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Last month, on June 14th, the Canadian Expert Panel on Sustainable Finance released its final report, ‘Mobilizing Finance for Sustainable Growth.’ The panel was appointed by Canada’s minister of the environment and climate change, Catherine McKenna, and minister of finance, Bill Morneau. The report observes that the sobering reality of climate change is upon us and argues that the finance community must play a critical role in supporting the transition to a low carbon economy.
The report makes specific recommendations for the asset management community, including, recommendation number 10, to “Promote sustainable investment as ‘business as usual’.”
Active money managers are often perplexed by the notion of integrating environmental considerations into their investment processes. To many, it means changing the way they think about investing. But, it is not. It is simply about viewing climate change as the investment risk and opportunity it truly is.
On the risk side, it is incorporating information and analysis to understand the potential impacts of regulatory change, legal action, reputation, and other factors on corporate performance. On the opportunity side, it is recognizing shifts in consumer and investor preferences and understanding how technology and innovation are addressing climate change while creating new areas of competitive economic activity.
Practically speaking, it could mean approaching investing from a thematic point of view, such as investing in leading wind farm technologies or government-backed green bonds. It can also mean identifying and avoiding investments in companies that are not able to adapt to climate change regulation and are more at risk of stranded assets.
For active managers it means identifying companies that truly integrate environmental consideration within their core planning, management and governance principles. Research demonstrates that these companies tend to perform well relative to their peers, with respect to share-price or future profitability. Indeed, firms that understand the full life cycle of their products and services and incorporate long-term sustainable thinking into their core values, are those that are recognized for their strong overall leadership and integrity.
As the Sustainable Finance report states, “Canada has the means and the opportunity to stand among global leaders as a decision-maker rather than a decision-taker in the global market for sustainable products, services and investments.” We must view the report, not as an environmental report, but as an economic report. And asset managers should ask themselves how they are responding to recommendation 10, and if they are “business-as-usual” or seeking competitive advantage through sustainable investment.
Paula Glick is co-founder of Honeytree Investment Management.