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Episode 23: Responsible investing is part of our investment management process

Jean-Francois Bordeleau, Senior Practice Manager, and David Laroque, Portfolio Analyst, at MD Financial Management (MD) discuss responsible investing at MD – why it’s important, how it works and why it’s ingrained in our investment management process.



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Thank you again to all the doctors and health care professionals out there for taking care of us at this time. While you’re focused on public health, we here at MD are committed to protecting everything you’ve worked hard to achieve. We are here for you and your family. If you have any questions about topics covered in this podcast or your financial plan, we are here to help.

Why is responsible investing so important to MD?

[Jean-Francois Bordeleau 0:55] You know what Alex? That question almost brings me back 25 years ago, when I started at MD. And one of the first things that I was told is that, you know, at MD, we understand physicians, that we know physicians best. And one of the ways in which this comes to life is understanding some of the values that Canadian physicians do espouse. And responsible investing, or the concept of responsible investing, is closely aligned to that.

You know, when we look at the word responsible, it implies, do no harm or do less harm, do good, do help. So, when we look at things like the environment and social issues, these are things that are important to many, many physicians, and as such, this is something that we're paying attention to.

How do we create long-term value for our clients by promoting positive change?

[David Laroque 2:01] Thanks for the question, Alex. MD has strived to design a robust, responsible investing framework that will align with our investors core values. We believe that incorporating responsible investing into the investment process will help deliver superior long-term performance for our clients.

At the highest level, we have our responsible investment policy which formalizes the incorporation of environmental, social and governance factors into the investment process. This policy extends to all of our portfolios managed by MD and is highlighted by the United Nations supported Principles for Responsible Investing six core principles.

Outside of this overarching investment policy framework, MD has also shown the ability to listen to client feedback and to be sensitive about issues that are important to our clients. This most clearly can be seen in the exclusions of tobacco and cannabis products, where we employ a negative screen to ensure our funds will not directly invest in manufacturers.

I would be remiss if I also didn't bring up our fossil fuel free bond and equity funds, which came about because of clients’ strong views against ownership of companies involved in fossil fuel. Understanding that this is not necessarily the right investment decision for all clients, these products nonetheless provide an alternative investment choice for those who may not be comfortable owning even the most responsible oil and gas companies.

How does our investment process incorporate responsible investing factors?

[David Laroque 3:18] So as mentioned earlier, MD's responsible investment approach is laid out in our responsible investment policy, which is posted on our website and This responsible investment approach is not a specific niche strategy, but a set of principles used in managing all of our portfolios.

As stewards of our clients’ capital, we feel it's important to be aware of all the risks, both your more traditional market-based risks, but also your ESG related risks associated with those investments. Nobody wants to be a shareholder in the latest corporate scandal in the news, it's not good for the company. And most importantly, for investors, not good for their investment returns.

So said another way, we look to get the best risk-adjusted returns for our clients that we can as fiduciaries. And in order to do that in 2022, we need to be aware of the ESG risks and [be] active in the responsible investing space.

So, you know, we have our strategy kind of broken down into four, kind of, pillars. So first, we look to incorporate our clients’ values. This can be reflected in something like our negative screen of tobacco and cannabis, additions to our product shelf like the fossil fuel free funds or additional focus on specific ESG related issues that are important to our clients.

Second, we consider ESG part of our investment process, and we want to know exactly what we own. So as dedicated active managers, our investment teams consider a broad range of ESG factors in their investment processes and have done so for many years. Rather than taking a passive approach to responsible investing, we conduct our own in-depth proprietary research and analysis. MD also has a significant portion of assets under management that are externally managed. We look to apply a similar ESG lens to those investments with the Multi-Asset [Management] team meeting regularly to review the holdings and identify any securities that might require action. So, in this case, we would consistently engage with our sub-advisors regarding ESG either through our annual stewardship reporting, or ad hoc requests related to individual investments.

The third pillar here would be our engagement strategy with companies that we own. So as stewards of your capital, we prefer constructive engagement over divestment. So, we've chosen to have a voice at the table of the companies that we invest in through proxy voting, and through direct engagement. So, this allows MD on behalf of our clients to advocate for improvements and corporate management on key issues that require shareholder votes.

The last kind of part of our strategy here would be that we would love to collaborate with organizations who share similar views. An example of this would be the UN supported Principles for Responsible Investment, of which we are a member, as are over 90% of the sub advisors that we work with. We also are members in Canada's Responsible Investment Association, and partner with many other likeminded organizations.

When we talk about client values, what are we looking at there?

[Jean-Francois Bordeleau 6:08] A couple of things, Alex, and I actually want to go back to your question, because a couple of key words there, one of which is influencing.

Now we've heard David talking about negative screening, which is one tool. But responsible investing or the concept of responsible Investing is not about divesting of everything, it's about making some conscious decision or understanding the impact. And when that investment, it may not be exactly what we're looking for, what our clients are looking for, to seek to engage, to influence for that positive change.

When we talk to our clients around some of the values that are closer to them. I mean, often we talked earlier about the E - environment, S - social, G - governance, and when talk about it, environment is the one topic that scores the strongest.1 And that's one of the reasons that has led to the creation of the fossil fuel free funds that we do have, so that those that wanted that step further, could have a product solution that met that need, that met their values. So that's one example Alex.

When I'm looking at another example, it’s a bit of a do no harm. So, physicians, they're here to help people have better health. So many, many, many years ago, when MD was owned by the Canadian Medical Association, there was a resolution passed, that the CMA will not encourage investment in tobacco product. And of course, as the investment arm of the CMA of the time, we did apply that negative screen in our investment solutions, and it is still on even though the ownership is no longer there, and that shows understanding of physicians.

But environmental issues, social issues, you know, maybe the last thing that we looked into that when we launched the Fossil Fuel Free Fund, we heard feedback from some of the early investors about a few other areas that were of more significant importance to them, one of which was weapons, and military and what was possible while fulfilling some of the duties that we have to provide certain investment returns. And we decided to add another screen around what is called controversial weapons.

So this is really about listening to the client, having the understanding of values, doing surveys, from time to time, to validate those values, and either have solutions that will closely support those values. Or if it's somewhat more complex, at the very least, consider those values as we engage with the money managers and the firms that are in our portfolios to influence those tough decisions.

What are ESG (Environmental, Social and Governance) factors and why are they important?

[David Laroque 9:07] Yeah, I'd be happy to Alex. So, there is a lot to unpack here. And there's quite a bit of depth behind each one of those but I'll just try and start it at the highest level here.

So, if you want to start with the one that gets the most attention, that would be environmental, so it comprises a wide range of issues. You know, anything from climate change impacts, carbon footprints, packaging and product waste, and natural resource sustainability. Most companies are focused on reducing their environmental impact and carbon footprint. Besides helping the planet, these practices can also have positive financial impacts. For example, reducing the packaging materials means lower spending and improved fuel efficiency, also helps the company's bottom line.

As a society and with the help of lawmakers, we're trying to hold companies accountable for their impact, something that we are seeing across all industries. So, companies setting targets of net-zero carbon emissions, ensuring their buildings are all green certified and increasing their sustainability through renewable resources. That all kind of falls under this environmental pillar. And so, you know, although the majority of the harm is probably caused by the few largest corporations, there's the hope that kind of stakeholder pressure is going to be like a rising tide that will lift all votes and result in increasingly sustainable operations across, you know, the supply and value chain across multiple industries.

So, looking at the second pillar, which would be social, it's a little bit more difficult to define. So basically, it comes down to a corporation's social license. So, do they treat their employees well? Are they a good neighbour, both locally and globally? Are they valued members of the communities they operate in? Now if we dig into each of those questions a little bit further, we can get some insight on how a company would be evaluated by a ratings agency or an investment firm.

So key issues for employees could comprise anything from career development paths to health and safety. This would also extend to a company's supply chains where we can look at their safety standards and labour practices – are people being paid fairly? Is the work environment safe? Many large corporations have struggled with this in the past, and they've been publicly pressured to improve their labour practices. So that anything like that would fall under the social end of the pillar.

So additional factors that we would want to look at define this social aspect would be a company's relationship with other stakeholders. Are they constantly under legal and regulatory scrutiny? Are people proud to have them in their communities? We've previously seen companies that have taken advantage of their position utilize a, I don’t want to call it a scorched earth policy in the communities they operate, but that's kind of what it was. If you think of an abandoned mining town or deforested areas. So, through an additional focus on ESG, there's a hope that we're going to see a change in corporate behaviour that will lend itself to more sustainable practices.

The final pillar here would be governance, which deals with companies’ leadership, executive and board compensation, internal audits and controls, anti-corruption, shareholder rights. Basically, corporate governance and corporate behaviour. We look to how well executive management and the board of directors align the interests of the company's various stakeholders. So, employees, suppliers, shareholders, customers, does the company give back to the community where it is located? Aside from the basic good governance practices, like proper reporting, and audits, we'd want to evaluate a company on a wider range of issues. So, we'd look at board composition, the amount of turnover, where, you know, we don't want entrenched board members, we are looking at diversity and inclusion, not just in the workforce, but also at the highest executive levels. We want to see incentives for the board and executives to have vested interest in the long-term sustainable success of a firm. An ideal way to enact this would be to have executive bonuses tied to factors outside of just revenue or income, you know, like employee or customer satisfaction or meeting certain environmental targets.

So, this pillar is where active ownership can really make a difference. So, in their annual proxy votes where both management and shareholder proposals will be on a voting ballot. If the board is perceived to be lagging on an issue or acting out of self-interest, they can expect significant pushback from engaged investors. It's not uncommon for shareholder proposals regarding diversity, sustainability and disclosure to pass despite management's objections.

Can you talk more about engaging companies to do better and provide some examples?

[David Laroque 13:19] Absolutely. Yeah, I'd be happy to expand on that. So, I think at the highest level here, it's often easier to enact the change you want to see when you have a seat at the table. So as JF was talking about, we have a negative screen for tobacco and cannabis. So, we can't really expect to have a say and how those companies are managed.

Now, if we do own those companies, and we obviously have a vote at the annual shareholders meeting, and we're happy to kind of exercise our right to do that. So, one way to be active owners would be through this proxy vote. So MD, utilizes the services of ISS to vote proxies on our behalf, using their sustainability policy, which will have us occasionally voting up against management's recommendations on key issues, anything from workforce diversity, to sustainable investments to additional reporting disclosure.

An example of kind of proxy voting, active ownership in action, would be what happened recently with Exxon Mobil, I believe it was in 2021. So, a bunch of shareholders have been lobbying to make changes to the board of directors at Exxon, to address the lack of focus on climate change and the firm's lagging financial performance. Two key pillars there. So as a demonstration of the power of active investors, we can see that in anticipation of this proxy vote which Exxon knew was going to be contentious, they spent about six months trying to appease the active shareholders. They launched a new low carbon fuel division, reshuffled a couple of directors, but ultimately it did not do enough to prevent the changes that were coming. So, the executives had pushed back on the narrative, but they had suffered a resounding defeat at the annual proxy voting meeting. So, with three alternative directors being elected, MD voted in line with the act of shareholders and against management's recommendations in this case.

we've also engaged directly with companies on behalf of our investors when we have concerns related to their ESG practices. Without getting into too specific of details we've spoken to corporations in the oil and gas, precious metals and financial industries, among others, in last year to kind of gain their perspective on ESG issues overall and specific ones that were affecting them. Although we have no specific targeted outcome for these discussions, we feel it's important for us to be engaged with these companies around ESG as part of our investment process, tying it back to receiving the best risk--adjusted return for our clients, these engagements can provide valuable insight into potential investment risks.

What do we mean when we talk about working with other organizations to advance responsible investing practices?

[Jean-Francois Bordeleau 15:40] There's a couple of areas in which we collaborate or partner with a few associations.

First, I'll start maybe internally, Alex, Scotiabank does have an ESG strategy. And they do have an action plan when it comes to improving and focusing on ESG related matters. So, our teams are in regular communication with those leaders of those areas within Scotiabank, to ensure that whatever we have in play, whatever we have in place, is aligned to that strategy and those principles.

Earlier, David mentioned that we are a signatory of the UN supported Principle of Responsible Investing, something that we often refer to as a UNPRI, and we're also a member of Canada's Responsible Investment Association. When we look at the UNPRI, something backed by the United Nations, it's really an association that's the leading proponent of responsible investing. And the mandate of that group is really to understand the investment implication of ESG factors, and to support the integration of these factors into investment ownership and decision [making].

So very much aligned to what David has shared with us throughout our discussion today. When we look at the RIA, the Responsible Investment Association, this is something that is in Canada. So, this is our industry association that is responsible for Responsible Investing in this country. And the membership includes people like ourselves, like asset managers, asset owners, some advisors, and service providers who promote responsible investment and responsible investing in Canada. So, these are some of the partnerships and collaboration that we do have in store amongst others.

Any final thoughts?

[David Laroque 17:33] I think it's probably just worth noting here that responsible investing and ESG, in particular, is rapidly evolving. So, we've seen significant improvements in the level and quantity of data that's available to analyze in even the last few years. So, rating agencies, they are, in my opinion, still perfecting their methodologies to truly capture all that accompany influences. You know, you hear often about, you know, scope one, scope two, scope three in terms of different carbon emissions. I mean, that's it's a completely different conversation. But there's a lot of data out there and being able to kind of refine it is, I wouldn't say it's a perfect science yet.

So, although it does feel like we've been hearing about ESG for a really long time, it's still in its relative infancy in the investment space. But anyways, I'm looking forward to continuing our work on it as responsible investors on behalf of our clients, for sure.

[Jean-Francois Bordeleau 18:22] One word that I take from what you've shared with us is that it's kind of early stage. And it's, it's early stage also in the spirit that responsible investing means something different to almost everyone, we put 10 people in the room, and we ask them, What does responsible investing mean to you? And we do get 10 different answers.

For some, it's all about divestment and divesting and, you know, that's one approach. And we do that in some of our solutions, like the fossil fuel free funds, and our negative screen on tobacco. It's more than that, by having a seat at the table, and you know, we're not, on purpose, investing in some of the most offensive companies. I mean, we are mindful of what we have exposure to, but by having some companies that are good, but not perfect, we do have a seat at a table to push for positive change, for lasting change. And this is something to me that's taking much more importance.

And when it comes to investing responsibly, when it’s about looking at the environment, social and governance factors, it's more than just about one approach to achieve that purpose. And from that perspective, you know, I really like what we are doing through the MD Family of Funds and different offers that we do have and the process that we have in place here. I mean, I do believe that it is very close to the value that physicians do have and it will fulfil the need of a majority of physicians, Canadian physicians, that have responsible investing concerns or considerations.

But we do have exposure to other investment options as well. So, if someone is looking for something very specific, we are able to do some research to find if such a solution does exist. So, I really like the opportunity that is available and the offering that we have for our clients in that space.


1 Client survey conducted in March 2022. When asked to rank Environmental, Social or Governance considerations in order of importance, 63% of surveyed clients ranked Environmental as the most important. Social and Governance were ranked most important by 19% and 18% of surveyed clients respectively.

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