The squeeze is causing the environmental, social and governance (ESG) industry to push back against conservative attacks by asserting that its only goal is to protect investors from social and environmental risk. 

But some industry leaders say the conflict demands a new approach based on real-world impact – particularly on CO2 reductions – and away from the sole reliance on environmental and social risk. 

In August, Texas banned 10 asset managers and about 350 investment funds from doing business with the state, including management of US$300 billion in public pension funds, for supposedly “boycotting” oil and gas companies from their portfolios. 

Recently, Republicans have focused their attacks on BlackRock, the largest asset manager in the world and a high-profile proponent of ESG investing. Nineteen Republican-led states accused the company of ignoring investor needs by supporting climate commitments that “force the phase-out of fossil fuels, increase energy prices, drive inflation, and weaken the national security of the United States.” 

BlackRock is scrambling to push back against the attacks, insisting it’s simply working to manage the risks of the energy and climate transition. ESG industry analysts have joined BlackRock in condemning the attacks. “These efforts are an attempt to gin up another phony grievance about how ‘liberal elites’ are destroying the country,” says Morningstar ESG analyst Jon Hale, adding it’s laughable to think of Wall Street money managers as left-wing ideological warriors.  

Former U.S. vice-president Mike Pence helped kick off the conservative backlash when he declared in May that “the woke left is poised to conquer corporate America and has set in motion a strategy to enforce their radical environmental and social agenda.”  

Republican denunciations of sustainable investing are an absurd caricature of the industry, but they have helped to expose the confusion and lack of standardization in ESG assessments, making the industry and the money managers that rely on them vulnerable to attacks from both climate-concerned investors and business-as-usual conservatives. 

Take BlackRock, for instance. The company is a strong proponent of “stakeholder capitalism” and is a prominent member of the Net Zero Asset Managers (NZAM) initiative, a global network pledging signatories to reduce financed emissions to net-zero by 2050. But these declarations contrast greatly with BlackRock’s record. 

The company holds more than US$300 billion in fossil fuel investments, including more than $100 billion in Texas companies. In its NZAM disclosures, BlackRock says it expects its portfolio companies to evolve toward net-zero, which means that it doesn’t need to divest its fossil fuel investments. It has also said it plans to vote for fewer climate-related shareholder resolutions in coming years as investors ask for increasingly detailed and demanding greenhouse gas commitments from their investee companies. 

These efforts are an attempt to gin up another phony grievance about how ‘liberal elites’ are destroying the country.

-Jon Hale, ESG analyst at Morningstar

But BlackRock isn’t the only financial company with an ESG reputation problem. Banks, investment managers and asset owners all rely on the global system of ESG ratings, which has faced growing criticism.   

In addition to confusion in ESG assessments, a recent Bloomberg investigation found that rating agencies like MSCI focus more on a checklist of corporate policies rather than actual company impacts. It cited the example of McDonald’s, which received a rating upgrade after improving some environmental policies despite the fact the company’s massive beef purchases produce more greenhouse gas emissions than the country of Portugal.  

This is prompting some industry leaders to call for reform. 

“That checklist is a blunt instrument that doesn’t reflect the challenges, subtleties and trade-offs of ESG,” says David Blood, who co-founded Generation Investment Management with former U.S. vice-president Al Gore. “People say sustainability or ESG is always a win-win – of course it isn’t. There are trade-offs.”   

This question of trade-offs is becoming increasingly important. The energy crisis triggered by the Ukraine war is forcing some asset managers to sacrifice CO2 reductions needed in the next decade for growing fossil fuel profits. This goes against traditional sustainable finance belief that there’s no conflict between financial return and ESG performance.  

“Investors increasingly want both sides of ESG: to mitigate risk and to make a difference in the world,” says Morningstar CEO Kunal Kapoor. “These are not the same, and they come with a new set of trade-offs for investors to make.” 

The current situation is causing ESG rating agencies to add impact metrics to their product listings, in part to meet new European Union sustainable fund classifications. And while many small investment managers have specialized in ESG impact for years, giant asset manager JPMorgan recently announced a new “double materiality” product, incorporating present risk and future impact. 

The UN-backed Race to Zero initiative also has the potential to drive real-world impact. Earlier this year, Race to Zero mandated that all entities pledging to achieve net-zero by 2050 under UN rules will need to avoid new fossil fuel investments, starting within 12 months. This includes banks, insurers, asset managers and asset owners that are members of the US$130-trillion Glasgow Financial Alliance for Net Zero. 

This is expected to put enormous pressure on companies like BlackRock and the world’s largest banks and asset managers to reject new oil, gas and coal investments, setting the stage for even more conflict with Republican lawmakers. 

But this may be a necessary consequence of needed ESG industry reform. If the sector can evolve toward a model of transparent, real-world corporate assessment, rather than relying solely on the notion of present-day risk, it will be better equipped to withstand the clash from conservative and sustainability critics. 

Eugene Ellmen is a former executive director of the Canadian Social Investment Organization (now Responsible Investment Association). He writes on sustainable business and finance. 

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In that crucial decade of the 1980s, Hutchinson pioneered the practice of shareholder engagement on social and environmental issues, a lifetime achievement for which she was recently appointed a Member of the Order of Canada. 

She was named to the Order “for her substantial contributions to Canadian socially responsible investment, notably through the Taskforce on the Churches and Corporate Responsibility.” And her appointment is the first time someone has been appointed to the Order for their work in responsible investment.

During the 1980s, Hutchinson served as coordinator of the Taskforce on the Churches and Corporate Responsibility (TCCR), an ecumenical coalition that operated between 1975 and the late 1990s. Under Hutchinson’s direction, TCCR was instrumental in introducing the concept of shareholder advocacy to Canada, a fundamental strategy of responsible investment. TCCR’s work helped to pressure Canadian companies to disinvest from South Africa and to support sanctions against the apartheid regime in the 1980s. 

The task force also worked on a wide range of what we now call environmental, social and governance issues two decades before the ESG acronym became common in the investment world.

“Church investors dared to come to annual meetings to ask questions, or even worse, church investors filed shareholder proposals,” she wrote in a 2018 blog about her early work. “That was very new in Canada. So, company spokespersons and shareholders who were friendly often said, ‘Why don’t you just sell your shares if you don’t like what we’re doing?’ That’s what they really wanted, because then we would be gone.” 

In addition to her work with TCCR, Hutchinson has served on the boards of numerous NGOs and on the investment committees of the United Church of Canada and the Atkinson Foundation.

Her influence was felt throughout the responsible investment community. Her fierce advocacy for shareholder rights, for example, inspired much of the early public policy work of the Social Investment Organization, which I led during the early 2000s.

After her appointment, I caught up with her by email to talk about TCCR’s early history and what its work means for responsible investing today.

The following interview has been edited for brevity.

Eugene Ellmen: It’s great that your work with TCCR has been recognized as an important contribution to social and economic justice in Canada. Congratulations!

Moira Hutchinson: Thank you! I’m still in a state of disbelief.

EE: What were the biggest challenges you faced as head of TCCR decades ago? 

MH: We operated under the assumption of relatively open access to the shareholder proposal mechanism until 1987, when a court [ruled] that a corporation could exclude a proposal that it believed was submitted “primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes.” The precedent made it easy for corporations to exclude almost any proposal from their proxy circulars until 2001, when this clause was eliminated as part of a broader set of Canada Business Corporations Act (CBCA) reforms.

It wasn’t, however, the legal framework that was the biggest challenge. The legal framework simply reflected the ideas prevalent in the investment community about the meaning of fiduciary responsibility. The consensus was that [investment fund] trustees must act in the best interest of their funds, and “best interest” was primarily defined in economic terms. 

Despite the lack of easy access to the shareholder mechanism to influence corporations, TCCR thrived until financial cutbacks in the churches led to its closure in the mid-1990s. We had developed a strong methodology of research and engagement with companies, regulators and governments for work on a range of issues. For example, we developed a significant investor presence on issues of forest land management.

Fortunately, there was continuity in applying what we had learned in this process, as Peter Chapman, the lead TCCR staff in this work, went on to become the founding CEO in 2000 of SHARE (Shareholder Association for Research and Education).

EE: How much of a change has happened in the management/investor relationship in the last 50 years? Have we really emerged from the age of Milton Friedman, when he said in 1970, “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.”

MH: The “rules of the game” concerning the relationships between corporate managers, institutional investors and society are evolving, and are being reinforced in part through government intervention. It will take vigilance to maintain this evolution. I’m encouraged by the fact that SHARE now brings together more than 120 investors – foundations, asset managers, Indigenous trusts, universities and religious organizations, representing $90 billion in assets under management. Its size and multi-sector representation means it is much stronger than TCCR ever was. Also, like TCCR, it engages with governments as well as corporations on “the rules of the game.” 

EE: There’s a general concern about greenwashing and the dissonance between what many companies say they believe about ESG issues and what they are actually doing. Do you feel corporate greenwashing has increased or decreased from the 1970s and ’80s? And what can investors do about it?

MH: Concern about greenwashing isn’t new, although I don’t remember calling it that in the 1980s. Over time, TCCR and other NGOs pressed for maximizing the access of shareholders and other stakeholders to information, shifting the emphasis from corporate responsibility to social accountability. In response, codes of conduct were developed in a number of contexts:  mining, forestry, the apparel industry, et cetera. They represented an improvement over when corporate responsibility was measured only in the limited terms of charitable contributions or a corporation’s own definitions of “best practice.” 

The role of investors in improving access to verifiable information is also critical. The effort that church investors through TCCR made in the ’80s and ’90s to get improved corporate disclosure continues. I know, from experience on institutional investment committees, how difficult it is to assess asset managers’ claims that they are doing the research and have the commitment needed to truly integrate ESG into their services. I’m encouraged that SHARE, for example, is working on two fronts to address this problem:  seeking improved disclosure regulation and bringing together coalitions of investors to meet jointly with asset managers.

EE: The debate about divestment versus engagement in fossil fuels is probably more heated now than ever. What are your thoughts on that?

MH: Choosing among responsible investment tools – positive and negative screening, divestment and engagement – is complicated. They are all important, and the most effective tool will vary depending on factors such as whether the issue is company-specific or broader, timing, the size and type of investor, possibilities for working in coalitions, et cetera.

I’m strongly influenced by my experience with TCCR’s efforts to support the end of apartheid in South Africa. At that time, most anti-apartheid activists outside of the churches gave their attention to divestment strategies. The “clean hands” approach of divestment best expressed the moral outrage of activists over apartheid. As well, divestment was the “hassle-free” alternative for institutions such as universities under pressure from their students and faculties. What was not well understood was the distinction between divestment (selling one’s shares) and seeking disinvestment by companies from South Africa.

The churches, through TCCR, enabled sustained attention to what companies were doing – seeking meetings with management, asking questions at company annual meetings, or even worse, from their point of view, filing formal shareholder proposals for inclusion in the proxy mailing to all shareholders. Early in our history, we were so unwelcome that on one occasion a bank chairman turned off the microphone at the bank’s annual meeting so that a church representative couldn’t ask a question. 

How does this history relate to our climate change crisis and the debate over fossil fuels? Both divestment and shareholder action have a role. Climate change cannot be addressed by only changing your portfolio. It must be addressed by changing the economy. So whether or not an investor chooses to own shares in fossil fuel producers, every company in the portfolio – railroads, banks, grocery stores, manufacturers – should be developing a strategy that is consistent with the goal of keeping climate change under 1.5°C. It’s encouraging to see the development of investor coalitions such as the University Network for Investor Engagement, through which university endowments and pension plans are collaborating to press companies on this agenda. 

EE: How permanent are the gains of the 1970s, ’80s and ’90s in establishing the importance of ESG issues? Will ESG be resilient enough to withstand attacks from the courts (such as the recent decision from the Supreme Court of the United States on climate regulation), conservative business people and politicians, or the culture itself?

MH: There is increasing recognition by investors that addressing public policy is an integral part of responsible investment, and that’s a positive development. Governments create the rules within which markets operate. I can only hope that investor coalitions will continue to press governments on issues related to responsible investment.

Eugene Ellmen was executive director of the Social Investment Organization (precursor to the Responsible Investment Association) between 1999 and 2012. He now writes on sustainable business and finance.

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Fasten your seat belt. Annual shareholder meeting season is coming up, and North America’s biggest companies can expect a bumpy ride.

Activist shareholders are gearing up to challenge more corporations on how they manage diversity, equity and inclusion. What used to be a box-checking exercise has gained real urgency after two social upheavals – the unequal impacts of COVID-19 and the death of George Floyd at the hands of Minneapolis police in the spring of 2020 – revealed the enduring hold of systemic racism in North America.

It’s no longer enough for companies to form diversity committees or hold inclusion workshops. Activist investors, mainly on the pension fund side, are demanding that big firms conduct intensive “racial equity audits” by outside experts to discover all the overt and hidden biases in their corporate culture, recruiting and compensation – not to mention their operations and products and services. Only with plans based on thorough, objective disclosure of their actual policies, practices and histories, activists say, can companies root out systemic racism.

Prodded by social critics, Facebook began a “civil rights” audit in 2018. The audit took two years to complete, and 18 months later the company (now renamed Meta) is still responding to the report’s recommendations. The same auditor, Laura Murphy, previously examined Airbnb, a process that resulted in the property-sharing platform adopting a strict non-discrimination policy and creating a dedicated anti-discrimination team.

Few companies like digging so deep. When U.S. institutional investors started pushing racial audits a year ago, Wall Street pushed back. Firms said they were already well engaged in diversity and anti-racism and didn’t need costly audits (or, presumably, the embarrassments that might emerge from them). Companies such as Citigroup, JPMorgan Chase and Amazon won heated proxy fights at their annual meetings. But activists gained one huge win last spring when BlackRock, the world’s biggest investor, with US$8 trillion under management, caved. It agreed to begin a racial audit in 2022.

It’s no longer enough for companies to form diversity committees or hold inclusion workshops.

But the activists kept pressing. In October – six months after asking regulators to block a racial audit resolution – Citigroup became the first big U.S. bank to agree to a racial audit. (Citi has published back-patting “diversity reports” since 1999, but recently it was fined US$25 million for failing to offer mortgage discounts equitably to all clients.)

Activist shareholders are expected to fight even harder this year. And companies that resist may be on the wrong side of history. A report from New York law firm Olshan Frome Wolosky says U.S. securities regulators generally support expanded reporting and disclosure on environmental, social and governance (ESG) issues.

The report included a sweetener for management: research indicates that “companies that affirmatively adopt meaningful approaches to these issues may not only help progress environmental and societal goals, but may also potentially see improved financial performance.”

In Canada, racial audits tend to be called “diversity audits,” or even “employee wellness” studies. So far, they have been more common in the public, education and not-for-profit sector than in business. But they’re coming, warns governance consultant Richard Leblanc, a professor at York University. He notes that new federal laws hold directors of Canadian companies responsible for more than just the health of their firms. They must also consider the short- and long-term impact of company operations on all stakeholders, including employees and communities. Forget proxy battles: Leblanc predicts activist shareholders will start suing companies that don’t provide full disclosure of their ESG impacts.

Rather than oppose social audits, Leblanc urges companies and boards to embrace and disclose them. Companies that take racial audits seriously will become employers of choice, he says. “You can’t fix what you can’t measure.”

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Of course, that was before the coronavirus began pummelling the economy. COVID-19 is only deepening our desire to support companies that behave nobly and put people and planet ahead of profits.

It just so happens that corporations with better environmental, social and governance (ESG) scores are proving themselves to be more financially resilient during the pandemic. Yes, sustainably minded funds have taken a big hit because of COVID-19, but Bloomberg found that they have been outperforming their conventional peers. Bloomberg’s analysis of 2,800 responsible investing (or RI, also known as sustainable, socially responsible or ethical investing) funds globally found that the average RI fund has fallen by about 12% this year as of March 12. That stings, but it’s just half the decrease seen by the S&P 500 Index over the same period.

According to Ipsos polling released by RBC Global Asset Management in January, two thirds of Canadians surveyed say they’re interested in RI. Nearly three out of four believe RI is “the way of the future.”

So why do so few Canadian banks offer any sustainably focused investing options?

Most bank advisors are poorly informed about ethical options

Corporate Knights anonymously visited Toronto branches of the Big Five banks in January and inquired about ethical investing. While some bank advisors were enthusiastic and fairly well informed, many advisors didn’t know whether their banks offered ethical investments or what those offerings entailed. Some advisors downright discouraged us from putting our savings into RIs. Notably, BMO and RBC were the only two banks that had dedicated RI funds.

The Toronto-based Responsible Investment Association (RIA) did its own polling with Ipsos in 2019 and found that while 79% of Canadian respondents would like their financial services provider to inform them about RI options, only 23% have been asked by their banks if they’re interested in RI. That helps explain why only a quarter of Canadians say they already have responsible investments, according to stats from Wealthsimple, BMO and the RIA.

In the U.S., meanwhile, new investments into sustainable funds quadrupled in 2019 compared to 2018 (pulling in a record US$20.6 billion in new money last year), and European investments doubled to a record-busting €120 billion, according to Morningstar.

Push to regulate the wild west of green investing

The tricky part for would-be purchasers is figuring out what investments genuinely align with their values. One CIBC branch advisor told Corporate Knights that “all the mutual funds we offer have gone through these ESG checks.” Ditto for all of RBC’s funds around the globe. That doesn’t mean they screen out any dubious companies or sectors. Only exclusionary funds with negative screens do that – and they may just screen out, say, tobacco and gambling but not thermal coal and oil. Part of the problem is there’s no universal standard for how terms like “ESG,” “low carbon” and “fossil-fuel free” are defined or applied, leaving funds vulnerable to “impact washing.”

Many Canadian ethical fund managers choose not to screen out fossil-fuel companies, instead investing in those they consider sector leaders. Which is fine for some responsible investors – if funds are transparent about it. But after the RIA received flak for listing fossil-fuel-free funds in its directory that were later exposed to contain oil and gas companies, the association is now considering creating a certification process for RI funds in Canada.

It gets even more muddled when retail investors start exploring the wider world of self-directed online trading accounts and robo-advisors (digital platforms such as apps that rely on software to offer financial advice), which often offer access to a number of American and international ETFs, or exchange-traded funds. (Branch-level bank advisors are generally not able to sell ETFs despite their booming popularity.) One ETF known as iShares MSCI ACWI Low Carbon Target ETF was called out for having holdings in Shell, Chevron and a number of other high-carbon companies.

To counter potential “impact washing” in Europe, the EU sets standards for the labelling of financial products, mandating that financial advisors disclose the sustainability risks of a finance product to investors, “regardless of the sustainability preferences of the end investors.”

Canada’s federally convened Expert Panel on Sustainable Finance recommended we do something similar here. The panel (which included Tiff Macklem, a Scotiabank director and Rotman School of Management dean, as well as RBC director Andy Chisholm) recommended that Finance Canada create “financial incentive for Canadians to invest in accredited climate-conscious products through their registered savings plans.”

How green are the banks’ own investments and loan books?

Many climate-conscious investors will also want to know just how their banks are dishing out their own money. All five banks have signed on to the UN-supported Principles for Responsible Investment, promising to fold ESG factors into investment decisions, though research by Corporate Knights has found that while the Big Five invest billions in sustainable-solution companies, they also invest billions in controversial weapons, for-profit prisons and severe environmental violators, as well as a number of other themes that would register as egregious on many responsible investors’ radars. All five also have loan books bulging with fossil fuels in relation to their renewable energy lending, putting them at odds with global money trends.

With former Bank of Canada governor Mark Carney cautioning that firms that ignore the climate crisis “will go bankrupt without question,” Canadians should be able to readily invest their retirement savings in environmentally-conscious options, sustainable finance champions say

With even central bankers now warning of climate-induced systemic financial crisis and former Bank of Canada governor Mark Carney cautioning that firms that ignore the climate crisis “will go bankrupt without question,” Canadians should be able to readily invest their retirement savings in climate-conscious options, sustainable-finance champions say.mo

In the meantime, the first RRSP deadline of the new decade gives Canadians a chance to rethink their finances, knowing there are now some options on the shelf that allow them to bank on a sustainable future.

Big Five ethical investing report card

We visited Toronto-area branches of the Big Five banks and asked advisors what ethical or sustainable investment options they offered. Here’s what we found:

Scotiabank

Ethical options: No responsible funds available in branch, though Scotiabank said in a statement that it has “considered” ESG factors in the investment process, and added, “Scotia iTRADE offers sustainable investing tools [online].”

Fossil-fuel-free or climate-conscious funds: No.

Knowledge of adviser: The personal banking adviser was unaware of any sustainable options and returned five minutes later to confirm that no options exist that the bank’s financial advisers were aware of.

Cost of values-aligned portfolio: N/A.

Bank loans and investments (clean vs. dirty): Scotiabank dishes out the second-most oil and gas loans ($14.8 billion), compared to zilch in loans to renewables.

Score: D-

TD Canada Trust

Ethical options: TD Canada discontinued its sustainability funds in 2013, and at this point there are no specific RI-themed­ funds available to Canadians at branch level. TD did not respond to our request for comment.

Fossil-fuel-free or climate-conscious funds: No.

Sustainability knowledge of advisor: One bank advisor was blunt, saying “To be completely honest, most socially aware investment funds don’t make a lot of profit. As such, we don’t have funds that invest in these companies.”

Cost of values-aligned portfolio: N/A.

Bank loans and investments (clean vs. dirty): TD has the smallest oil-and-gas loan book of the Big Five, but its investment book is another story. Among the Big Five, it has the worst ratio of investments in sustainable-solution companies to harmful companies.

Score: D-

CIBC

Ethical options: No specific RI funds. CIBC’s VP of Public Affairs says that “ESG factors are included in our investment process across all funds.”

Fossil-fuel-free or climate-conscious funds: No.

Sustainability knowledge of advisor: Initially, the branch manager said that CIBC has some ethical funds that “don’t invest in tobacco companies or oil companies,” but the manager and a financial advisor weren’t aware of specifics, so they placed a phone call. “We don’t get asked this question frequently,” the manager said. After their call, the manager updated earlier comments: “The good news is there’s no specific mutual funds that actually do that since all the mutual funds we offer have gone through these ESG checks.”

Cost of values-aligned portfolio: N/A.

Bank loans and investments (clean vs. dirty): CIBC says all its funds are filtered through an ESG lens, but it has $2.7 billion, or 6.4% of assets, invested in companies flagged for harmful products and activities, including palm oil deforestation and severe human rights violations. On the bright side, the bank has 9.4% of its investments in companies tagged as sustainable-solution providers, because they earn more than a fifth of their revenue from themes like renewable energy and electric cars. On the loan side, CIBC’s exposure to oil and gas companies is almost five times as large as its renewable energy book.

Score: D

RBC

Ethical options: RBC’s Vision line uses ESG filters to determine holdings while screening out weapons makers, as well as traditional sin stocks like tobacco and alcohol. RBC Vision also has a Women’s Leadership fund.

Fossil-fuel-free or climate-conscious funds: Yes: the RBC Vision Fossil Fuel Free Global Equity Fund. Though a financial planner at one branch said the bank doesn’t offer entirely fossil-free options, suggesting that omitting a whole sector could limit the opportunity to grow. RBC’s Vision Fossil Fuel Free fund actually outperformed RBC’s Global Equity Fund in both 2018 and 2019.

Knowledge of adviser: The financial planner was well versed in the Vision line (besides fossil-free funds) and enthusiastic about the Vision balanced fund, saying it has outperformed RBC’s regular balanced fund (“being green is saving companies a lot of money down the road”).

Cost of values-aligned portfolio: Varies, but many are slightly lower than conventional funds.

Bank loans and investments (clean vs. dirty): Canada’s largest bank has the highest total amount of oil-and-gas loan exposure on its books ($16.4 billion). That’s more than seven times more than its renewable loans, which gets it into trouble with environmental activists, though it also has the biggest ratio of investments in sustainable solutions to harmful companies among the Big Five.

Score: C+

BMO

Ethical options: Branches offer BMO’s Sustainable Opportunities Global Equities mutual fund, as well as a Women in Leadership fund. There are eight new ESG ETFs for self-directed online accounts.

Fossil-fuel-free or climate-conscious funds: Yes: the BMO Sustainable Opportunities fund.

Knowledge of adviser: The personal bank associate was enthusiastic about BMO’s sustainable opportunities fund, explaining that she invests in it herself, but she cautioned that it is mid-to-high risk and is best for longer-term investments. A financial planner follows up via email to discuss ESG options further.

Cost of values-aligned portfolio: Fees vary, but the Sustainable Opportunities fund has a somewhat lower fee than comparable BMO funds. The ESG ETF fees are also priced lower than many non-RI equivalents.

Bank loans and investments (clean vs. dirty): BMO has both the biggest renewable-energy loan book and sustainable-solutions investment book among the Big Five, but it has the largest amount invested in companies classified as “harmful.”

Score: B-

A version of this article appeared in the Toronto Star.

*Note: This article was updated for the Spring Issue of Corporate Knights magazine.

** Sustainable solution investments includes 512 companies in the Corporate Knights database that earn more than 20% of their revenues from products or services (such as reneable energy, energy efficiency, electric cars, public transit and organic food) that benefit the environment or society as tracked by Corporate Knights Radar.

*** Harmful investments include 451 companies in thermal coal, weapons, for-profit prisons, as well as companies with severe human rights and environmental violations, and other types of egregious products and misconduct tracked by Corporate Knights Radar.

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Canadian inventor says solar panels ‘almost cheaper than plywood’

Our most popular story of the year. JP Morgan says innovations have made solar power dirt cheap. He told Gideon Forman that the challenge now is getting politicians to understand this.

The world needs more Ethiopia and less Exxon

2019’s Nobel winners reveal how different the world could be when our leaders invest in a better future. Ethiopian Prime Minister Abiy Ahmed Ali won the Nobel Peace Prize this year for ending a multi-decade war with Eritrea. Former ExxonMobil scientist Dr. M. Stanley Whittingham also won a Nobel prize this year for his pioneering work in the development of the lithium-ion battery for the company in the 1970s. For whatever reason, after Whittingham’s initial breakthrough, Exxon put the rechargeable battery project on ice, citing high manufacturing costs and safety concerns. Our editor-in-chief Toby Heaps wonders how different the world would be had the company invested its vast resources in a better future rather than holding it back.

Youth rising: Meet 2019’s top 30 under 30 sustainability leaders

As world leaders descended upon New York City for the UN Climate Action Summit in September, millions of young people gathered in more than 200 countries on seven continents to make their voices heard. They walked out of their classrooms, their workplaces and their homes to join a 16-year-old Swedish girl in demanding that the climate crisis be treated like the emergency it is. In Canada and around the globe, youth are stepping up to create a more sustainable world. We challenge you to read up on our latest 30 under 30 leaders and not feel inspired to rise to new heights in 2020.

Think you can’t afford that EV? In a faceoff against gas cars, the numbers say otherwise

Electric vehicles face a major obstacle: They cost too much. Or at least that’s what the sticker price tells us. Corporate Knights pits 2 EVs against 2 internal combustion vehicles on total cost of ownership. Guess who wins?

O holy funds

Who knew one of our most popular stories of the year would be a guide to how Pope, the Aga Khan and Anglican Church invest their money?

From bomb shelters to boardrooms: Cisco’s Rola Dagher says giving up was never an option

Our Women in Leadership columnist Sheima Benemberek spoke with this tech industry president about how she went from Lebanese bomb shelters to heading one of the biggest corporations in Canada.

Is your ethical investing app upselling greenwash?

‘Animal welfare’ funds heavy in animal testing? Low-carbon funds dripping in oil? Our managing editor Adria Vasil offers up a BS-free green guide to 9 socially-responsible investing apps AKA robo-advisors.

Which smartphone is more ethical, Apple or Samsung?

Our popular Sustainable Stock Showdown columnist Tim Nash pitted all kinds of companies against each other in 2019. His most popular column answered a question a hotly debated question: Apple or Samsung?

 A tale of transformation: the Danish company that went from black to green energy

Rounding out some of our most popular stories of the year, Eric Reguly delved into the real-life story of how one of Europe’s most coal-intensive companies grew into a green energy giant.

The post ‘Almost cheaper than plywood’ solar, bargain EVs and youth rising round out 2019 appeared first on Corporate Knights.

The General Electric Company (GE:NYSE) was founded in 1892 by American icons including Thomas Edison and J. P. Morgan in upstate New York. It was initially famous for producing light bulbs and rapidly expanded into home appliances, aviation and power generation. The company’s market value peaked just shy of $600 billion in 2000 but has steadily declined to less than $100 billion today.

GE’s story is the cautionary tale of a company that started a move towards sustainability in 2005 (remember former CEO Jeffrey Immelt’s Ecomagination exhortation that “green is green?”) but nearly collapsed thanks to legacy businesses in the financial and power sectors. A lot has been written about how GE Capital dragged down the once dominant behemoth after the 2008 financial crisis. But the main reason GE’s financial performance reeks is that the company bet that gas power would be a golden egg, and it turned out to be a rotten one.

As recently as 2016, GE’s power division (which is separate from its renewable energy division) accounted for half of the company’s pre-tax profits. It had doubled down on gas power with its late 2015 acquisition of Alston, a major French industrials company, for $13.7 billion – GE’s largest industrial acquisition ever. Soon after, orders for gas turbines cratered, forcing the company to slash order projections by 75% (from 160 turbines to “somewhere around 40”) in early 2017. By 2018, the power division had slipped into the red, losing $800 million, as detailed in a recent report by the Institute for Energy Economics and Financial Analysis.

Number of all large gas turbines (>100MW) sold worldwide

As the IEEFA writes, “Investors lost billions when the (once) most valuable company in the world, General Electric Company (GE) and its largest shareholders – BlackRock, Vanguard, State Street and Fidelity – misjudged the pace of the global energy transition and subsequent collapse of the gas turbine and thermal power construction market.”

Yes, GE is still, astonishingly, betting big on coal. Not only has it been a “leading supplier of coal-fired power plants worldwide,” in early May it announced it was building Kosovo’s new $1.3 billion 500-megawatt power plant. I agree with the IEEFA that the move is “deeply puzzling.”

Back when GE first announced its Ecomagination campaign (with a pledge to put US$1.5 billion into green R&D), ethical investors such as myself were excited to see such a large company make such a bold green commitment. After all, in the ’90s GE was better known among socially responsible investors for its nuclear weapons parts production which made it the subject of a successful boycott. (It’s still the world’s 22nd largest weapons maker, according to 2017 data, with US$3.8 billion in arms sales representing 3% of its revenue, it’s just not the nuclear kind).

By 2015, Ecomagination had generated over $200 billion in cumulative revenues, and Fast Company wrote that Ecomagination had “become the lynch pin of a remarkably successful reinvention of GE, the foundation of the company’s future, and the vanguard of the global movement towards corporate environmentalism.”

A 2008 print ad campaign for GE’s Ecomagination.

Unfortunately, management saw things differently, and, as the IEEFA put it, “GE assumed wrongly that demand for natural gas and coal would continue to track global economic growth” – an assumption that  cost GE and its investors as much as $193 billion over the past three years.

Its financial woes could get even worse since GE is currently facing a Securities and Exchange Commission investigation into the conglomerate’s “aggressive” accounting practices at both its capital and power divisions.

GE was a great investment throughout the 20^th century, but lacking a clear forward-looking strategy to transition into a low-carbon future, it’s no wonder that sustainable investors are turning out the lights on GE shares.

As an alternative, I present to you Schneider Electric (SGBSY:OTC). Schneider Electric is a French energy management company making hardware and software that helps companies improve their energy efficiency. It’s set ambitious targets, such as 80% renewable energy and 200 zero-waste-to-landfill sites by 2020 as well as full carbon neutrality across its extended supply chain by 2030. The company reports on its progress towards these goals every quarter with a non-financial disclosure document that I wish other companies would emulate. I’m not surprised at all to see Schneider Electric at #60 on the 2019 Corporate Knights Global 100 Most Sustainable Corporations in the World list, and #13 on the 2019 Corporate Knights and As You Sow Clean200 list.

Schneider Electric has been reliably profitable over the last five years, and has outperformed GE while paying a higher dividend. I expect demand for its energy-efficient products and services to increase as companies and governments around the world get more serious about climate change.

If you want to keep the lights on sustainably in the 2000s, forget GE. Schneider Electric is a better investment.

Beta is a measure of a stock’s volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0. Lower beta means less risk.

Have a company in your portfolio that you want to replace with a more sustainable option? Write us an email or send us a tweet!

Tim Nash blogs as The Sustainable Economist and is the founder of Good Investing.

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Berkshire is a conglomerate with over $700 billion in assets. The largest business it owns is an insurance company (Geico), and its power business is both a major burner of fossil fuels and builder of renewables. About US$200 billion of Berkshire’s assets are invested in a basket of stocks with tax-dodger Apple being the largest egg and just under $US100 billion invested in financial services companies, including Bank of America (a Global 100 company) and Wells Fargo (which has earned some bad press in relation to unethical marketing practices). Berkshire earns clean revenue from things like non-coal rail and renewable energy projects, including the US$2.5 billion Topaz Solar Farm and giant wind farms in Iowa, with its power company, Berkshire Hathaway Energy, claiming it has made a cumulative US$25 billion investments in solar, wind, geothermal and biomass generation.

While Buffett told investors he has a “big appetite for wind or solar,” make no mistake, averting climate change is not his motivation. Buffett has made statements that indicate he’s unconcerned about climate risks, even though Berkshire Hathaway’s largest holdings are insurance companies. GEICO took a US$490 million loss due to flooded vehicles from 2012’s Hurricane Sandy, and still Buffett told shareholder and NASA climate scientist, James Hansen, in 2016, “[climate change] will not hurt our business, and it’s immaterial compared to other things that could affect our insurance business.”

This shortsightedness helps to explain why Berkshire Hathaway is still making big bets on oil (Buffet just sunk US$10 billion into Occidental Petroleum) and continues to own major stakes in coal-fired electricity generation (though some of its utilities are finally coming around to the idea of retiring coal plants early). Berkshire’s also actively lobbied against rules that would make it easier for people to put solar panels on their roofs.

Berkshire Hathaway doesn’t disclose much in the way of environmental data (at this year’s shareholder meeting, Buffett extolled the virtues of avoiding “needless reporting”). Instead, Berkshire simply provides a link to the paltry list of its companies (just 12 of the 66 listed) that release sustainability reports. I believe this is a huge blind spot that exposes Berkshire Hathaway shareholders to environmental, social, and governance risks that could come back to bite investors.

There is no company on earth quite as diverse as Berkshire Hathaway. But since Berkshire’s largest business is insurance, we’re pitting it against one of Canada’s biggest insurance and financial services companies in this week’s showdown.

I’ll be honest that I was skeptical of Sun Life Financial going into my research. While it claims to integrate ESG considerations within its institutional investments via the “ESG+” lens, it doesn’t offer any specific socially responsible or green investments options for retail investors. I’ve helped many clients get rid of overpriced Sun Life mutual funds to invest in greener and cheaper options. That said, I’m pleasantly surprised with what Sun Life is doing.

Sun Life earns clean revenue points from investments in renewable energy, green bonds and its ownership of Bentall Kennedy – a leader in green buildings. Sun Life’s chief investment officer has publicly spoken about the company’s exposure to climate risks, and I’m curious to see the results of a climate change scenario analysis they’re performing this year. Sun Life still has a long way to go, especially on the integration of sustainability risks into its investment funds, but its performance has been good enough to be named #41 on the Corporate Knights Global 100 list of the world’s most sustainable corporations. Over the past five years, Sun Life led investors to more profitable pastures than Berkshire, and as the current bull market cools down, Sun Life’s 3.9% dividend looks pretty against the goose egg offered up by Berkshire. If you’re looking to ditch your Berkshire Hathaway holdings, Sun Life would certainly be a more sustainable pick.

Have a company in your portfolio that you want to replace with a more sustainable option? Write us an email or send us a tweet!

Tim Nash blogs as The Sustainable Economist and is the founder of Good Investing.

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The four Canadian ETFs that focus exclusively on gender all launched within the span of a year, with Evolve Fund’s Evolve North American Gender Diversity Index ETF kicking things off in mid-2017. And soon after, Mackenzie Investments, RBC, and BMO Global Asset Management all launched gender-focused ETFs of their own, giving everyday investors access to stocks with more women in the leadership than most. RBC’s was the only fund to exclusively track Canadian companies.

As it stands, just 17.9% of women occupy board seats around the globe, as of late 2018. MSCI Inc., the global provider of equity, fixed income and hedge fund stock market indexes, predicts that it will take until 2029 to reach a worldwide average of 30% women on boards among MSCI All Country World Index (ACWI) companies. In Canada, the global non-profit Catalyst is striving for a much earlier date, asking all corporations to reach that goal by 2022.

Canadian companies are getting close, with a reported 27% of women on boards. But we’re still a long way off from true gender parity. Thanks to growing interest from investors (including gender-focused funds) companies are starting to pick up the pace on this issue, says Tanya van Biesen, executive director of Canadian operations at Catalyst. Diversity policies aren’t mandatory in Canada, but the Ontario Securities Commission’s “comply or explain” rule essentially requires companies listed on the TSX to disclose the number of women on their boards as well as their policy on diversity, or else explain why they don’t have one.

Catalyst is urging companies to see diversity and inclusion as a talent issue and essential to creating a productive, innovative and profitable workforce.

Top 25% of organizations that have gender diversity in their executive leadership teams beat out the industry average on profitability and value creation.

“If [companies] are looking for motivated, educated, and talented people, [women are] an obvious place to look,” van Biesen says.  “There have been many studies done to indicate that a gender diverse team generates better outcomes that relate to reputation, financial performance, productivity, innovation and risk management.”

Investors should take note: investing in companies with gender imbalances can cost you – the top 25% of organizations that have gender diversity in their executive leadership teams beat out the industry average on profitability and value creation, according to an oft-cited January 2018 report by management consulting firm McKinsey & Company, an organization dedicated to improving the performance of corporations.

For investors who want to make a difference with their money, several firms have launched Canadian ETF products dedicated to this cause. How do they stack up when it comes to women in leadership?

Mackenzie Global Leadership Impact ETF establishes itself as the clear winner when measuring board diversity — its holdings have an average of 34.7% of women sitting on its companies’ boards.

Other gender diversity metrics reveal that the fund’s holdings have 30% of women in senior management and 34% have a woman CEO or CFO, according to statistics based on holdings as of August 31, 2018.

Evolve North American Gender Diversity Index ETF fares the worst in this lineup when it comes to women on boards (26.8%). To be fair, the ETF is optimized for a range of gender equity criteria that goes beyond the number of female directors. It follows the Solactive Equileap North American Gender Equality Index, which scores companies on 19 different criteria, such as the gender balance of senior management, recruitment strategy, supplier diversity, and freedom from violence, abuse and sexual harassment.

Michael Simonetta, chairman of Toronto-based Evolve Funds Group Inc., says gender diversity should be measured across company culture, so it’s “not really a concern” if Evolve North American Gender Diversity Index ETF has a lower number in the women on boards category than competitive funds.

“You can have a board with 40% women, but if your policies are negative toward women in the workplace, how good is that from a gender balance perspective?” he asks . “It’s not.”

Fund Face-off

So, how well does the leading fund, Mackenzie Global Leadership Impact ETF (MWMN), hold up against one of the standard ETFs not pre-occupied with gender diversity?

The Mackenzie ETF trumps its benchmark (iShares MSCI World ETF) when it comes to promoting environmental, social and governance issues, with superior scores on average CEO-to-worker pay, gender diversity on boards, and its carbon footprint. Interestingly, the positive gender screen also results in more exposure to companies with products or services that benefit the environment, and less exposure to companies whose products or services have negative impacts like weapons and gambling stocks.

With regard to returns, the Mackenzie ETF is ahead of its iShares benchmark (XWD) on a year-to-date and one-year total return basis, but since its inception on December 3, 2017, it is behind with a 10.8% total return versus 12.5% for the benchmark.

Bottom line: the Mackenzie ETF offers investors significantly more gender diversity, a slightly better sustainability profile and comparable returns, beating its benchmark in two of the three time periods evaluated.

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Before we get started, I need to communicate that cannabis stocks are much riskier investments than the typical big companies we look at in this column. A high Beta suggests heavy volatility, so only invest if you’re ready to put on a safety belt and go along for an intense ride.

Canada-based Canopy Growth (WEED:TSX) is the largest cannabis company on the stock market today. I first heard about Canopy in 2014 when they purchased the abandoned Hershey’s chocolate factory in Smiths Falls, Ontario and turned it into a massive greenhouse for growing medicinal cannabis. Their share price was hovering around $2 at that time, and what a ride it’s been for investors with the share price reaching a high of $67.74 in October last year just before legalization in Canada. On April 15, it opened at $55.74. With popular brands like Tokyo Smoke and Tweed, Canopy is well-positioned to blaze a trail in the now-legal recreational market. Alcohol maker Constellation Brands, which we profiled in our St. Patrick’s Day showdown, recently made a US$4 billion investment in Canopy.

But how sustainable is Canopy? Not very, according to this report from sustainable investment research firm Sustainalytics. Canopy scored poorly on several measures, including energy intensity and the use of pesticides. Canopy does not publish an annual sustainability report, so lots of important data goes unreported. A quick look at their Corporate Social Responsibility webpage shows a focus on educational partnerships with groups like Mothers Against Drunk Driving (MADD) and the Canadian AIDS Society, which is laudable. However, the only environmental initiative I found was a partnership with TerraCycle to develop recyclable packaging. With a lot of question marks around energy/water consumption and a lack of policies that ensure safe growing practices, investors have cause to be paranoid.

A much smaller Canadian company, The Green Organic Dutchman (TGOD:TSX) is a medicinal cannabis producer that only grows certified organic product. It, too, has yet to deliver a formal sustainability report to date, but they do publish specific sustainable principles like recyclable packaging (their glass jars should avoid the overpackaging backlash that Ontario Cannabis Store products have faced), and a commitment to efficient technologies like heat transfer and water reuse. Most importantly, all of The Green Organic Dutchman’s farms and greenhouses are certified organic. They’ve just started selling to medicinal customers and have short-term plans to enter the recreational market. Sadly, stoners won’t be able to smoke a legal organic joint from TGOD this weekend.

You’ll notice on our scorecard (below) that both companies have pretty high CEO-to-worker pay ratios, but Canopy’s has definitely raised eyebrows. Canopy’s CEO, Bruce Linton, collected over $6 million in total compensation in 2017, equivalent to 15% of the company’s $40 million revenue that year. Love that TGOD’s CEO pay was only $1 in 2018, but some will argue that the $2.5 million in shares he earned as a bonus that year tipped the scales, considering the company had yet to earn any revenue or launch their IPO.  In contrast, the median total compensation of 101 other high-growth companies at IPO stage (including LinkedIn, Yelp and Google) was US $564,000 (C$750,000), according to Crunchbase.

There’s no doubt that The Green Organic Dutchman wins this week’s Sustainable Stock Showdown, but a big question remains. Will cannabis consumers live up to their tree-hugging stereotype? If so, then I expect the organic certification to be valuable as consumers should be willing to pay more for The Green Organic Dutchman’s product. That said, the legal cannabis market is still young and it’s impossible to predict. If consumers don’t care about their green being truly green (namely certified organic), then we’ll find ourselves in a “race to the bottom,” whereby companies compete to grow the cheapest crop. The race to cut costs is all too common for traditional commodities like wheat and oil. Cannabis is still just a commodity at the end of the day, and, in this scenario, The Green Organic Dutchman will have a much harder time competing.

Have a company in your portfolio that you want to replace with a more sustainable option? Write us an email or send us a tweet!  

Tim Nash blogs as The Sustainable Economist and is the founder of Good Investing. Tweet him at @timenash.

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Bayer stocks had already started plummeting a week prior, when a U.S. court ruled that Monsanto’s notorious glyphosate-based Roundup herbicide had caused 70-year-old Edwin Hardeman’s non-Hodgkin’s lymphoma. There are another 1,600 glyphosate cancer lawsuits waiting to be heard in Northern California alone, largely by the farmers and groundskeepers that used it for decades.

Monsanto’s no stranger to the courts. The chemical company was a major target of lawsuits in the late 1970s and 1980s stemming from its use of Agent Orange during the Vietnam War.

The first big Roundup verdict came through last August when the Superior Court of California ruled in favour of Dewayne Johnson, a former school groundskeeper who also developed non-Hodgkin lymphoma. The $78 million verdict is under appeal, but investors are already spooked. As they should be. Shares of Bayer are down 42% since the Monsanto purchase was finalized in June 2018, and investors are questioning the wisdom of that acquisition. It should come as no surprise that investors are looking for alternatives.

Enter Chr Hansen Holdings.

Chr. Hansen is a Danish bioscience company in the agriculture/food industry that feels like the complete opposite of Monsanto and Bayer. Rather than producing chemical pesticides, the Danish innovator uses “good bacteria” to provide natural solutions for livestock and crop protection and prolonging the shelf life of foods such as yogurt and cheese.

I first learned about Chr. Hansen because it’s the top holding in The Organics ETF (ORG) that gives investors exposure to the growing organic food market.

The more I learn about Chr. Hansen, the more I love it. They’ve set specific targets connected to the UN’s Sustainable Development Goals and 82% of their products are already contributing to those targets. It was no surprise to me when they were named #1 on the 2018 Corporate Knights’ Most Sustainable Companies in the World list.

Investors have also been impressed with Chr. Hansen’s share price growing spectacularly while remaining very stable with a low beta. One could argue that Chr. Hansen is currently over-valued, but I expect them to continue growing their business as food manufacturers and consumers keep demanding healthier, natural alternatives.

If owning shares of Bayer is giving you a headache that just can’t be cured, consider ditching them for shares in Chr. Hansen who is the clear winner of this week’s Sustainable Stock Showdown.

Have a company in your portfolio that you want to replace with a more sustainable option? Write us an email or send us a tweet!

Tim Nash blogs as The Sustainable Economist and is the founder of Good Investing. He teaches people how to invest online and make intentional decisions with their investments.

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