The UN Principles for Responsible Investment (UNPRI) was launched in 2006 to promote a global standard for responsible investing for both asset managers and asset owners. Signatories essentially commit to incorporate environmental, social, and governance (ESG) issues into their investment analysis and decision-making process and in their ownership policies and practices.
Since those early days, the number of signatories has increased dramatically, rising to 2,232 in 2018. And that number will only continue to grow — according to a 2017 survey conducted by the CFA Institute, 73% of surveyed investment professionals see ESG factors becoming increasingly important in the investment decision making process in the near future.1
The financial risks of social concerns is real
At MD Financial Management, we signed the UNPRI based on a clear understanding that it's about much more than our signature. Almost all of our active portfolios are managed on a long-term fundamental basis, in these cases, we are looking for companies with resilient business models and management practices that can generate attractive risk-adjusted returns to help our clients achieve their financial goals — ensuring these businesses manage any ESG-related risks is part of that.
The consideration of ESG risks has quickly become about sound management practice. Take climate change for example — flood risk and weather-related risk has grown as the planet's temperature has risen. This has not only caused unfortunate hardship for thousands of people, there have also been lasting economic and financial consequences affecting many more.
In 2017, Hurricane Harvey dumped 1,000 mm of rain on South Texas and Louisiana over a period of four days. Risk Management Solutions analysts estimate the economic losses from the disaster at between US$70 and $90 billion.2 These are numbers that investors cannot afford to ignore.
Engaging responsibly to best represent our clients
In our funds and portfolios, we invest in many different stocks on behalf of our clients, which makes our funds (and effectively our clients) minority owners in these businesses. We exercise these minority ownership rights by following sustainability criteria through our proxy voting practices. Proxy voting gives MD a voice on behalf of our clients, to influence corporate management on key issues requiring shareholder votes. We understand that we need to consider all the risks with a business, including those related to ESG, for example, ecological risks related to material or energy companies and supply chain labour risks in fashion or apparel companies.
Many of our sub-advisor partners have ESG considerations built right into their investment process. However, as awareness for social investing grows, the field of available research around ESG-related risks is also expanding. We recently subscribed to MSCI ESG Research for additional third party data to review our portfolios. This allows us to efficiently monitor our funds and portfolios for ESG-related risks.
In cases where a company scores poorly, we initiate discussions with the underlying sub-advisor to understand their views on that company's practices to make a decision. This may ultimately lead to us engaging with the company to have them improve practices, or even exiting a position where the practices and or risks are considered too poor for investment. This concept isn't new to us — we have long avoided tobacco-related companies.
It's also prudent to mention that ESG considerations must be taken within the context of a company's entire outlook and position. Just because a company has an excellent track record in this area doesn't mean it is a good investment. There are many businesses that rank highly with regards to ESG considerations that we would consider to be too risky for investment.
Providing choice at MD
When it comes to personal beliefs and values, not everyone holds the same views.
With beliefs and values being highly unique, we've decided to provide our clients choice — options for investors so that they can choose a portfolio that aligns with their personal views. This is the basis for providing the MD Fossil Fuel Free Equity Fund™ and the MD Fossil Fuel Free Bond Fund™, both of which exclude companies involved in the production and distribution of fossil fuels and seeks to invest in companies that are developing solutions to problems caused by fossil fuel usage.
From our perspective, the fundamentals of the business is what matters most — our chief objective remains to achieve the best risk-adjusted returns for our clients so that they can achieve their own personal financial goals, but to do so in a responsible manner. It's important to us that our clients are comfortable with the companies they are investing in.
For more information about our investment strategy, MD Funds or your portfolio, please do not hesitate to contact your MD Advisor*.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).
1 Future state of the investment profession, CFA Institute
2 RMS models economic losses from major Hurricane Harvey and associated flooding, Risk Management Solutions
About the AuthorMore Content by Mark Fairbairn