Breaking down trends in ESG products

Environmental concerns are changing how asset managers consider risk, with investors demanding impact products, emissions reduction and divestment from fossil fuel companies, CIBC’s sustainable investment head says.

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“Investors need to be more conscious of how their managers consider [environmental, social and governance] factors, and how ingrained the process is within the investment process,” said Aaron White, vice-president of sustainable investments at CIBC Asset Management.

“We’re currently seeing scrutiny directed toward how we manage ESG risks. And I believe that as ESG integration continues its wide adoption, we will see more regulatory and investor interest on the authenticity and results related to how managers consider these factors within their process.”

Impact investing is the most interesting product trend at the moment, White said. CIBC and other firms are working to develop frameworks for assessing investment outcomes and linking those outcomes to impact, he said. The strategies will track and report non-financial impacts to help investors align their investment goals with their values.

“While there is a limited amount of investment strategies in this area today, as research and investment processes evolve, I would expect this to be the next frontier of ESG investing,” he said.

Another trend is fossil fuel divestment. While there’s some debate about whether divestment is a better approach to influencing the energy transition than engaging with companies, investors “are focused on divestment,” he said.

“There are two key drivers to this theme. Firstly, a values alignment objective where investors believe that divestment advances their goals of an energy transition,” White said. “And secondly, an investment thesis where investors believe that the traditional energy sector can’t offer growth as transition becomes a larger global focus.”

Meanwhile, oil companies are looking to demonstrate their capacity to change. On Wednesday, a group of Canada’s largest producers announced a joint strategy to reach net-zero greenhouse gas emissions by 2050. The plan includes building a carbon sequestration facility in Cold Lake, Alta.

While many investors consider divestment, White said, others are trying to reduce emissions within their portfolios.

“The challenge with these strategies is that currently the data is not perfect,” he said. “However, as disclosures and reporting standards evolve, I think we’ll start to see increases in emission-focus solutions.”

One potential solution is carbon offsets, which some companies and asset managers see as a way to reach net-zero commitments sooner.

“As we work towards net zero in 2050, offsets certainly will play a role. However, they should not be the starting point,” White said. “We need to first reduce emissions through operations and a real energy transition — perhaps using technology like carbon capture can play a significant role — and then use offsets as a last mile type solution, reducing the inevitable final emissions.”

Sustainable fixed-income products are also on the rise. Growth in Canada has been limited to green bonds, which finance environmental projects. In Europe, White said, sustainably linked bonds — which have sustainable targets integrated into the bond’s covenant and can assess penalties to the issuer — are becoming more popular.

“All of these bonds typically trade at a slight premium to the issuer’s traditional debt and therefore create incentive in cost of capital for the company to make these commitments,” he said. “I think we’ll see an acceleration and issuance, and, as we do, an increasing number of investment solutions catered to investors.”

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