Canada’s institutional investors double down on sustainable investing amid COVID-19, report shows

The steel mills in the Hamilton, Ont. waterfront harbour in October 2018. The Canadian Press/Nathan Denette

Canada’s institutional investors plan to double down on sustainable investing in the wake of the COVID-19 pandemic, according to a report by financial-consulting firm Millani. 

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In a survey of 23 pension funds and wealth managers representing $2.3 trillion in assets under management, 74 per cent said they believe the pandemic will have a positive impact on environmental, social and governance (ESG) investing. Sixty-five per cent of investors said they expect companies to disclose more information about ESG risks to their business, while just four per cent said they expect disclosure to decline. 

Talking Point

Of 23 institutional investors with more than $2.3 trillion in assets under management, 74 per cent believe the COVID-19 pandemic will have a positive impact on environmental, social and governmenance (ESG) investing, with 65 per cent expecting companies to disclose more information about ESG. The survey conducted by financial-consulting firm Millani follows strong quarterly growth in ESG investing compared to traditional funds.

Milla Craig, founder and president of Millani, said the firm conducted the survey—which included the Caisse de dépôt et placement du Québec, BMO Global Asset Management and several other large pensions that asked not to be named—in part because corporate clients were wondering whether investors would lose interest in ESG and focus instead on more immediate impacts of the economic crisis. “We’re seeing that, no, actually, there’s going to be an expectation of improved disclosure,” Craig told The Logic. “The number one thing for all these investors is performance, but it’s not just financial performance anymore—it’s whether you are able to measure the impact of your investments, as well.” 

The pandemic has hurled the markets into panic. In late February, stock markets worldwide reported their biggest one-week drop since the 2008 financial crisis. Volatility continued through March as governments issued lockdown orders, factories shuttered and companies began masses of layoffs—March 9 marked the biggest single-day drop in Canadian stocks since the crash of 1987. A crash in oil prices triggered by disputes between Russia and Saudi Arabia compounded the sell-off. Investors flush with ESG holdings, however, have avoided some of the carnage in the markets this year. An analysis by investment research firm Morningstar found that 73 per cent of ESG funds in Canada outperformed traditional funds in the first three months of 2020; ESG investments for the quarter were also higher than all of 2019.

The oil-market crash that has coincided with COVID-19 explains some of the high performance among ESG funds relative to other exchange-traded funds, said Ian Tam, director of investment research for Canada at Morningstar. “But that isn’t the only reason,” he said. Even ESG funds with exposure to the energy sector outperformed their traditional peers; they also fared better than global equity funds, which tend to have low exposure to oil and gas. 

“One of the biggest issues for many of the funds is they want to [invest], but the question is where? Where do we put this money?” said Craig. “Right now, capital is scarce, and you’re going to need to work really hard if you want access to capital or you want to keep your cost of capital low. Given the flows of funds going into ESG—it’s the game in town—you better be disclosing.”

Some investors who responded to Millani’s survey noted renewed interest in the “social” aspect of ESG in particular, which includes issues like worker protection, health benefits and supply chain sustainability. “Investors are getting information they didn’t get before with regards to the fragility of supply chains and certain employment arrangements,” said one respondent. “This will be something that we will probably ask more questions about.” 

The report also predicts heightened interest in impact investing, which differs from ESG in that the investment is designed to address social or environmental issues, rather than just considering them in companies’ operations and risk assessments. “Stakeholders may start to ask deeper questions about the end goals of their investments … looking at how investment decisions affect communities and employees,” the report reads. “This added pressure from clients will influence the wider financial community to reflect more deeply on the purpose behind investing and how investments can make positive impacts on society, along with delivering returns.”

Kathryn Wortsman, managing partner at Amplify Capital, a Toronto-based impact investing fund, said its portfolio has benefitted from the pandemic overall. “When we created our investment thesis four years ago, we said we want to solve for three big buckets: clean energy, health and education,” said Wortsman. “If you look at what the government is spending on today, it’s education and health.” The fund is now planning to go to market with four portfolio companies—in the digital-health sector, online education and cleantech—in the next month, after seeing their businesses surge since the start of the pandemic. Amplify itself is also raising its second fund. “Our existing investor commitments were pretty adamant that we close,” said Wortsman. “I’ve been able to keep up fundraising during this time as investors are telling me, ‘We’re putting all investing on hold except impact investing.’”

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Tam noted it’s hard to make long-term predictions of whether companies will retool to satisfy investors’ heightened interest in ESG based on one-quarter of deal activity during a pandemic, but he said it’s not hard to fathom. Craig, meanwhile, sees the government’s criteria for pandemic relief funding as a sign that ESG considerations could become a regulatory requirement rather than a choice. When Ottawa announced $300 million to help large corporations weather the pandemic, it required applicants to report climate change-related risks to their business and set restrictions around share buybacks, dividend payouts and executive pay. “It’s communicating to the investment community and the corporate community how this particular government expects to build back the economy,” said Craig.