Investing to improve the world: The power of ESG investing
by Tom Mason
For those of a certain age, Exxon Valdez is shorthand for environmental disaster. When the 215,000 ton oil tanker ran aground in Alaska’s Prince William Sound on March 24, 1989, it triggered the worst oil spill in history up to that point –– a disaster that had a massive and widespread effect on the fragile northern ecosystem along more than 2,000 kilometers of coastline.
In addition to the environmental damage, the oil spill quickly became a financial and public relations disaster for Exxon. The company eventually paid more than $2 billion for the cleanup and more than $500 million in fines. But surprisingly, one thing didn’t happen. Exxon stocks barely felt the impact. As the world watched in horror as the disaster unfolded, Exxon shares wavered and then held fast –– falling by less than 4% in the two weeks following the spill. After four weeks, all the shareholder losses caused by the Exxon Valdez Disaster had been recouped.
Twenty-one years later, Exxon Valdez’s tragic record was severely challenged by another oil spill, this time in the Gulf of Mexico. When the Deepwater Horizon drilling rig exploded in flames 64 kilometres off the coast of Louisiana, resulting in the loss of 11 lives, the aftermath saw the worst leak of oil by volume in history.
But this time the stock market took a much different direction. British Petroleum, the owner of Deepwater Horizon, saw stocks plunge 43% in the wake of the disaster. Shareholders and investors were starting to pay careful attention to the environmental performances of the companies they invested in.
“We’re seeing a real shift in the way investors react to those kinds of negative news stories,” says Richard Nickerson, senior financial planning advisor with Assante Capital Management Ltd. “Look at what happened to SNC-Lavalin in 2019. Their stock dropped close to 69% in the wake of a corporate governance scandal. And the optics were much less negative than a major environmental disaster.”
The reactions to Lavalin and BP are part of a growing trend. Many investors are moving to an investment strategy known as responsible investing or ESG investing, with ESG standing for “environmental, social, and governance.”
“In the last two years it has exploded,” says Robert-Yves Mazerolle, senior financial planning advisor with Assante Capital Management Ltd. “Interest in ESG investing has doubled in that time. Today investors want their money to be where it matters.”
Responsible investing is a subject Mazerolle always raises with new clients. “I ask them if they understand what it is, if they have any questions about it. I’ve become more proactive about discussing ESG. I’m not there to push. I just want them to be educated about it.”
Most investors already have a good understanding of the “E” or environmental component of ESG investing. It’s about supporting companies who have a good track record of environmental responsibility and innovation, or companies who are developing things like green energy systems. The “S” or social aspect that takes into account things like working conditions, child labour policies and human rights issues, is also fairly straightforward. It is the governance aspect of ESG that is often more abstruse, according to Mazerolle.
“Clients come in focused on the E and the S, but you don’t get the E and the S unless you have good governance. “It’s about choosing companies with good boards. Companies that have proper compensation for their executives. Good governance doesn’t make the news, because whenever it does make the news it’s not a good thing. We bring in the governance factor and have that discussion.”
“All we are doing is aligning clients’ investments to their values,” says Marc Pinet, wealth management advisor at Assante Capital Management Ltd. “It begins with a conversation about what they’re doing in their lives and what their value systems are. Once the discussion is started, it really starts rolling.”
On its surface, ESG investing is about using the power of investment money to effect change in the world. The portfolio manager engages with the companies they wish to invest in, and they become active in improving ESG standards within the company. Portfolios that have billions of dollars in them can have a major impact on policy.
Pinet points to large petroleum companies that are actively working to change the culture of their companies and their business models in response to shareholder demands. “Those companies are working with fund companies that go to the meetings, that have proxy voting and are in the position to influence the direction the company takes. We’re influencing those companies with money and with votes. For those who are hardcore into ESG funds, they really value the influence that the proxy voting has over the company.”
But there’s another powerful reason to focus on ESG investing: the stocks of companies with good ESG credentials tend to show less volatility than non-ESG competitors during times of economic uncertainty – a fact that was demonstrated dramatically at the start of the Covid-19 pandemic. “The biggest myth out there is that responsible investing costs money,” says Richard Nickerson. “Research actually shows that returns are better and risks are lower when investors focus on ESG. If you’re investing in companies that are looking towards the future, your investment will do well in the future.”
But effective ESG investing requires research, to avoid companies that are involved in “greenwashing,” says Pinet. “Everyone is coming out with ESG funds. You can’t just jump on board and start riding the train just because you see it’s popular. You have to back it up with strong ESG policies.”
On the positive side, more and more clients are seeing the opportunity to align their portfolios to their values. The trend is strong in Europe, where 50 percent of all investment money is going into ESG funds. In the U.S., 25 percent of all investments went into ESG funds in 2020. In Canada, it’s still only about 10 percent but the number is growing every year. “Investors are getting to be more outspoken about their beliefs and their values,” says Pinet. That’s a good thing for the future of this planet.”