ESG – What It Is and What It Isn’t
[Speaker name: Dominque Barker, Associate Portfolio Manager, CIBC Asset Management]
ESG stands for environmental, social, and governance. So they're three factors that we take into account that are qualitative in nature. So E, environmental takes into account for example the environmental risk that a company might be facing. Social might include, for example, supply chain management for an apparel company. And then governance is how the company is governed. So taking into account board structure, board diversity, compensation of management. We think that governance is the most important factor because you can't have a strong E or S without a strong G. I think there's a misperception that ESG means that we're going to exclude a number of investments and that's not it at all. That's something called social responsible investing where we put a negative screen. So for example no tobacco, no alcohol, no marijuana.
Evaluating companies using ESG factors
Each of the individual analysts at our firm who cover their own sector are going to rank all of the companies within their sector from an ESG lens perspective. We weight the E, the S, and the G differently depending on which sector. But on top of that as a portfolio manager and having an ESG overlay on an investment you can look at positive factors on ESG and how those may impact investment decisions. So for example in the energy sector if you had two companies that were valued identically but you had Company A that had a better safety record than Company B, when you are measuring and you're reading the corporate social responsibility reports and you're measuring things like safety you will therefore have a way to understand which company is better positioned such that when the valuations are similar between two companies you're obviously going to choose the company that has less risk in terms of safety.
What’s driving ESG demand?
We are starting to gain momentum and I think that's driven not only by millennials, which is certainly a factor in an older generation. People wanting to make a difference with their investments and feeling good about what they're doing. So that is driving the demand for ESG investing and also from an institutional perspective. What we're seeing is RFPs, or Request for Proposals, incorporating much more detail with regards to how ESG is integrated into our investment process. Another factor driving ESG investing is the fact that brand is taking a much bigger part of the value of a company and so therefore if there's negative news related either on the environmental side, the governance side, or on the social side, you can see a very quick impact on your share price as a result of that.
ESG impact on energy space?
While some people may have a negative view on the energy sector as you know when we talk about ESG investing, that's not the proper approach. ESG is taking into account the risks and properly reflecting those risks and being smart about when you buy a company and making sure that it's cheap enough when you take into account those risks. From a Canadian perspective, we're also large producers of natural gas and natural gas, I would say, is a bridge fuel for the world economy and we're seeing that a number of global energy companies really shifting their emphasis from oil to natural gas. And so therefore there's lots of opportunities in Canada to, for example, buy natural gas or to invest in natural gas.
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