Why ESG investors need to choose their wealth managers carefully

Opportunists are trying to exploit interest in sustainability by greenwashing their expertise, resulting in investor cynicism

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The energetic shift by Canadians to invest more sustainably is incredibly positive and has a profound effect on the world around us. As the CEO of an independent asset manager in Canada, I encourage investors to look beyond ESG investing to sustainable investing and stewardship that focuses on people, the planet and prosperity.

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A survey conducted on behalf of Franklin Templeton in October 2021 found that 59 per cent of Canadian investors didn’t know what ESG is, which is understandable given the acronym is used in different ways. When these investors were provided with a definition from Investopedia of what the environmental, social and governance criteria is, 61 per cent said it is somewhat or very important that their options include ESG principles when they are making an investment decision.

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Sustainable investing is a transformational shift that is gathering speed in lockstep with the critical challenges we face. Yet, opportunists are trying to exploit the interest in sustainability without practicing sustainability principles, or frankly “greenwashing” their expertise, resulting in cynicism starting to permeate investors’ minds. Let me stress that true sustainable integration means that it must be fully ingrained in all aspects of managing money, it cannot be merely marketing spin.

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With $37.9 billion in assets under management in Canadian sustainable funds and ETFs (according to Morningstar Canada as of December 31, 2022), it is vital that asset managers “walk the talk” when it comes to sustainable investing. Researching and selecting investment partners carefully is essential because many managers have limited experience and resources devoted to this complex field.

When deciding what to invest in, it is important to ask if the asset manager has a strong understanding of the role of sustainability in finance, and couples this with global reach and asset class expertise. Are they committed to integrating sustainability principles into their investments, and do they have a depth of sustainability resources to do so? Are they peeling back enough layers in their reporting and analysis to really understand the key drivers of business at these companies? Are they engaging companies and influencing their behaviour in a positive way to create thoughtful change, and is the engagement reflected in their voting activity?

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As stewards of our clients’ capital, we recognize that the opportunity to generate risk-adjusted returns requires an understanding of how natural, human and financial capital are connected in value creation. This holistic circle of capital applies to every aspect of investing — from the country, issuer and portfolio levels, right down to the individual investor. Companies that manage all three forms of capital well will also enhance the overall productiveness of the economy over the long term.

We believe that in order to create long-term value, the risks to natural and human capital are inextricably intertwined with financial capital. Sustainability of natural capital, including our resources and our climate, are vital to economies, markets and our clients’ portfolios. Rising temperatures and sea levels, along with increased extreme weather events, pose a threat to the global economy.

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Human capital is the knowledge, skills and other human characteristics that exist in people and communities; it is a critical ingredient in productivity and economic growth. As investors, we recognize how this contributes to the value of the companies in which we invest — and look to understand the management of human capital accordingly.

Active ownership, via the engagement of investee companies, helps make their business more resilient and sustainable. Our specialist investment managers practice strong active ownership, as it is essential to ensuring our investee companies are acting in the best interest of the end investor, creating repeatable investment returns and positive outcomes in all three forms of capital (natural, human and financial). Our main ability to drive change as an investor is by using our ownership rights to hold companies to account in their management of all three forms of capital, which is crucial to our portfolio returns.

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In addition to our firm being a founding member of the Canadian Coalition for Good Governance (CCGG), of which I am also a board member, endorsing the UN’s Principles for Responsible Investment (PRI) since 2013 and being part of the Net Zero Asset Managers (NZAM) initiative (to name just a few), we advocate for standardized measures and metrics, as well as the development of enhanced sustainability regulation in Canada.

High-quality climate-risk data, gathered through mandatory disclosures, is vital to the correct pricing of risk and optimal allocation of capital. Fortunately, both the U.S. Securities and Exchange Commission (SEC) and the International Financial Reporting Standards Board (IFRS) are creating requirements for climate-related disclosures. Franklin Templeton welcomes the roll out of the SEC, IFRS and International Sustainability Standards Board (ISSB) proposals that will create a comprehensive global baseline of sustainability disclosures.

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Some of our specialist investment managers started integrating sustainability into their investment process decades ago, today all of them do. We believe sustainability is relevant to all funds and investments by considering the full suite of information, both financial and non financial, that make up the long-term value of an investment.

Although there is a lot of work that needs to be done and many challenges ahead, I hope we are not talking about sustainable investing as a separate discipline a few years from now. I hope that soon all investing will be inherently sustainable, and that sustainability will be a fundamental part of everything we do.

Duane Green is chief executive of Franklin Templeton Canada.


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