Fitting ESG into portfolios

Investors who care about the United Nations’ sustainable development goals (SDGs) should consider forest products, says Dominique Barker, portfolio manager and senior equities analyst at CIBC Asset Management.

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Investing in lumber relates to multiple SDGs, including climate action, infrastructure, and sustainable consumption and production, she said in a Feb. 21 interview.

Lumber, which has traditionally been used in homebuilding, remodelling and repair, is becoming more common in commercial real estate, Barker said. “We are seeing some changes to construction methods to allow for large buildings made of wood.”

This is important for sustainable development because lumber can replace cement and steel, which account for 5% and 3% of global greenhouse gas emissions, respectively, she said.

“When a tree grows, it is capturing carbon,” Barker said. “So if we can use lumber in commercial real estate construction, we can actually capture and store that carbon for long periods of time, which would be an immense benefit from a climate-action perspective.”

Barker noted that Sidewalk Toronto, a high-tech urban development slated for Toronto’s waterfront, will be made mostly of wood. “It represents the SDG of infrastructure and responsible consumption and production,” she said.

From an investment standpoint, one company that’s producing lumber in Canada is West Fraser Timber Co. Ltd. The B.C.-based company operates 45 manufacturing facilities in Western Canada and produces wood panels and pulp.

“It’s attractively valued and has a double-digit free cash-flow yield,” Barker said. “[It has] practically zero debt on its balance sheet, and it continues to buy shares. So it’s a nice investment from a financial perspective, but it also is helping solve some of the sustainable development goals that we’ve set for ourselves.”

On March 18, West Fraser opened at $65.69. The stock’s 52-week low was $60.44 while its high was nearly $98 (in June 2018).

Analyzing a company board

Clients focused on environmental, social and governance (ESG) factors can also look at a company’s board to ensure it’s managing its human, environmental and social capital. This allows for good governance, Barker said.

Key items to analyze include: diversity, skillset, ownership (e.g., do board members own company shares?), business ethics, legal and regulatory compliance, compensation and financial disclosure.

Board diversity is topical, Barker said, noting CIBC is a member of  the 30% club, a global organization promoting at least 30% gender diversity on boards of directors.

“We have been actively engaged with companies, along with other investors in Canada, to add more women onto the boards,” she said.

One driver of board diversity in the investment industry is the Canadian Securities Administrators’ (CSA) women on boards initiative, which requires disclosure of corporate governance practices across Canada. In its most recent review, the CSA found the percentage of board seats held by women has increased to 15%. The percentage rose to 25% among the largest companies (the 47 issuers with market capitalization of greater than $10 billion).

When looking into business ethics, and legal and regulatory compliance, Barker suggested finding out how much a company lobbies the government.

“Lobbying the government can be a red flag to investors because it could mean [the company is] trying to change the laws to benefit them. And if they’re not successful, it could have negative repercussions,” she said.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.