Environmental, social and governance (ESG) factors are important to the investing choices of The Logic’s subscribers, our November survey has found.
Fifty-four per cent of respondents said ESG is significant to their investing decisions. Twenty-one per cent said it is very significant, while 33 per cent said it is somewhat significant.
“When not superficial, they illuminate deeper insights into how the product/service/company relates to the world, which is critical to making an informed investment decision,” wrote one subscriber.
Amid escalating climate change warnings and growing awareness around social inequality, ESG investing has risen to about 25 per cent of all professionally managed assets globally; 93 per cent of the 250 largest companies by revenue now report their sustainability results.
ESG factors include a company’s environmental sustainability, treatment of workers and board diversity. Investors are increasingly considering those measures in their risk assessments of companies and, for those that don’t meet the bar, work with them to improve their policies.
Canadian institutions have been part of the movement. In May, the Bank of Canada released a report that for the first time warned of how climate change threatens “both the economy and the financial system.” Thirty-nine Canadian organizations, including the country’s big banks and institutional investors, have signed onto the Task Force on Climate-Related Financial Disclosures (TCFD), a global initiative spearheaded by Bank of England governor Mark Carney to mitigate climate change’s impact on the economy. And in 2018, the federal government convened the four-person Expert Panel on Sustainable Finance, meant to ensure that companies transitioning the country’s economy to a low-carbon one are getting money.
But some subscribers aren’t convinced.
“I don’t trust ESG measurements,” wrote one respondent.
Another said, “The business of business is to make money for shareholders while complying with laws and regulations.”
Fiduciary duty is a common concern among those skeptical of ESG disclosure. According to a survey from the Canadian Securities Administrators, one issue is that “some of the demand for climate change-related information is driven by considerations other than investment considerations, and therefore may not be aligned with the interests of shareholders.”
The expert panel tried to address that concern in its final report released in June, which states “sustainable finance must become, simply, finance” if Canada is to meet its long-term goals. Among its 15 recommendations, it suggested clarifying “the scope of fiduciary duty in the context of climate change,” as well as embedding climate risk into the country’s financial system.
The lack of standardization in ESG measures is also a barrier to progress among firms. A recent report from the magazine Euromoney details the issue, looking at how, despite the attention their industry receives, sustainable finance bankers worry the sector remains niche, and that change isn’t happening quick enough. Their suggestions include mandating the recommendations of the TCFD, which uses 15 climate metrics on which organizations can report.
But The Logic reported in June on how those measures themselves are difficult for firms to implement because climate-risk metrics aren’t standardized across industries. Several international regulators are working on solving the issues, including the European Commission, aiming to pass laws on ESG disclosure. In Canada, groups like the expert panel recommended doing the same for an approach specific to the country’s needs.
The results are from The Logic’s November 2019 subscriber survey. A private link was sent to subscribers by email and the survey was conducted online. All respondents were kept anonymous and duplicates were removed as needed. For this survey, subscribers were asked, “How significant are ESG factors in your investing decisions?” Their choices were: very insignificant, somewhat insignificant, neither significant nor insignificant, somewhat significant, very significant, I don’t know.
The TCFD is gaining traction—the Canadian government, as well as the country’s five largest banks and six of its eight largest pension funds, are abiding by the standards. Companies are also finding other standards on which to align themselves, such as the Paris Agreement, which looks to limit global warming to less than 2 C above pre-industrial levels.
Many still share the view of one subscriber who wrote that in making their investment decisions, ESG is a factor—but “one of a large number.”