Understanding the E, S and G of ESG

FEBRUARY 10, 2022

Environmental, social and governance (ESG) factors and sustainability factors have become increasingly important in building investment strategies that last.

As Head of Institutional Business at Sun Life Global Investments, Anne Meloche has seen first-hand the growing emphasis on sustainability in the investment world. As a leader of the business strategy delivering products and services to institutional Clients, Anne has deep knowledge of what makes up each of the three ESG components.

Q: Why is sustainability a topic of discussion in the investment sector?

A: We can no longer ignore the risks associated with these factors. It’s not just a switch that was flipped. Global warming is the most obvious example. That’s one of the E factors in ESG. The S factor gained prominence in 2020 and 2021 with the residential school tragedies, and the Black Lives Matter and #MeToo movements. The lack of diversity on company boards is another S factor that has come to the forefront. The G factor has grown in importance with the focus on proxy voting at shareholder meetings. We need to start thinking in solution mode instead of marketing mode.

Q: What impact does sustainability have on how investments are managed?

A: E, S and G issues are connected to systemic issues, especially climate-related risks. Research has shown this. That’s why there’s so much buzz in the market. Governments are aware of it, and now companies are too. If companies don’t make an effort to understand these risks, it will impact their sustainability in the long term. And that could affect their performance in the stock market. It’s a major concern for us.

On the other hand, there are also opportunities associated with the risks. Some companies embrace this sustainability dynamic on a daily basis. KBI, a sub-advisor we work with, invests in funds of disruptor companies, including some of the start-ups that are driving innovation.

It’s not about avoiding specific types of investments. Innovation requires financing. Large companies have to be supported as well. It doesn’t matter whether it’s a personal care products company making a less polluting bar of soap, or a chocolate maker trying to reduce its manufacturing footprint.

Q: How does sustainability impact your role?

A: We get questions from our Clients every day. People want to know about our approach to ESG factors. They also want to understand whether our approach aligns with their own investment principles. My role is to make sure we really understand our Clients’ needs, questions, principles and concerns. Then we provide the information they need.

Since most of our products are managed solutions, like Sun Life Granite Funds, that’s what we get the most questions about. Who determines the criteria? The concepts? The portfolio composition? The foundations? The strategies? We work together with the investment team to make sure that what we tell Clients reflects what goes on in their discussions with our sub-advisors.

Q: How does that impact the relationship with SLGI’s sub-advisors?

A: Since our offerings are managed by external partners, some of which are in the form of “fund-of-funds”, the selection of managers is critically important. Given our changing landscape and increasing relevance of ESG considerations, it’s vitally important for us to understand their overall approach to ESG. This extends to understanding how decision-useful criteria is embedded when selecting stocks. We ask them about it directly. We want to see the E, S and G factors in their research, investment decisions, and increasingly, in risk modelling.

We even ask them to show us the systems and processes they have in place to integrate the factors. We want them to show us how it works on a daily basis as they choose a stock. It has to start at the top with business leaders and then cascade to the rest of the firm. If there’s no buy-in at the top, it won’t cascade down.

Q: How does SLGI integrate sustainability into the investment strategies?

A: On the institutional business side, when our Clients choose investment funds for their capital accumulation plans, they are acting as fiduciaries in the best interest of the members. As a fiduciary, there’s no point investing in projects that align with their values if there’s no financial value. The two have to go hand in hand.

To make that happen, we collaborate with our sub-advisors, discussing transition plans and asking them questions. We work together to find solutions. We can’t stop emitting carbon just by snapping our fingers. We’ve started this major shift as a society. There have been some great innovations, but there is still a lot of work to do.

Q: SLGI signed on to the Principles for Responsible Investment and the Net Zero Asset Managers initiative this fall. Why is this important?

A: We recognize that there are climate-related systemic risks that can impact financial performance. Ignoring this is bad for governance. As a manager of managers working with more than 15 sub-advisors, we have seen quite a broad picture of the various ways to integrate ESG factors.

That being said, we don’t have all the answers. By joining the initiative, we’ve found a better way to share knowledge and work together to solve problems. The industry has joined forces, as we have on many other issues. This will help us decide on the best tools and practices. These are serious issues, and we need to stop thinking that we’re powerless to act just because we don’t have all the data or answers; it’s time to move forward.

Disclosure note:

Information contained in this article is provided for information purposes only and is not intended to provide specific financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment fund managed or sub-advised by SLGI Asset Management Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. Information herein has been compiled from sources believed to be reliable as of the date of publication, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy.

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