The Observer

Articles of Interest

ESG implementation: navigating the evolution of your practice

By Margaret Childe, Managing Director, Head of ESG, Research and Integration, Canada, Manulife Investment Management

Q: How does ESG information fit into the evolving regulatory environment?

This is an evolving consideration on all fronts. The Pension Investment Association of Canada (PIAC), in its response to the federal government’s 2020 consultation paper, “Strengthening Canadians’ Retirement Security”
[1] notes that “PIAC believes, because of the potential for ESG factors to have financial impacts on plan investments now and well into the future, it is within the scope of our members’ role as fiduciaries, as currently defined, to consider these in their investment processes.” PIAC further lays out its support for principles-based guidance from the federal government that affirms that “the consideration of ESG factors, including climate change, in the investment process is consistent within a fiduciary framework and which encourages pension plans to both consider ESG factors in the investment process and to disclose how ESG is integrated into the management of pension assets.” [1]

In my capacity as an ESG analyst, I’ve observed that ESG information can be relevant to the risk/return profile of an investment. Some of the challenges that can be faced when incorporating ESG factors into the investment process include the consideration of time horizons and access to useful, comparable ESG data. It can be difficult for investors to predict the value of future losses or gains or even try to determine when those losses or gains might occur. ESG factors may be material over a longer time horizon and understanding the impact those risks have on our environment and society requires continued transparency from issuers, and consistent disclosure of material business risks and opportunities. 
Q: What are the different approaches to ESG?

ESG practices can be illustrated across a continuous spectrum, and we will focus on the most common ones. ESG integration is about systematic inclusion of financially material ESG issues in investment analysis and decisions, with a focus on material ESG factors. A thematic approach may focus on a specific goal such as climate change or diversity and inclusion. Negative screening will restrict investment in certain areas deemed as sensitive business areas., Socially responsible investing is often associated with negative screening, given its focus on doing no harm, and may exclude areas such as tobacco, weapons, and coal, but may also include positive screens as well; for example, issuers with at least 30% female representation on the board.

If considering how to begin the process of developing an ESG statement or policy, see the Principles for Responsible Investment guide “
Writing a responsible investment policy”. [2]  
Q: Can you explain the components of a strong stewardship approach?

Expectations for components of stewardship codes have common fundamental principles across markets at this stage in the global development of stewardship codes. There are, however, some nuances that investors should consider when executing against specific jurisdictional codes. Virtually all codes—which today span 20+ markets—include principles directing asset stewards to responsibly and transparently exercise their rights and responsibilities, collaborate with peers and policymakers, engage with their investee companies, integrate ESG factors into investment decision-making, and build robust mechanisms to mitigate conflicts of interest. For example, the
UK Stewardship Code, set by the Financial Reporting Council, comprises a set of 12 apply-and-explain principles and sets high stewardship standards for asset managers and asset owners. [3]
Q: There are an increasing number of ESG consultants. What credentials should be considered when looking to engage with a consultant?

There is a lack of standardized credentials that are globally recognized, and this is an issue that affects ESG practitioners broadly. There are developments in this space; for example, the CFA Institute launching a new global ESG investing qualification, which aims to teach certificants how to integrate material ESG factors into investment analysis. The Sustainable Accounting Standards Board also has a two-part certification, and there are courses available through Canadian institutions as well. However, a certificate is best complemented by experience in working with asset owners on their ESG efforts; for example, this can include public policy experience relevant to ESG issues.

There has been a lot of momentum around ESG, and we see this reflected in the efforts of consultants as well. Some consultants have developed their own internal framework where they rate the investment and ESG capabilities of managers. This has moved beyond a check-the-box exercise, where consultants are developing more structure to how they evaluate managers. However, there are no requirements as of yet to have these validated or verified by an independent third party. Where the plan sponsor or administrator does not believe it has sufficient knowledge on the topic of ESG factors, it would be prudent for it to seek advice from an external advisor who has expertise and experience in this area. Best practice dictates that the administrator should look for consultants that have appropriate credentials and relevant experience.

Q: There is increasing concern around greenwashing. How can this be addressed?

Greenwashing in ESG integration can be distinguished from greenwashing in thematic investing. For ESG integration, the investment management team should be doing their own ESG analysis—this requires education and training to develop a high level of expertise. Third-party ESG research is a valuable tool for investment managers to consider, but it doesn’t replace the due diligence done by the investment team.  We work with our clients to better understand their investmen. objectives, and we believe that asset owners should ask for examples of ESG integration in practice and look for whether the manager has employees who are knowledgeable about ESG, access to third-party ESG data sources, and training to bring this all together. This can be trickier for passive investments, where the concept of stewardship is all the more important. For thematic investing, the reporting and tracking of the objective should be transparent. Best practice accounts for both the positive and negative impacts from thematic investments—not just the positive.
Q: Are there additional resources for plan administrator’s that may be useful?

There are some great resources out there to help, including the PRI’s “
Asset owner resources” page, which includes guides and tools to help asset owners review ESG practices through selection, appointment, and monitoring of managers. [4] The PRI resources even address the question of culture—likely one of the most important indicators for assessing a manager.

For a recent overview of the Canadian asset management industry, EY released
findings on its survey of Canadian managers, which provides some insight into current practice. [5]
Q: What tools are available for climate risk assessment? How does a plan administrator begin to incorporate climate risk into the investment process and manager oversight?

The development of climate risk assessment methodologies and tools, such as scenario analysis, is a work in progress. There’s a good deal of uncertainty associated with the climate transition that needs to be considered in a climate risk assessment. Climate change presents varying levels of physical (e.g., extreme weather events) and transition risk (e.g., policy), and the time horizon over which the risk manifests itself is a key factor that varies across the different lines of business and investments, which adds to the complexity of assessing climate risk impacts. The starting point should be a simplified approach differentiating two different time horizons—short term (e.g., 2020­–2030) and long term (e.g., 2030–2050)—and the potential implications of both physical and transition risk across them.

  • The short-term perspective could provide insight into how climate change risk is assessed in today's risk landscape and business planning horizon.
  • The long-term view could be used to begin discussions on long-term business opportunities and/or strategic implications.[6]


Margaret Childe, Managing Director, Head of ESG, Research and Integration, Canada, Manulife Investment Management

Margaret Childe is Head of Environmental, Social and Governance (ESG) Research and Integration, Canada, at Manulife Investment Management. She is responsible for working collaboratively and proactively with Manulife IM’s Canada-based investment teams on ESG integration, identifying and managing ESG risks and opportunities for Canadian portfolios. Margaret also works on global ESG integration projects and methodologies for ESG product development and represents Manulife IM’s ESG capabilities among the local investment community.