Responsible investment

Ashleay: Welcome to the “In Your Interest!” podcast. My name is Ashleay and this week I'm joined, as usual, by my chief strategist colleague Sébastien Mc Mahon. We'll be talking about responsible investment with David Caron, who is a director and portfolio manager in North American equities. We will also be answering some of the questions many of you may have.

David: Hi.

Sébastien: Hello, David. It's great to be  here together. It's good to be talking about ESG, so responsible investment. It's a catch-all theme. But we wanted to have you on board here to explain exactly how we integrate that into portfolio management. So, can you give us maybe a primer of how, you know, at iA Global Asset Management, we're integrating the ESG risks into investment decisions?

David: Yeah. No problem. Just one thing I want to make sure, so, as a portfolio manager, we have a fiduciary duty to look at all the risks. So ESG integration aligns perfectly with that. So, we have all the information, the material risks are integrated into an investment analysis and decision making. So, just as an example, on the bond side, what they are doing, they have a report per company. And in that report there's a specific section. So, they have to include all the comments on ESG risks: it's part of the report. So, they are covering financial risks, credit risks and also ESG risks.

Sébastien: So ESG again, it's environment, social and governance. So, you know, is there a ranking system or information at least that's available to assess how good of corporate citizens are all of those companies which we invest in?

David: Yeah, so we use internal research. But just as an example, on the equity side, what we do: we use ESG rating agencies, like MSCI and Sustainalytics. So, when companies are performing badly in terms of their industry or their peers, so what do we do? We penalize them in our valuation models. So, it makes it more difficult to add them to our investment portfolios if they are performing badly. So, this approach, obviously, it covers all the integration of ESG risks in our investment decision process. We prefer to use that method instead of using negative filters, because negative filters will just reduce our investable universe. We prefer to have more flexibility and have the ability to look at all the companies.

Sébastien: That’s a very important point here. So, it's not an exclusion process. It's not that if you don't score high enough on ESG factors, we will not invest in you. It's more about raising the bar for an investment in a firm that is not scoring as strong on the ESG lens and being active, you know, the fiduciary role here, trying to influence that company through your position with your investments.

David: Yeah, exactly. So, just to make sure that we have some improvements from companies, we do engagement also. And there’s two different ways to do engagement. So the first one: every year, companies, at their annual general assembly, we have to vote on many different things. So, we have to, on our side, in terms of fiduciary duty, we have to vote. So, we do thousands of proxy votes annually and always with a sustainable approach. So, it makes a meaningful impact on companies, with that vote. And also, the other way that we are doing engagement with companies, it's with a meeting with management teams. So, we meet with the companies. We want to make sure – as I mentioned before, we use rating agencies – we want to see their score improve over time. So, we make sure that we communicate our expectations to the companies.

Sébastien: Can you maybe, just before we move forward, just define what the proxy vote is? What’s the process there?

David: Yeah. So, every year, there’s a list of questions that we have to vote on. So, we have to vote for or against. And there's many things that it covers, obviously governance, so you have to elect the board, but also you have to vote on specific things, sometimes that are clearly related to ESG, so, in terms of environmental impact on the companies, in terms of compensation... it's many different votes that we have to do.

Sébastien: But the concept is that when you hold one share of a company, you have the right to one vote for all of those questions when the annual assembly comes and all of those things. And, you know, if clients invest in funds, well, the fund buys the shares for them. So, the fund manager has all of those voting rights. So, the idea is that we use this position of, uh, not position of power, but of influence to steer these companies in the right direction on the behalf of our clients.

David: Yeah, exactly. So, we have a voice to make sure that things evolve over time for companies.

Sébastien: Okay.

Ashleay: And is it true that investors have to make a trade-off between their values and returns when investing in an ESG fund?

David: I don't think there's a compromise to do between performance and ESG criteria. It's a misconception. So, there's no trade-off. In fact, when you think about that, when you consider ESG risks, you have a better picture of the companies that you have to invest in. And also, when there’s a risk, most of the time there’s also opportunities. So, our ESG approach also gives us some new investment ideas. So, we have the full picture of a company in terms of risk and in terms also of opportunities that we can generate.

Ashleay: Okay. And you've launched the Canadian Sustainable Equity Fund in 2022. Broadly speaking, can you describe the makeup of the fund and what you seek to accomplish with it?

David: Yeah. With the fund, what we want to make sure is, we want to emphasize the need for industries or companies to innovate for sustainable development. So, we invest in ESG leaders – that's the main part of the portfolio – but also we want, with that fund, to offer a unique approach to sustainable investment. So, there’s a thematic part also to the portfolio. So, it's ESG leaders, and if you have a company that is producing or doing something for carbon capture, we want to make sure that also we can invest in innovation in the portfolio. In the end, obviously, we want the fund to outperform our index. So, we want to have a good fund that is also having a strong risk adjusted return. But it's all part of that: having good performance and also a tilt to investment in sustainable development.

Ashleay: Okay. And can you give an example of a sustainable investment theme that you're working on and you have exposure to in your portfolios.

David: Yeah, okay. With my colleagues – we started last year – we work on an investment theme that is called energy transition. But energy transition is obviously covering a lot of things. So, we have like, greening the grid. That means that you have to probably remove some coal in terms of the energy production to probably replace it with renewables. You have to look at electrification, so, more electricity, more infrastructure, better infrastructure. So it's another theme, and also decarbonization. So when you look at that, energy transition for us, that means that you have to look at companies that are improving energy efficiencies, that are developing new technologies and also changing their consumption patterns. So it's creating a lot of new investment opportunities in the portfolios. Maybe just an example of one company that we bought last year: it's a large manufacturer of electricity transformers. So already it's very much part of the transition team. And we bought that company because obviously there's an increased need for electricity, and there was also at the same time a shortage of transformers. So, the impact on pricing was very important. So, we bought the share, we invested, and also the rising price of transformers increased the revenue of the company and the profits at the same time. So that investment was really a big creation of added value last year for our portfolios and strategies.

Sébastien: Maybe this is not in Canada, maybe I'm mistaken here, but because of the weight of energy in the investment landscape, we tend to think about like those energy plays here on the ESG front. Do you have also some other examples of things that you've looked at in the past on the social and the governance aspect?

David: Yeah. On the social side, we have a clear example of that. We have a company in our portfolio that is providing payment solutions for people working let's say for Uber or DoorDash to have access to what they gain instantly. So, most of the time you have people that don't have necessarily access to all the banking products. So that way they have access to credit cards and also they have access to be instantly paid for their services.

Sébastien: Okay. But also you look at rankings, like the factors that you look at when you screen companies, like gender parity in the board, upper echelons of management, you know, how they're treating the environmental issues, equity, diversity, inclusion, those are all of the factors that you look at when you make an investment.

David: Yeah. And there's also compensation that is a big part of that. We want to make sure that the management is well aligned with us in terms of ESG risks or other things like that.

Sébastien: Okay, okay, good.

Ashleay: Great! And in conclusion, David, what is your outlook for ESG in 2024?

David: Obviously, this year, it's a big year. It's an election year in the US. So obviously we think that there will be probably some political noise, some anti-ESG narratives that will probably increase this year. It was the case last year in 2023, but this year it's particular with the US elections. At the same time, we think that there are limitations to how much politicians can push back on the current ESG integration process by US investors. So yes, there are uncertainties, but at the same time, we think that there's a limited downside also for investors.

Ashleay: So that's all for today. Thank you, David, for explaining the key components of responsible investment. And thank you also to our listeners. Please don't hesitate to reach out if you have any questions. And we'll see you all next week. Loved this podcast? Want to know more about economic news? Follow our “In Your Interest!” podcast, available on all platforms, visit the economic news page on ia.ca or follow us on social media.