Why social issues matter to investors

It’s important to shield assets from potential risks. For foundations, pensions and wealthy people, those risks can include what’s known as environmental, social, and governance (ESG) issues.

It’s vital that foundations invest in accordance with their missions and core values; otherwise, they risk breaching the fiduciary duty owed to investors.

Pensions increasingly view themselves as universal owners that depend on a stable and growing economy. Environmental degradation and social unrest are impediments to long-term economic growth, so pension groups like CPPIB, BCIMC, and Québec’s CDP have created ESG policies and are taking steps to address these issues.

ESG issues don’t need to be financial drawbacks either. For example, firms that have a higher percentage of women on their boards of directors outperform their all-male counterparts to the tune of 4.8% annual return on equity.

Markets haven’t yet figured out how to price certain ESG issues, but you can beat the street by paying attention.

Since most portfolio managers haven’t integrated ESG into their risk analysis, asset owners are starting to search for managers who use ESG risk assessments to achieve superior risk-adjusted returns.

The best managers understand how ESG issues are affecting macro trends — like energy prices and the rise of the global middle-class — and can identify which companies are best positioned to outperform by creating efficiencies and gaining market share.

Managers who use this integrated ESG approach are more effectively considering emerging risks like water scarcity, carbon pricing, and human-rights violations in the supply chain.

At the same time, they are capitalizing on opportunities to invest in companies that are creating solutions for tomorrow’s problems.

As of Dec. 31, 2013, $1 trillion in Canadian assets are managed using ESG criteria, with the vast majority coming from funds that have signed the United Nations Principles for Responsible Investing.