ESG investing in an uncertain environment

The ESG investing landscape has undergone significant changes over the last year, largely as a result of market uncertainty and the geopolitical events surrounding Russia’s invasion of Ukraine, CIBC Asset Management’s head of equity research says.

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“For investors, the geopolitical risk is higher, and it has had economic and market consequences with supply chain impacts and contributions to the inflationary environment that we continue to experience,” said CIBC’s Crystal Maloney.

One of the main areas affected by the invasion was the energy sector, Maloney said, as the world’s dependence on Russia and the Middle East as energy sources was thrust into the spotlight.

The energy crisis expedited the timeline to transitioning to renewables, she said, as the need for alternative energy sources became more urgent.

Additionally, the role nuclear power will play in the energy transition has become a topic of conversation, Maloney said, with some investors considering investments in nuclear-involved companies for the first time in years.

Inflation has affected the industrial sector, prompting investors to seek companies with strong pricing power to offset higher inflation. Higher interest rates have also affected the technology sector, causing an impact on higher growth and expensively valued technology companies.

However, as the tightening cycle nears an end, these sectors have somewhat recovered.

In this environment, Maloney looks to ESG analysis to shape investment decisions as it provides a comprehensive view of a company’s outlook by considering ESG factors alongside traditional fundamentals. In the Canadian market, Maloney said there are opportunities for investors who focus on stocks that are priced relative to their long-term fundamental value.

For example, CP Rail emerged as a favourite, Maloney said, offering defensive characteristics as a best-in-class rail holding. Its acquisition of Kansas City Southern provided growth, increased market share and improved profitability, she said. CP Rail also ranked highly in terms of ESG, with transparency, safety track record, energy efficiency and diversity programs.

Another opportunity in the industrial space is WSP Global, a leading engineering design firm with strong ESG credentials. It serves clients in the environmental sector, displays a strong M&A track record, and demonstrates defensive characteristics through business diversification, Maloney said. WSP also linked its credit facility to ESG-related targets, she said.

Kinaxis, a provider of cloud-based supply chain software, is another investment opportunity, Maloney said. Kinaxis is carbon neutral, using renewable energy at its data centres, and it reports scope one, two, and three emissions, she said. The company also prioritizes diversity and inclusion, surpassing goals for female representation and setting targets for hiring candidates on the autism spectrum and persons with disabilities.

Looking ahead, Maloney said investors can anticipate further developments in the ESG space. They should expect to see greater regulations to combat greenwashing, updates on climate risk disclosure rules from the U.S. Securities and Exchange Commission, and the finalization of standards by the International Sustainability Standards Board.

These will aim to standardize disclosure frameworks, making it easier for investors to compare companies and for companies to provide standardized disclosures.

“There are a number of items that we are keeping an eye on in terms of the upcoming year,” she said.

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