Clients Expect Advisors to Lead Them on Responsible Investment – Deborah Debas, Pasquale Posteraro, and Nicola Fritz

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Our conversation with three thought leaders on responsible investing, Deborah Debas, Senior Responsible Investing Specialist at Desjardins, Pasquale Posteraro, Portfolio Manager, Equities, at Desjardins Global Asset Management, and Nicola Fritz, Portfolio Specialist, IMPAX Asset Management.

We discuss three fundamental investment dimensions of responsible investing through the ESG lens: Risk, Reward, and Impact. Pasquale Posteraro and Nicola Fritz provide deep dive insight into how the overlay of active portfolio manager and shareholder engagement is having a collaborative impact on identifying environmental, social and governance risks, how interaction between investee companies and investors is leading to progressive corporate responsibility, and how that mitigates risk substantially for investors.

Deborah Debas provides valuable insight on how advisors can be more proactive vis-à-vis responsible investing with their clients. Current research shows that more than two-thirds1 of retail investors are wanting to make sure their investments have more meaningful impact, but that only a small minority of 16 per cent2 of advisors are being proactive with their clients about ESG and responsible investing.

Advisors, they underestimate the interest of investors for this type of investment. And they might also confuse the lack of questions for a lack of interest on the part of the investor.

We get into interesting perspectives on how advisors can fulfill their clients' families' expectations, by leading discussions on and being knowledgeable about responsible investing, and how this can have a meaningful impact on advisors' relationships with their clients' successors as well.

Links / Resources:

Desjardins Responsible Investing Resource Page

Desjardins Responsible Investing Certification Program and Training
(see Materials and Training section for link to join)

Desjardins Webcasts - Continuing Education
5.5 IIROC Credits - or - 6.25 CE Credits (The Institute) Available

Contacts:

Deborah Debas, Desjardins on Linkedin
Pasquale Posteraro, Desjardins Global Asset Management on Linkedin
Nicola Fritz, IMPAX on Linkedin

Full Transcript:

Ep. 67 – Responsible Investing with Deborah Debas, Pasquale Posteraro, and Nicola Fritz

Pierre Daillie: [00:01:34] Hello everyone. I'm Pierre Daillie, Managing Editor at AdvisorAnalyst.com. My special guests today are Deborah Debas, Senior Specialist for Responsible Investing at Desjardins, Pasquale Posteraro, CFA, an Equity Portfolio Manager at Desjardins Global Asset Management, also known as DGAM, and Nicola Fritz, Portfolio Specialist at London-based Impax Asset Management.

Deborah, Pasquale, Nicola, welcome to the show it's great to have you.

Deborah Debas: [00:02:01] Thank you, Pierre. It's a pleasure to be here.

Pasquale Posteraro: [00:02:02] Thank you Pierre, also a pleasure to be here.

Nicola Fritz: [00:02:04] Thank you Pierre. Great to be with you today.

Pierre Daillie: [00:02:06] Great to have you all. It would be helpful if each of you could take a turn to tell us about your backgrounds, the arc of your career and what you're up to these days. Deborah?

Deborah Debas: [00:02:17] Sure. So I'm Deborah Debas, I work as the Responsible Investment Specialist for Desjardins. I've been working in the responsible investments space since 2008, when we actually first launched the Societerra Portfolios. They were the first responsible investing portfolios offered in Canada and in Quebec.

So most of my work is done educating advisors and investors alike to the benefits of responsible investing.

Pierre Daillie: [00:02:43] Great. Thank you. Pasquale.

Pasquale Posteraro: [00:02:45] Yeah. So for myself most of my career I've been an equity analyst since 2004, when I started at Standard Life Investments prior to Desjardins even I was at a Investors' Group and Mackenzie where I really start to learn the ESG part of and how it will integrate into our equity analysis.

As an investment analyst, we always I always put an emphasis on the governance side, so it's always been part of the process, but really in the last six years is really just integrating the whole process because ESG is a broader thematic. So we really Desjardins and with the ESG team within Desjardins Global Asset Management it's really integrating the two not only from the equity, but the fixed income side as well, and other assets like real estate. So I've been at Desjardins Global Asset Management in the last two years. So as a Portfolio Manager and really just integrating ESG within fundamental analysis and how to construct and put names into the funds.

Pierre Daillie: [00:03:35] Thank you Pasquale and Nicola from London-based IMPAX.

Nicola Fritz: [00:03:40] I have worked for IMPAX for about seven years, almost. Early in my career. I worked for large investment banks JP Morgan, Credit Suisse, and so forth. I grew up really in global macro. I was a proprietary trader at Credit Suisse and before IMPAX was working for a hedge fund based in Hong Kong.

So I've really worked across a number of different asset classes. I started my career in the late eighties it's been awhile and I came to a point in the career where I really wanted to combine impact with achieving returns. So I did my own manager research. Having worked with lots of the large institutional investment consultants and the list was quite short at the time, to be honest.

So IMPAX, as you mentioned, based in London, is very much a global firm came on the spectrum as specialists in this transition to a more sustainable economy, with sort of proven impact metrics and real thought leadership as a, as an expert in a specialist in the area. It's been a terrific experience.

Pierre Daillie: [00:04:43] Thank you. So today in our conversation, we hope to cover a fair bit of ground. To start, we're going to talk about how responsible investing is maturing into a proven investment strategy with three major dimensions: risk, return, and impact. We're going to talk about how advisors can set themselves apart from the herd to really differentiate their practice and to grow their book and why every advisor should have RI solutions on their shelves and be proactive in their conversations with clients on RI.

Research shows that advisors are underestimating how important it is to their clients, for what they do with their investment dollars to matter. Why is RI such an important consideration for advisors?

Deborah Debas: [00:05:32] Well, I think the first element of response is because they're just good investments.

They're really sound and proven valid investing strategies. And the business case for integrating environmental, social and governance criteria is into investment decision-making has been really strong and proven time and time again. We have these institutional investors that have been investing that way for decades now.

And the fact of the matter is we're now offering the same proven strategies to retail investors, and they actually care about that. When your clients actually want to invest in a certain way, it might be a good idea for an advisor to have these options on their shelves.

Pierre Daillie: [00:06:15] Deborah, I think there's a lot of misperception about the maturity and the depth of the ESG strategy.

If you look at the recent year, just in 2020, the growth in assets, under management and Canada for responsible investing funds on ETFs was 55% of asset growth just for that one year. If you compare that to the general industry, it was only 11%. So it's five-fold the growth.

Deborah Debas: [00:06:20] So we, we were, you know, Desjardins, We've been in the space for about 30 years and yes, 30 years ago it might've been niche. But what we've seen in the last years is really an increase in interest and the mainstreaming, if you want to integration of these ESG factors into investment decisions. If you look at the recent year, just in 2020, the growth in assets, under management and Canada for responsible investing funds on ETFs was 55% of asset growth just for that one year.

If you compare that to the general industry, it was only 11%. So it's five-fold the growth. So there's a definite switch here. A shift towards more responsible investing and what we know, and we've been conducting surveys with private retail investors over the past four years and every other year, that there's an increase in interest from clients for a type of investment that would not only look into the financial side of thing, but also look into environmental and social practices of the companies that we choose to include in our portfolios.

However, what we see is that it's probably still niche for advisors because there's a small minority of them actually addressing this type of investments with their clients. It's about 16% of them. Whereas it's about two-thirds of investors that wants to incorporate that into their portfolio.

Advisors, they underestimate the interest of investors for this type of investment. And they might also confuse the lack of questions for a lack of interest on the part of the investor.

So there really is a gap. There's a difference between the interest of the clients and the amount of conversations that advisors are having. So I think advisors, they underestimate the interest of investors for this type of investment. And they might also confuse the lack of questions for a lack of interest on the part of the investor.

Most of investors retail investors, they won't rely completely on their advisors for ideas, for new investment ideas, for confirmation of what they think might be good for them. So if the advisor is not proactive on this the investor will probably not rise the topic.

Pierre Daillie: [00:08:21] Yeah. They could be quite disappointed by this especially if they have such a desire to see their investment dollars make an impact. Can investors really have an impact when they invest?

Deborah Debas: [00:08:33] Yes, there are different ways that they can. They can definitely help green companies grow.

So those companies that are actively working at solutions for environmental and social issues they're in need of investments. They're in need of shareholders. They are in need of capital. And that is one way that they can do it, but they can also really help drive the way to a more sustainable economy by investing in those companies that are being proactive in the in the way that they set their objectives, the way that they're tweaking their business model to reduce on their negative impact and improve on their positive impact, no matter the sector that they're working in, if we want to really drive the energy transition and drive the economy towards a lower carbon of itself, we need to work in every sector of the economy and investing responsibly is one of the ways to do that.

Pasquale Posteraro: [00:09:21] And I'll add a, it was just a few points even when it comes to advisors and the one underestimating. And I can understand sometimes the confusion from their part, because like I mentioned, in my opening remarks when you think about ESG it is so broad and how can you quantify and how do you make sure it actually has a return?

I think, when you think about these types of strategies, the market, sometimes it's too short term oriented and these types of goals sometimes, or most of the times, it's a longterm goals that you really have to see the connection and the correlation between doing the right thing, how the company invests, if it's an energy transition, as the company invest in into those metrics going forward, there's an energy consumption.

It's (ESG) here to stay. I've been hearing it since I started like really getting into the weeds, really integrating it within the investment in the asset management side that it's just a fad, and it's not going to last, but I think it's here to last and eventually, my hope is that ESG integration won't be talked about; it's just going to be part of the process.

And it's not gonna, it's not going to last, but I think it's here to last and I think eventually my hope is that ESG integration won't even be talked about; it's just going to be part of the process. So for the advisors, I would say that I think it's going to be important to learn more and more about it.

That's going to be a lot less, there's going to be less liability. There's some companies that come to mind that had some issue in California. So it's a question of education too and for the advisors. The only remark I will say is that it's here to stay because it's, I've been hearing it since I started like really getting into the weeds, really integrating it within the investment in the asset management side that it's just a fad.

And it's not gonna, it's not going to last, but I think it's here to last and I think eventually the way I see it as eventually my, my hope is that ESG integration won't even be talked about, it's just going to be part of the process. So for the advisors, I would say that I think it's going to be important to learn more and more about it.

And I think the next generation it's going to be mandatory because you're already seeing it talking to my son, talking to it or teenagers they want to make sure. It's not just about the shareholder anymore. It's about the stakeholder. So you want to make sure that the company is doing the right thing for the longer term.

And I can understand, again, the disconnection between the return and the short-term performance from a stock within a year. But I think it's one has to cancel the noise and make sure that what we do invest in what an advisor does, the question of education as well, and learning more of the process of it.

And then we'll get more into the discussion after how we could do integrating it. But those are the aspects I would add.

Maybe Investors view it (responsible investing) as important and urgent but advisors view it as important, but not urgent.

Pierre Daillie: [00:11:18] The industry is, is prone to short-termism. Is it possible that, because of that kind of short-termism that because ESG and responsible investing are longer-term ideas that, that investors in general may have a conflict between the short-term-ism and the long-term view on these. Like, Maybe investors view it as important and urgent but advisors view it as important, but not urgent. And maybe, What needs to happen more is that the urgency rises. We're starting to see that, that there's momentum happening as ESG and responsible investing as an idea, take, hold and become more mature.

And it's being led by shareholder engagement, right?

Pasquale Posteraro: [00:12:01] Absolutely. And I think that's one of the keys where it's really one of the biggest tool that we have as an asset manager. When you think about shareholder engagement, because it's really it's the start to have a dialogue with those companies and that's, again, the disconnection between short-term and long-term , sometimes when we have these conversations, sometimes it's with the board.

We don't talk to the board every quarter. It's on a yearly process when it's proxy season. Companies do reach out and we have a conversation with them, and that doesn't happen overnight. It happens over several years and then we could actually start to make a difference between that the ones that are actually making a difference and the one that actually are brushing it off and bring the whole motion of greenwashing to the table.

So I think that is really, like at Desjardins Global Asset Management that's one of the biggest tool that we have. It's really engaging with these companies and see the ones that are actually responding and having a conversation with them. So it, it really, again, brings to that long-term aspect because when you think even from a portfolio manager in order performance is on a yearly basis, but one has to be believe in some of these fundamental analysis that sometimes it takes time.

Sometimes there's a disconnection between the market. You think about renewable. Last year, renewable valuations went really up, and everybody was on board this year with the volatility of the market. You've seen some rotation I don't believe renewables are done.

And I think it's just a question of sometimes the market reacting really fast on, on short-term noise, but one has to stick to believing in these low long-term metric and believing the same thing as the company that grows. And the return on investment capital is really important. And ESG ties in into that.

Pierre Daillie: [00:13:41] Yeah. Absolutely. And so from your perspectives, how would you engage with the companies that you're meeting with? And secondly, do you have any examples that you can talk about where you engaged with the company and saw some improvement take place?

Pasquale Posteraro: [00:13:57] Absolutely. Several examples. And when we started, a lot of them didn't have a social responsible report, or they don't have any ESG pending they will talk about ESG, but that work, they wouldn't have a per se strategy. And sometimes it's also guiding those companies because then to the board, the company tries to learn because there's a lot of information, there's a lot of different entities, we're going from SASB (Sustainability Accounting Standards Board), PRI.

It could be confusing. And then some of these surveys are actually cumbersome. But absolutely there's been positive and there's been negative as well where some company has completely ignored them and after several years but the ones where you do engage and have a conversation, and it's both ways because, as Desjardins Global Asset Management, we also have metrics to show them that we're actually going that route.

So when we have a conversation with that, while we're actually doing it as well, so it's very important to, to follow those those strategies. So there's been a couple of companies. If it's from a board diversity adding we've seen some companies that I had, one woman after several conversations, you saw that they really start to accelerate adding two or three women on the board.

Even from a diversity standpoint within the company. There's many examples. I could cite.

Nicola, I think you wanted to chime in before, so I'll let you talk as well.

Nicola Fritz: [00:15:10] Yeah. Thank you. I just wanted to add to that question of short-termism and , long investment horizon that, there are trillions of dollars now from institutional investors that are very much long-term minded.

When you think about pension plan obligations, there are decades and decades, in the future. So as they try to match their assets and liabilities, the likes of the Council of Institutional Investors or Institutional Investors Group on Climate Change, The Investor Network on Climate Risk.

So these are all conversations that are being held with companies with longer term horizons. And we've seen a sea change in the eagerness of companies to engage through reports, their huge growth, the numbers in terms of how much companies are reporting. And we can get a little bit into the quality of that reporting as well, because just stuff doesn't really tell you much, but if you take a materiality approach for us, it is as equity investors, a risk tool. And so our turnover in our equity funds, it's something around five years so that they reasonably long horizon.

Our objective really is to use that process to assess the character and the quality of the company, because the quality of those engagements, those conversations tells you a lot about the management team and how they think of their risks and how they operate their company.

It's not private equity, but it is certainly we are minority shareholders. And our objective really is to use that process to assess the character and the quality of the company, because the quality of those engagements, those conversations tells you a lot about the management team and how they think of their risks and how they operate their company.

And as specialists of looking at sustainability and how that fits into the long-term resiliency of the global economy, we focus on what are the opportunities. We know that there are going to be winners and losers at the company level. So for us, it's about building resiliency with the investee companies that we have.

And I can give you a few examples: physical climate risk. We have a climate scientist in our team. Some sectors like food and others may have some decent reporting on things like water risk. But for example, we went and did a deep dive on our water utilities. Do they understand their risks in terms of water sourcing and so forth?

So we went and took the physical data that's available  to an Asia based water utility, and said, here are the risks we see from what we can see. They took that to the board and then came back to us and said here are the rest of our assets.

Can you map the climate risk for these assets as well? So there's incredible exchange of information.

Can you map the climate risk for these assets as well? So there's incredible exchange of information.

And it was quite surprising how little it was being talked about and reported. So we went and took the physical data that's available  to an Asia based water utility, and said, here are the risks we see from what we can see. They took that to the board and then came back to us and said here are the rest of our assets.

Can you map the climate risk for these assets as well? So there's incredible exchange of information. And as I say, working with companies to, to make their operational models better for the longterm. And that's also, as Pasquale was saying reporting and sustainability processes, some companies are very small, they don't have the resources to report that 25,000, ESG data services.

And then of course, another big topic for us as human capital, especially after, during of course an after what we see with the pandemic. So it's not, it needs importantly about diversity and pay equity, but it's about family leave policies and flexibility at work and, pay equity transparency.

So all of those conversations led by which company are certain topics, most material in terms of that applies to them, makes for a better understanding and a better company.

Pierre Daillie: [00:18:48] Thank you Nicola. That institutional sponsorship of these initiatives is going to be a very significant driver on valuations, on qualitative assessments analysis.

It's such a primary concern at the institutional level which is very significant. Fundamentally, how can you possibly ignore, that when there's so much institutional sponsorship driving these changes at these companies.

If I'm an advisor and I'm ignoring this then really I'm missing out on a huge opportunity which my clients are actually interested in. Sometimes clients feel they don't have the room to bring that or when they have brought it up, it hasn't really been taken seriously and the advisor sort of brushes it aside because it's, it seems to be a secondary concern.

Maybe that's the segue to talk about, the opportunity that advisors have to differentiate themselves.

What we know is that women and millennials are the two segments that are more interested in investing true to their values, to their priorities, closer to, the benefits for community, you, for the environment, for the planet.

So if, as an advisor, you're not being mindful of that shift, well you're at risk of seeing up to maybe 70% of your assets, just leaving your practice because you're not being proactive in your conversations and you're not connecting, with the successors of your clients. So you've been working very hard at building your practice and because you're not careful of those shifts happening, you're not aligning with the investment preferences of your new clients, of the heirs of your actual clients.

You might be losing that asset to other advisors that, are seizing that opportunity. So it really is something to keep in mind, responsible investing and understanding the ESG and the value of it can really act as an insurance policy for your practice in a way.

Deborah Debas: [00:19:48] Yeah, absolutely what we see happening. Humans, they're creatures of habits, and you might have, as an advisor, a recipe that has always been working.

And why would you change if it has been working? But the fact of matter is we are in a transition right now and the money is also being transferred to the next generation. It's estimated that around $900 billion will be passing through from hand to the younger generation.

So millennials and women that will be inheriting that money from usually their parents or their husband. And what we know is that women and millennials are the two segments that are more interested in investing true to their values, to their priorities, closer to, the benefits for community, you, for the environment, for the planet.

So if, as an advisor, you're not being mindful of that shift, well you're at risk of seeing up to maybe 70% of your assets, just leaving your practice because you're not being proactive in your conversations and you're not connecting, with the successors of your clients. So you've been working very hard at building your practice and because you're not careful of those shifts happening, you're not aligning with the investment preferences of your new clients, of the heirs of your actual clients.

You might be losing that asset to other advisors that, are seizing that opportunity. So it really is something to keep in mind, responsible investing and understanding the ESG and the value of it can really act as an insurance policy for your practice in a way.

Pierre Daillie: [00:21:21] This is probably the clearest cut opportunity for advisors to change the nature of their business going forward.

Deborah Debas: [00:21:30] Nicola, see you nodding, do you want to chime in?

Nicola Fritz: [00:21:34] Yeah, i absolutely agree. I think also, I understand how traditional adviser practices, have that earlier experience of the sin stocks and tobacco has done pretty well, in the time period X, many years ago, thereabouts. Obviously when energy traditional energy will do well.

So there's sort of nothing to say that tactically over a shorter horizon, there aren't value parts of the market that make absolute sense. But having said that, the whole backdrop is entirely different now. We have, the sort of top down in terms of, we are decarbonizing the globe, we have now net zero goals that cover the vast majority of the global economy.

And, even if you may not agree with the policies or even with the science, there's no question that in terms of portfolio risk, if you will, you are now looking at policy risks, if you are not investing with a more sustainable lens. So again, IMPAX really looks at it from a risk tool.

What are the risks to the business models as companies who are not adapting or not able to change their business model get left behind. For us it's very much a hand-in-hand as a financial imperative, to include these parameters, which yes, 20 years ago, maybe 12 years ago, there weren't even some of these acronyms, but now this is a, financial risk decision and horizon and sort of awareness.

Pierre Daillie: [00:23:12] I think what's interesting is just to, you know, look at the contrast between, the fact that 85% of institutions have gotten behind ESG and only 16% of retail advisors. At some point, obviously, whether advisors believe it or not, there's going to be a reconciliation where, everybody's on board.

So the question is when do you warm up to the validity of ESG? I think that's a really big question that advisors have to address for themselves.

I'm surprised like, in terms of looking at the research to find how engaged investment companies are with their investee companies in this process of assessing risk through the ESG lens and Pasquale., just to come back to you to circle back to what we were talking about earlier, are you finding collaboration with your investee companies?

Pasquale Posteraro: [00:24:05] Because ESG doesn't have any standard. It's the lack standardization, like accounting was 60 years ago where, there was a lot more rules coming in and a lot more standards. That's a question of time. There will be standards coming our way. But until then, to your point, Pierre I think it's a question of of calling the companies again, right?

What's the proper way. How what do they need to do? What really at the end of the day like Nicola said, it's managing risk and the more you manage the risk, the more you have better returns for the long-term; less liability issues are going to have down the road. But I always tell the companies.

And this is why it's also important for Desjardins to set goals and to show an example of that. If I'm engaging with a company and I'm telling them this is the way not necessarily the right way of doing it, but you should consider these alternatives and we're, by the way, we're doing the same thing.

It speaks we're not just saying it to say it. We're actually doing it ourselves. So it's becoming more and more important. The company is engaging with us, so they're trying to figure out as well, but at the end of the day, nobody knows the company better than themselves. And if there's a certain stuff, if I'm talking about SASB or TCFD, and if there's something they're not known from a disclosure perspective that they're not really comfortable with. Well then tell me what you feel comfortable with and maybe what can have a material or non-material financial impact to your company, because at the end of the day, it will have an impact to your return. So it's that two way stream of having those conversations with a company and educating, them you know, sometimes you don't need to do these 75 reports. At the end, you know what it is that is going to drive your company, you have all the information and another thing, it's not a company no more, you're transparent, the better it is. The less liability issue because the boards are trying to figure that out as well, because there, because you can put these data into your 10-K because there's liability issues. There they're a bit not afraid, but they're, holding back, but it's going to be a question of time.

The standards are going to come. They will have to provide that information and it's up to them to tell us what really has an impact. So again, it's a question of educating going into that right direction. That's going to just help us to make the wise decision, not just from a shareholder perspective, but from a stakeholder perspective.

Pierre Daillie: [00:26:18] It's only a matter of time before it trickles down to the entire business. There's a difficulty probably identifying what ESG is? If I was running a retail advisory business, I would be wondering, what's keeping me from doing things that are synonymous with what's happening at the institutional level?

Deborah Debas: [00:26:35] I think it's rather it's all a matter of education and knowledge and understanding, advisors are used to comparing investment products on two dimensions, risks, and returns, and correlate that with their client's needs in terms of time, horizons of risk tolerance, et cetera. But we're adding, information and criteria is that they're not used to dealing with and their environmental and social and governance issues.

And, they're really hard to pinpoint. They're intangible, they're hard to quantify. They're hard to measure. There's no standards in the industry, depending on your methodology, you might give more importance to one criteria compared to another the information that you have access to you as an advisor is, there's a lot of it, the quality is lacking.

It's sometimes not reliable, it's not comparable. So how do you deal with this immense amount of information that you might feel is important, but you don't really know how to simplify distillate, analyze and, what impact will it have on your portfolio makeup? So understandably it has taken a long time.

And I think, this kind of conversation that we have is actually helping to try and simplify and explain the science behind it. And perhaps also reassure advisors that they don't need to have all the answers to try and incorporate this type of strategies because we're here to help. To give you an example, as my role is to help advisors understand the strategies, understand how they affect portfolio makeup, understand how they can incorporate that.

We actually have a training program, it's a certification program that advisors are welcome to and we actually explain to them, what are these ESG factors? How are they incorporated in our decision-making processes? And. It's also a good way for them to understand that if you're an active manager while most of our portfolio managers, IMPAX and DGAM being two of them, we have they have proprietary ESG assessment processes.

So we don't rely on third-party data providers because we have issues with the way, data is made and Pasquale just address that exactly is the fact that the companies know themselves, what is important to them and what might affect their business in the future. And so we need to rely on the companies and the data that is provided to us.

So I think education with advisors. Is key to them incorporating this type of of solutions and products into their practice. So you need to educate themselves and then they might need to educate their clients as well, to let them know that, there aren't options that can allow them to invest in a way that, will help them meet their future liabilities and, get to their financial objectives, but also have a positive impact on the planet and community.

Pierre Daillie: [00:29:21] I think it would make sense to share a link to the the education that you just talked about the training.

So maybe the training program that you guys offer is a great starting point.

Deborah Debas: [00:29:33] If I might add something and maybe Nicola and Pasquale will chime in there as well. I think where it's also important for advisors to get educated is to really understand the strategies because now that everyone has been launching responsible investing products, ETFs mutual funds, it's getting harder and harder to differentiate between the different offerings and.

Everyone seems to have the same type of products. Everyone seems to have the same type of responsible investing strategies, some exclusion, ESG integration, shareholder engagement. But the question is to what extent are portfolio managers actually using them? And to what extent are they able to get results from that?

And to what extent are they reporting on the results as well? And these are all questions that advisors should ask themselves and ask their wholesalers, but they really should be understanding those strategies so that they're able to find the ones that are better able to meet their client's needs.

Otherwise they run into the risk of, maybe having disappointed investors at the end of it.

Pierre Daillie: [00:30:35] Exactly. Pasquale, how about, or Nicola... how about solving environmental issues? Do you have a good handle on, on, on what companies are working on that?

Nicola Fritz: [00:30:44] Well, Absolutely. We created at IMPAX, a really, a taxonomy or a nomenclature and a whole structure for environmental markets is as we call it. That was in 1999. And I'm, I'm following our discussion with lots of interest because one of, I think the key things is to look for authenticity. So I sympathize with advisors who are overwhelmed with ESG or sustainable products. I think at the end of the day partnering with an authentic experienced partner like Desjardins, who has that deep experience to differentiate, it's really important and same thing for IMPAX.

So on the environmental solution side, we really organized that opportunity set over 20 years ago into four key areas, covering energy, water, food, and waste. Those even intuitively makes sense because those are core parts of the economy that, enable economies to function.

So within energy, of course, it's about renewables, wind, and solar, or biofuels or other alternatives. It's early days, but even the possibility of using green hydrogen. But actually interestingly enough, in that sort of altered that new energy space as we call it, the vast majority of the solutions that are investible and an equity portfolio are actually energy efficiency is renewables is a really important area, but from a number of stocks in terms of opportunity, the quality companies there, it is not a big group. And so on the energy efficiency side is everything from kind of industrial energy efficiency. Some of these are hardware components, or even maybe analog semiconductor chips.

Some of them are software solutions. You have companies now that are helping construct a building where engineers and architects and other parties that are part of the construction now have access to an embodied carbon module. So if they're planning the building, as they're constructing the building, they can assess really the sort of carbon footprint of the building.

So you know, those kinds of solutions and, water is everything from transporting it to treating it, testing it. Again, a core ingredient for any economy, you can't grow an economy without probably even faster growth than the population for water. Those are two examples and you can be defensive, you can go into a water utilities or some of the treatment names that are more, yeah, probably defensive part of the portfolio, or of course they're industrial or other in markets that will have some more cyclicality.

For us, that construction of a portfolio across these environmental solutions is important to achieve lots of diversification, including food. And as I mentioned waste as well.

Pierre Daillie: [00:33:42] So is there any is there any proof of the impact and how do you measure, how do you quantify the impact.

Nicola Fritz: [00:33:49] It's not as simple as just doing a sort of traditional carbon footprint from our point of view, a carbon footprint scope one, two, maybe part three, which is emissions at the factory and the energy use and maybe transportation so forth.

That is a good start. But for environmental solution, sometimes you have a company that makes insulation or that does water treatment. That is not a carbon free process, absolutely athlete sort of point of production or that service. What you also have to look at is what does that insulation achieve when you install it in the home compared to the baseline, competing product or a more efficient water pump for utility expense, maybe 80 or 90% of its budget on energy to move water around is heavy and treatment costs a lot of energy as well.

So really it's the idea of, ah, if you have a more energy efficient water pump, where does it run? What's the energy source how more efficient is it against the other pump and so forth? So one of the reasons that IMPAX hesitated to do all that work is because it means you have to look at each company in the portfolio, look at each business line, and then it sets that relative carbon efficiency, if you will, or carbon offset, but that's not something we've done for six years, we were working on our seventh report.

And we want it to be very mindful that this was conservative data and that it was also vetted by an external environmental consultant. So yes, there are ways to quantify the positive benefits. And it's not just carbon, as I mentioned, it's water amount of water treated or provided. It's the amount of waste recycled, and if the amount of renewable energy generated.

So that's the kind of advanced work that we do. And frankly takes us about two quarters each year to do that kind of company by company work

Deborah Debas: [00:35:51] I would say Pierre that starting a conversation by showing the impact a fund can have on the planet and on communities is actually a very good way to kickstart a conversation about responsible investing, because really you want to start by showing what responsible investing does, forget about how it works and how we choose the companies. You start by showing the results.

And then you reverse engineer it, and then you talk about it. But really showing that when you invest, you can, you can bank on, good potential return. And, the previous years have shown very good returns but you can also invest and have these companies work, and, basically do whatever you're doing yourself as an individual to try and reduce maybe your own footprint.

Maybe you use your bicycle more, maybe you compost. I don't know, it, consumers have been changing their habits to reduce the impact that it can have on the environment. And so if they're changing their investment habits as well, it just makes more sense. And so starting with the impact with the result is a good way to start a conversation.

Pasquale Posteraro: [00:36:57] So Pierre I'm just going to chime in, because we talked about a lot of the subjects I'm going to, I'm just going to follow up for a couple of things. Prior you mentioned, how does advisor reach out to the next generation? And I can bet you if they do educate themselves and they're able to just start talking about it.

I think they'll make a connection, either it's engaging with women, like Debra mentioned the next millennials, I think they're it starting that conversation. And then if the advisor is able to have a conversation. They will be able to make a connection because I think it's becoming, like I mentioned before, I think it's going to be really important.

And then I could also see that if you give to companies or even a fund X, certain Fund Y, one is going to give you a return of 8%, but the other one was going to give you a return, let's say of 7%, but you know that you have quality companies that, that are there for the long-term and are really engaging on ESG framework.

I can bet you, those people are probably going to pick that one because they want to make sure that they invest for the future. They want to make sure that it's a sound company, not just from a routine. Yes. Return obviously is the number one priority. It's always going to be important when I think the next generation is really going to focus.

Okay. What is this company doing? What does it mean to me? What does it mean for the next generation? There's you could see that they're questioning it. If it's climate changes, water consumption. The next generation and it's starting younger and younger. So that will be number one on the subject of how, you have an impact again, it's showing and one of the problems, and this relates to one of the other questions you have, you think again about ESG and all this stuff starts to come out.

A lot of this stuff are very subjective. So even from an equity analyst or portfolio manager, sometimes it's hard to quantify those subjective recommendation, or how do you quantify it into numbers. But the market is evolving. And, if you take TCFD (Task Force on Climate-related Financial Disclosures) or a SASB where most of the disclosure they want is actually quantitative.

So in a few years from now, as some of these companies are embarking and then starting to disclose these quantitative data. Then it's starting to, for me, it's easy to take those numbers and actually put them in a model and actually start to quantify what's the real impact from a return perspective, because now I have a sound data that I actually could do and actually see what the company is doing and engaging with that company within that atta.

And it's always the example I use, again, if you have, just to say the ones that are trying to do I won't mention the company, but a mining company. And all, some of the times you don't dealing with aboriginals this company actually went ahead and from a turnover perspective, actually when it's hunting season and when there's certain holidays; Well, you know what we know that it's really important- take the time that you need. And then you just come back."

By just changing the type of mindset you, you just saw, the turnover really starts to go down. And then that information as a portfolio manager, I could take it, bring it to another mining company, by the way, have you ever considered this? You could see that the turnover actually really improved.

So that's the way you could actually start to measure impact from one company to another and seeing the trajectory that the company is actually doing the right thing.

Pierre Daillie: [00:40:07] We definitely don't live in the world of cutthroat capitalism anymore where the capital market is blind. Capital markets have become, more visionary and more forward-looking and more concerned. And there's a lot of talk about the tail wagging the dog where you get into subjects of greenwashing. Companies will make bold statements, like they're going to be net zero by 2030. What remains to be seen is whether or not they actually deliver on it because that's, eight, nine years into the future. How much of that work Nicola , does IMPAX do in order to, flush out cases of greenwashing? Are there any examples where, companies said they were doing something and it turned out they weren't?

Nicola Fritz: [00:40:50] Thank you, Pierre absolutely. It is the thing about this aspect of working with or looking at company is it is time consuming. It is manual. And so that's part of the issue. And part of the, I would say advantage and the reason why you want to pick an active manager, because you cannot speak to 3000 companies at once, but if you have a portfolio of 40 or 60, names, across a pretty big team. Absolutely. And you must have those conversations. And one of the things that IMPAX does as part of the investment process, it's not just the financial quality of the balance sheet, the margins, and so forth. And the operational quality. We create a company by company, an internal ESG score.

And we use a materiality approach because otherwise you're looking at a thousand different metrics and it comes back to that whole risk and shareholder vulnerability, or shareholder value creation question. So what we do is we look at, each company and see what are the most material issues? Is it toxic emission?

Is it workplace practices, health and safety? Is it, chemical safety. Is it their carbon footprint? And then drill down into what are they reporting? What are their processes? What are their targets. And as you say, there's a little bit certainly going on of we're going to put these very aggressive targets forward and that, that'll be for someone else to deliver them because those are 10- , 20-, or 30-year targets.

So we want to see, science-based targets and we want to see progression, which is also why the engagement is a longer term exercise. You know, most things don't happen inside of six months. Sometimes they do. But if you're looking for quality management, people and the processes that they use and the targets that they set, that's something you want to revisit.

And for us, therefore, we assess that before we invest in a company as best as we can. And then we track them and we talk to them every six months, every year, maybe every quarter, in some instances, and press them on their progress to achieve change in goals, in the areas where we think they need the most improvement, because if we're a shareholder, we already think they're a good company. So we're not going to be expecting or seeing cases of, as you say, total greenwashing where it's something that's completely yeah inappropriate, but we know that there's improvement and we compare across the industry.

We know what their peers are doing. We press them, the vis-a-vis their own sort of, landscape.

Pasquale Posteraro: [00:43:29] And I'll add, for the greenwashing, and this is again, why it's important to have the dialogue, the shareholder engagement, because you follow up. So you see the ones that are actually improving and the ones that are actually taking you for a ride basically.

So it, again that's really important from that perspective.

Pierre Daillie: [00:43:45] It's interesting because, all it would take is to realize that what we're talking about here is just as important as accounting. As an assessment, we look at publicly traded companies all the time. We look at their earnings.

It's the ongoing dialogue for all companies but in particular, the ones we're investing in and all of that's regulated. That's why, the reporting is so important on a quarterly basis. I'm just wondering, do you see a future where we're going to have ESG season .

Nicola Fritz: [00:44:14] With respect to, when are we going to be there? We're already there. The UK said yesterday as part of the upcoming G7 meeting, they would like to push forward that large companies , basically are forced to report off of the TCFD. So again, what's the most compelling incentive for most investors.

It is dollars and cents. It is risk. It is missing out on returns, or sitting on portfolios that have content that will be left behind. So from my perspective, I think that's the most effective tool is how many companies do you have that have legacy businesses or assets or stranded assets where the other suddenly going to be faced with de-carbonizing sector by sector. That are suddenly faced with an inability to to, to adapt. And you talked about the visionary investing in capital markets. You know what, one of the lightning rod tools is, as much as we love to also hate social media, everything is instant, a misstep by a company whether it's diversity, whether it's pollution, whether it's cybersecurity, boom, it is in the headlines.

Then there goes the share price. So it is that kind of instant news and accountability that I think, the investors or the consumers also now have.

Pierre Daillie: [00:45:34] Exactly. it's a pleasure to talk to people who are very passionate about the work that they do and the meaning it has for them.

I don't think you can value anything more highly than that engagement that you all have. It's really nice to see that, that as a company you're walking the talk as well. .

Deborah Debas: [00:45:54] Speaking of walking the talk and having these Ideas and convictions really stem from the top of our company are really important to us. And the fact that yes, we are integrating these ESG criteria as in the products that we can offer to the public.

But, it's much broader than that in the way that. We do business it's in the products, but it's also in the way that we conduct ourselves as responsible corporate citizen as well. So we're a large financial cooperative and the ESG integration is not only in the products, but it's also in our decision-making processes for, insurance offering, for credit and financing.

The same way we require commitments and disclosure and convictions from the companies that we invest in. Of course we'll do the same.

And we'll also report on, on, on the financial side of the business, but also on the impact side of the business and the impact side of the investments that investors are entrusting their money to to us, it really goes both ways.

Pierre Daillie: [00:46:58] How do you differentiate between all of the RI options out there?

Pasquale Posteraro: [00:47:03] So that's a really good question Pierre, because like I was mentioning at the beginning, there's a lot of different entities, right? At the beginning, when I was doing my research and everything, I would use everything that's out there because I was trying to understand.

But at the end of the day, like Nicola was mentioning too, small, smaller companies don't have the resource. So you try to really help them out as well, and see what could have a material financial or non-financial impact on their company. So the ones where I'm putting more of an emphasis right now, one is where Nicola mentioned is the TCFD, which is a Taskforce for Climate Financial Disclosure.

And that too, we're asking the company to go there, but there's a challenge as well with that because it's a scenario analysis, so it's whatever variable you'll put in. It's whatever you get out and you can compare two companies and they'll have two different answers or output. But the fact is that at least they're doing it. To us, that is going to towards the the right direction.

And it's again doing that disclosure. That's really important. The other one is SASB. When you think about it, it's very concentrated. There's not that many especially depending on the sector of the company deals with it's a certain amount of disclosure that they have to do. It's not a lot.

When you think about their disclosure right now, it's close to about 80. And it's specific to their sector. So those are the ones that we integrate within our own proprietary research. And then on top of that we layer our shareholder engagement our dialogue or our own process of what we find that is really important to the companies, GRI is also valid because it asks for data And PRI as well.

Those are the ones that have been there for awhile. There's a lot of information. At the end of the day, it's really trying to concentrate. What do you really think that it could have a material impact on the company and you have to try to what the ones that really matter to them. And again, I'm going to say this again.

It is up to the company to really tell us what could be the impact and it's going to be a case by case and that's where it becomes really important. So for now, Because, like you mentioned before too, I counting and I mentioned. That before 60 years, 70 years ago, there was no standards from an accounting perspective.

I think ESG is going to the same route. I think it's just a question of time that we will have standard and people will talk about it. You could see it proxy season, the compensation becoming an issue. People are voting against it. More and more pension funds are being more and more vocal and not just one pension fund, everybody is going that route. So companies need to be on board. So it's still a learning process, but I could see the light at the end of the tunnel where it's becoming more or more concentrate.

Pierre Daillie: [00:49:37] It'll be interesting to see if ESG becomes adopted in the way GAAP was adopted.

Pasquale Posteraro: [00:49:42] Absolutely that's the same type of mind frame when you think about it, again, it's assessing risk, it's an important disclosure from the company and we need to be aware of it. At the end,

it's just mitigating risk.

Pierre Daillie: [00:49:54] Is there a future where this becomes regulatory or is this something that remains self-regulating?

Pasquale Posteraro: [00:49:59] I hope so, because if it does get regulated, then it takes a lot of the confusion out of the market, because at least we know exactly what's expected. I'll just leave it at that.

Pierre Daillie: [00:50:10] Okay. So it will level the playing field.

Nicola Fritz: [00:50:12] Some standardization is helpful when it's not going to be easy, but I think we will move in that direction because there are so many different metrics and data points and approaches.

I think there are hopes that over time it will gel into some standard metrics that can be used, but I think cohesion will help.

Pierre Daillie: [00:50:34] So do you see that coming from the financial market authorities or does that come from the regulators?

Deborah Debas: [00:50:40] It's a little bit of both. The requirements for ESG disclosures have been multiplied over the last years by, financial regulators and financial authorities.

And what we see is more and more the the will to establish some kind of a baseline. So I think as portfolio managers, we don't really want walls or ceilings as to how we do our ESG analysis and integration, but really having this kind of baseline where you know, anything under that should not be called responsible or sustainable investing might probably be helpful.

And we see new regulations coming out of Europe and we've seen we've seen coming south of the border as well. Canada will follow suit and I know that work is already being done. The question is how soon will it come out? And how stringent or maybe demanding will it be?

Pierre Daillie: [00:51:31] What are your thoughts for where do you start as an advisor?

Deborah Debas: [00:51:35] You need to start by knowing your product and knowing your client. These are the things that you usually do as an advisor. This is just part of your everyday job. When you talk to your client, you ask the questions, you get to know them. And, if you ask the right questions, you'll know what they care about.

And there's a good chance that you'll find an entry point there to talk about sustainable investing. And it usually is a very positive outcome because some investors, they don't know that their investments can actually change the world for the better.

They might have no idea that this type of options exist. And it's usually a really positive eye-opener. So just starting the conversation is usually positive with your client in terms of knowing your product. If you're looking for actively managed solutions, in terms of what you should be looking for is look for good fund manager that is really experienced, that has strong expertise and conviction with their ESG solution. So what you're looking for really is true ESG integration, that is really ingrained in the decision making process. That means no systematic approach really, and proprietary ESG assessment. Ideally, it would also be ingrained from the top management of that company.

You're looking for very strong engagement process so that, this portfolio manager actually engages with investee companies to have them improve on their ESG practices. Of course, if they're doing that, they usually have a robust reporting system and disclosure.

On their extra financial performance. And, if you can have access to thematic impact investing, that's always a plus whether it's, bonds or stocks, thematic impact investing is really interesting to clients because this is where you can have a measurable impact on communities and the environment, and this is really empowering for your clients.

So if you have a mix of that, then you have quality solutions to offer to your clients.

Pasquale Posteraro: [00:53:32] From our part I'll keep it short. I think, obviously what Deborah says know your client, right? Obviously not all clients are probably interested in ESG, but know your clients. And I think educating themselves uh, learning a process, obviously it's a lot of information.

I think it's really key. I think if they wanted to have or start to engage with the next generation, as there's estate planning or vice versa, I think the next generation is going to be one of their top priorities. So I think it's really important that they've put a focus on that because it's going to be, I'm hopeful that, in five years from now, we're not talking about ESG.

It's just part of the process. There's no such thing. It's just, it's integrated. And it's just part of doing your research, doing your fundamental and the companies that won't will just be excluded and won't have access to the capital versus a company that come on board. So I think it's an important step to for the ones that want to learn is there's a lot of information.

You educate yourself, you learn about clients, but I think it's something that you need to be aware of because I don't think it's a fad. I think it's here to stay and it's going to be part of the process.

Nicola Fritz: [00:54:38] I think I would summarize it as a discovery process and the educational process of review for your clients.

And then I think importantly, you don't have to go it alone. there are fabulous resources. There are fabulous partners who have worked in this space and looked at investments with this kind of lens for a very long time. And they're more than happy to help you at this point. They're well equipped to do just such a, such to be just such a help along the process.

Pierre Daillie: [00:55:07] This is where you, you really start to formulate and, if people are wondering, like, how do you address inequality? This is a really good starting point. What's given rise to ESG and responsible investing is the inequality itself that has arisen over the last, 10, 20 years in leaps and bounds.

This last year, with the pandemic, has really magnified, some of those inequalities so that it's become even more dear to the investing public, to the public in general, but to the investing public in particular, in terms of what we're addressing here.

Compared to the last decade, where all the emphasis has been on passive investing, on indexing, this is a way more exciting topic. I want to I want to thank you very much. This has been a really informative, insightful conversation. Thank you very much.

Pasquale Posteraro: [00:55:57] thank you Pierre

Deborah Debas: [00:55:58] thank you, Pierre Thank you, Pierre

 

 

Notes:

1 https://www.riacanada.ca/research/2020-ria-investor-opinion-survey/
2 Étude 2018 sur l’investissement responsable. [Survey of 2,212 Canadian respondents, including 1,214 from Quebec]. SOM Survey for Desjardins Investment inc., September 2018 [internal document].

 

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