So, first of all, we're developing those tools for the analysis before you do your investment to analyze all of the relevant factors. That includes these ESG factors we've discussed. Secondly, you go on to monitor your portfolio over time to look at those. Are there any flags that you need to be aware of and that can lead into the third prong, which is really about stewardship, being a good steward of those investments over time, and that is focused mainly on engagement with companies as well as voting for equity owners.

Sébastien: So, it's not just that, you know, as investors, we're aware of these and we have them in mind. We're actually doing something about it. The there are some firms out there that advocate, you know, let's not invest in energy because energy, let's say oil production, is polluting. That's an approach. That's not the approach that we have at iA, though, right?

Maggie: Well, I would say generally there's many, many different approaches that can be had or taken. And it depends whether you're talking about an approach that applies to all of your investments, which is ESG integration. And that's what we've been talking about and engagement as well. And in my view, any good manager should be doing those across all their investments. And then there are some approaches that apply more specifically to an individual preference of the investors. So, you might apply, for example, a negative filter on your investable universe. And that's what you're talking about, Sébastien, where you would maybe carve out certain investments that you don't want to be in, like high-carbon-intensive industries, tobacco, you know, arms manufacturers and so on. Another approach might be, for example, and this is really getting into ESG fund construction. Another approach might be where rather than having a negative filter, it's more of a positive filter. So, you're looking at all of the ESG factors for a given company, a given investable universe, and you're looking at which companies within their universe or within their industry are better performers, and you're selecting those companies that are the better performers in their industry. So, that would be like a best-in-class approach. And then a third approach, and that one's more focused on what are the practices and the programs and policies of a company. The third approach might be more focused on what are the activities of the company. So, does it have a business model that is more fundamentally sustainable, like recycling of waste, for example? Does it derive a certain amount of revenue from those activities? And you can direct your investments into those areas. Typically, that type of fund would focus more on environmental issues, green activities.

Sébastien: And we hear a lot about impact investing where, you know, as fund managers we manage people's money, but we have to buy stocks from companies and that gives us actual voting rights for the assemblies of these companies so we can influence them to become better corporate citizens.

Ashleay: Yeah. And increase accountability basically on those.

Sébastien: Yeah, exactly. So, do you have a vision for where we'll be in five to ten years?

Maggie: That's a really good question. No one has a crystal ball. I think that there is increasingly a desire to have a forward-looking outlook on investments, which is why sustainability is really coming to the fore. And I think that there's going to be more of an integration and kind of an. understanding of the scientific basis for a lot of what we're talking about. So, just recently, for example, you may have heard of the Paris Agreement. So, that agreement sets a global target to keep the global average temperature well below two degrees, preferably 1.5 degrees by the end of the century. So, that's a global target that we have related to climate change. Recently with COP 15, we have now a target that relates to biodiversity and we're looking to maintain at least 30% of our natural resources, our forests or our seas and so on, to be pristine, to be preserved. And that now gives us a global target for biodiversity. So, I think we're going to see more of that area coming forward. I think it's just going to get more technical; it's going to get deeper into the subjects at hand and there will always be a need for sustainable investing. experts.

Sébastien: You know there's a demand for responsible investing. When you look at the younger generations, the millennials, I mean, they want their money to be invested in a responsible way. So, as an industry, we need to make sure that we represent the wishes and the preferences of our clients. So, likely that's going to be taking more and more and more space in the investment industry over the coming decades. Let’s hope.

Ashleay: Absolutely. So, Maggie, Sébastien, thank you both so much for your input and for those listening to us. Please don't hesitate to share and ask us more questions. You see, it gives us these beautiful podcasts to listen to afterwards. So, we'll see you all next week. Maggie, Sébastien, thanks again and have a great day.

Maggie: Thank you so much.

Sébastien: Thanks.

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