More investment decisions will integrate ESG Factors

An interview with Brian Minns, CFA, Manager, Sustainable Investing at Addenda Capital.

Q: Has the COP21 in some measure increased the pressure on companies on issues relating to carbon emissions?

Brian Minns : Yes, the Paris Agreement is sending a strong signal to companies that global governments are going to take action to reduce greenhouse gas (GHG) emissions globally. So while it doesn’t have a direct impact on companies right now, it is an indication that governments around the world are taking this very seriously.

And then there are some knock-on events. For example, the Financial Stability Board chaired by Mark Carney launched its initiative to look at better disclosure from companies on gas emissions and climate-related risks. The task force is going to figure out what sort of information are investors perhaps lacking from the organizations that they are investing in. A few voluntary initiatives have emerged around climate-related data and this task force will try to reconcile them. The Task Force on Climate-related Financial Disclosures is expected to deliver specific recommendations by the end of 2016. From there, different countries will eventually be responsible for pushing new disclosure schemes to their capital markets.

Q: What will be the next step this year?

B.M.: Coming up on April 22nd we will watch and see if the Paris Agreement is ratified by enough countries and comes into force. That’s key. The U.S. has already signaled that they will ratify it so it would be surprising if the Agreement doesn’t come into force on the first day that it’s available to. The playing field for companies around the world is going to change because basically the reporting countries do on GHG is going to improve.

Q: What governance topics will be voted on frequently in the upcoming season of shareholder meetings?

B.M.: In the U.S, we will continue to see several shareholder proposals on what has been called Proxy access. Shareholders are seeking easier access to nominate their directors to the board, which is one of their fundamental rights. In the past, as a shareholder you could bring forward people you wanted included in the ballot but you would need a separate ballot. There is a big expense associated with that. A new model has emerged in the past couple of years. For example, shareholders representing more than 3 % or 5 %, who have held those shares for more than three years, can nominate directors representing 20 % or 25 % of the board. These nominees will actually get included on the circular that goes out by the company, reducing the cost barrier.

Q: Within the financial community, is it still sometimes difficult to convince of the relevance of ESG factors?

B.M.: I think there is a broad spectrum in terms of where people are at with regards to thinking about ESG factors or sustainable investing. It’s important to make sure that people understand we have moved on from the ethical screening side of things. We are now at an approach that incorporates these factors into investment processes with the intention of adding value, by enhancing returns or helping manage risks.

If you don’t call it ESG or SRI and just say here are some new ideas to look at when you make your investment decisions, and you can demonstrate through some quantitative analysis or through case studies that this approach can actually add value, people are receptive to it.

(Interview conducted on March 23, 2016)