ESG stands for Environmental, Social, and Governance. Investors are increasingly applying these factors into their investment process to identify material risks and growth opportunities. Although ESG metrics are not currently included as mandatory disclosures for global companies, the trend in this direction is apparent. There are several institutions such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD) that are working to form standards and define materiality. The goal is that these investment factors are incorporated consistently across investment managers. Progress is being made, but the industry is still in the early stages of uniformly developing ESG standards.
Fund Flows How significant is the traction being made by the sustainability sub-set of the investment industry? At the end of the second quarter 2021, sustainable investment assets (excluding fund of funds) hit CAD$26 billion in Canada. This represents a quarter-over-quarter growth rate of 22% and a year-over-year growth rate of 130%. The CAD$26 billion still represents a smaller portion of the overall Canadian investment landscape but the growth rate is staggering. In the U.S., 2020 saw sustainable investment funds grow by USD$51.1 billion.Performance How have sustainable investments performed? Here are some eye-catching statistics from Morningstar Canada.
- 75% of ESG indexes outperformed their broad market equivalents in 2020
- 88% of ESG indexes outperformed for the five years through the end of 2020
- 91% of ESG indexes lost less than their broad market equivalents during down markets over the past five years, including the most recent COVID-19 bear market of 2020
What’s the story? Combining the significant growth of the ESG investment landscape and the performance data over the last five years, two primary conclusions can be drawn. First off, more and more money continues to flow into ESG investment vehicles. Secondly, and even more importantly, the money being invested is outperforming investment vehicles that have not incorporated some form of ESG investment factors.What is Matco doing with respect to ESG investing? Matco’s view since 2018 has been that the growth trend in ESG investment factors is long-term and here to stay. We also believe that the current frameworks for ESG investing are not perfect but they will continue to improve over the coming years. We pride ourselves on staying true to our Matco M-Factor investment process, which focuses on analyzing fundamental investment data. We also understand that the investment landscape evolves over time. Our commitment is to determine which aspects of this evolution can be meaningful in our mission: to preserve and grow capital for our clients.Over the last year, we began analyzing the inclusion of ESG factors to compliment our M-Factor process. The results have been encouraging, showing that the inclusion of ESG factors can generate additional incremental returns, while providing additional downside protection in bear (down) investment markets. Over the coming months, we will continue to rigorously analyze additional data. The results will ultimately determine if and how we begin to incorporate ESG into our investment process. We are excited by the prospects based on what we have seen so far and look forward to providing further updates soon.In the meantime, if you have any questions regarding ESG investment factors or our Matco M-Factor investment process, please don’t hesitate to reach out.[Source: Morningstar]Trevor Galon, CFAChief Investment OfficerLocal: +1-403-718-2130