For the greener good: Taking the lead in sustainable investing

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As the climate warning bells ring louder, an increased focus on environmental, social and governance (ESG) issues is high on the agenda for many companies worldwide. In fact, more than half of chief executive officers globally (57 per cent) are prioritizing climate action, according to a recent study by United Nations Global Compact and Accenture. In addition, 71 per cent are actively working to develop a net-zero emissions target for their company.

Sustainable investing is also on the rise, as an increasing number of ESG issues are financially material and as socially conscious citizens seek to align their investments with their personal values. With this new mindset, investors are seeing that making positive changes in the world can and must coincide with compelling financial returns. However, for investors eager to put their money toward the greener good, there are diverging views on the best path forward.

As the Canadian government recently announced more detailed elements of its climate strategy, companies and investors too need to double down on climate ambitions. This includes looking beyond just fossil fuels and energy companies but also looking at all major sectors. In other words, “there needs to be a total portfolio approach,” says Monika Freyman, vice-president, sustainable investing at Addenda Capital, one of Canada’s largest multi-asset investment firms with more than $40-billion under management.

The reason, she adds, is that a focus only on fossil fuels, although important, tends to overlook carbon emissions produced across all sectors, from heavy industry, transportation, buildings, agriculture and more. It also tends to view climate risks and opportunities too narrowly.

For Addenda, engagement is one key tool for activating positive change. The firm takes a climate transition approach, investing in companies that have goals and ambitions to meet emissions reduction targets and moving on a net-zero pathway.

This is especially important for a country such as Canada, where the oil and gas, transportation, agriculture and logging industries are vital to the economy and account for many companies and jobs across the country. These sectors are also generally greater greenhouse gas emitters.

“Our approach is to truly engage with companies and push them to have ESG and climate expertise on their boards, to have policies and strategies in place, and shift their business models,” Freyman says. “It’s not just about investing in a particular clean technology, but having a complete strategic shift in their thinking and approaches.” In addition, she says, Addenda looks to really understand climate transition and physical risks (and opportunities) throughout its investment decision-making processes.

“For example, our Commercial Mortgages investment team draws in data to gain insights into aggregate portfolio exposure to wildfire, storm, earthquake and flood risks. Investors have to remember that it’s not just about climate mitigation, but that it’s increasingly important to assess risks and build opportunities related to climate adaptation, and being more resilient. Flood and wildfire events in the West over the last several years have driven this point home.”

These aren’t necessarily easy approaches, but Addenda believes they are essential.

“Encouraging companies to be more climate aware and proactive requires more work for investors, but the work has to be done,” Freyman says, adding that there are financial and non-financial benefits. “Investors are seeing that making positive changes in the world can coincide with financial returns.”

A path to investing in saving the planet

How does Addenda support companies that are taking steps to reduce their emissions in pursuit of net zero? Addenda, which is co-owned by Co-operators Financial Services, has a long history of blending the analysis of ESG factors to its investment process. Most recently, Addenda launched two new investment funds: the Climate Transition Canadian Equity Pooled Fund and the Climate Transition International Equity Pooled Fund.

Among the first climate transition funds in Canada, Addenda’s equity funds invest in stocks of public companies that have signalled they want to be part of the transition to a lower carbon world. The funds are actively managed by Addenda’s portfolio management teams and feature climate selection criteria that will strengthen over time. With this comes a strategy to engage with these companies to encourage them to achieve their carbon objectives and to ratchet up their ambition over time.

“We have criteria for company inclusion in the portfolio based on their climate ambitions, and they become stricter over time as climate ambitions need to rise to meet net-zero goals,” Freyman says. “That’s why engagement is core to this. We want to see companies moving along with their ambitions on the road to lower carbon and climate transition.”

Addenda also joined the Net Zero Asset Managers initiative, a group of 236 global asset managers committed to supporting the goal of net-zero greenhouse gas emissions by 2050 or sooner. This growing movement is in line with global efforts to limit warming to 1.5 degrees Celsius and investing aligned with this goal.

Addenda is also a founding participant of Climate Engagement Canada (CEC), a finance-led initiative that drives dialogue between the financial community and Canadian corporations to promote a just transition to a net-zero economy. Akin to the global Climate Action 100+ initiative, of which Addenda is also a participant, CEC aims to work collaboratively with companies to address climate change risks and opportunities.

“Investors in Canada are coming together to engage with 40 of the country’s highest greenhouse gas emitters in the country, so it’s a force to bear,” Freyman says. “Collectively, we’ll work on climate action to build a sustainable future for all Canadians.”

For more information, visit Addenda Capital.

Advertising feature produced by Globe Content Studio and Addenda Capital. The Globe’s editorial department was not involved.