The COVID-19 pandemic is pushing every industry into the future, and the investment industry is no exception. Canadian investors are increasingly embracing the shift away from more expensive mutual funds and into lower-cost exchange-traded funds (ETFs). According to a report from the Investment Funds Institute of Canada, more than $18 billion has flowed into ETFs so far in 2020, compared to only $4 billion into mutual funds. As the stock market crashed and recovered in March, ETF investors stayed the course by investing $3 billion, while mutual fund investors panicked and sold more than $14 billion.

A big part of the growth in ETF assets has come from so-called robo advisors like Wealthsimple, which automate the process and make it very easy for people to start investing in ETFs. These robo advisors have only increased in popularity during the pandemic: Wealthsimple, for example, saw twice as many sign-ups in March of this year compared to March of last year. Not every robo advisor offers a socially responsible portfolio, but for those that do, approximately one third of new investors opt in. Up until now, most of the offerings were similar and offered a very loose definition of “socially responsible,” so I’m very happy to see Wealthsimple raising the bar.

I wasn’t impressed when Wealthsimple launched its first socially responsible portfolio in March 2016. The portfolio consisted of a mishmash of exchange-traded funds (ETFs), all with different and often conflicting definitions of social responsibility. Wealthsimple itself admits that the original methodology left a lot to be desired. Thankfully, the company updated the portfolio in June by launching its own socially responsible ETFs, with lower management fees and a unique methodology.

With more than $5 billion of assets under management, it’s worth examining Wealthsimple’s new socially responsible portfolio to see whether it really lets people “invest in a better world” – or is just clever marketing. Wealthsimple’s updated socially responsible portfolio is chiefly made up of two new ETFs: the Wealthsimple North America Socially Responsible ETF (ticker: WSRI) that includes Canadian and U.S. companies, and the Wealthsimple Developed Markets ex-NA Socially Responsible ETF (ticker: WSRD) that includes companies from Europe, Japan and Australia. Both ETFs trade on the Toronto Stock Exchange and use the same screening methodology to determine which companies are allowed in. WSRI charges an annual management fee of 0.2%, while WSRD costs 0.25%.

Contrary to some of the ETFs in Wealthsimple’s old socially responsible portfolio, the new ETFs explicitly exclude weapons manufacturing, defence contracting, tobacco, alcohol, adult entertainment and any company found to be in violation of the UN Global Compact (principles covering human rights, child labour and corruption). The new funds also exclude companies related to oil, gas and coal, making them fossil-fuel free. Additionally, the top 25% of carbon emitters in each industry are scrapped, as are companies with fewer than three women or less than 25% female representation on their boards of directors. According to a 2019 report from Osler, a leading business law firm, just 39% of TSX-listed companies have more than one female director on their board. That means Wealthsimple’s gender screen excludes roughly 60% of Canadian stocks.

Even with all those screens, Wealthsimple’s new ETFs still include a number of companies that would raise eyebrows among many ethical investors. Its North American ETF includes Amazon, which is being sued by Canadian delivery drivers claiming unfair treatment, and Facebook, which is facing a growing boycott from advertisers unhappy with the social media’s hands-off approach to hate speech.

The fundamental problem with the “one-size fits all” approach to ethical investing that robo advisors and funds offer is that the methodology never goes far enough for some investors – and goes way too far for others. Wealthsimple has stated that the new funds will continue to improve and evolve, so we could see something like a racial equality screen introduced (pretty please). But there are currently only 233 companies in both ETFs combined, and I would expect additional ethical screens to keep reducing diversification.

Does the new portfolio, as advertised, let people “invest in a better world”? Well, not quite. It does a good job of excluding problematic companies, and it does include a handful of stalwarts on Corporate Knights’ list of the Global 100 Most Sustainable Corporations in the World, including McCormick. But the portfolio has lacklustre exposure to companies whose main business is providing sustainable solutions such as renewable energy, electric cars, green buildings and energy efficiency – all themes that are outperforming with good long-term growth prospects. For example, in the Wealthsimple Developed Markets ex-NA Socially Responsible ETF (WSRD) fund, just 20% of the companies have a significant line of green or sustainable products or services, according to the Corporate Knights Green Flag Database.

For the time being, investors who want to invest in sustainable solutions will need to incorporate additional products like green ETFs or community bonds if they want their investment to have a positive impact.

Tim Nash blogs as The Sustainable Economist and is the founder of Good Investing. This article was provided by Corporate Knights magazine.

The post How sustainable are Wealthsimple’s new socially responsible funds? appeared first on Corporate Knights.

Meanwhile, protests have erupted across the world calling for racial equality and police reform. Although these protests have had little impact on the market, they’ve raised a good question: can investors support companies that promote minority empowerment while earning market-rate financial returns?

The NAACP Minority Empowerment ETF (ticker: NACP) is an exchange-traded fund (ETF) from Dallas-based Impact Shares, which specializes in socially conscious ETFs. According to its fact sheet, the NAACP ETF “is designed to provide exposure to U.S. companies with strong racial- and ethnic-diversity policies in place, empowering employees irrespective of their race or nationality.”

While the fund is not sponsored or endorsed by the National Association for the Advancement of Colored People, it holds shares of companies screened according to 10 racial-equity metrics inspired by the NAACP’s opportunity and diversity report cards: criteria such as board diversity, freedom-of-association policies and conflict-mineral programs. To be included in the fund, companies must report on at least five of the 10 criteria and be free of major controversies. Research is performed by Sustainalytics (recently acquired by Morningstar), and the in-depth methodology can be found by downloading the “playbook” from the Morningstar site.

Incorporating social-equity criteria into the decision-making process is important work, but investors will question whether this requires a sacrifice in financial performance.

Since its inception in July 2018, the NAACP Minority Empowerment ETF has closely tracked and actually outperformed the S&P 500 by about 4%. I doubt that the outperformance is due solely to better social-equality scores (the fund skews toward bigger companies with more momentum), and we don’t know whether the outperformance will continue. But fund investors have been happy to earn higher-than-market-rate returns so far.
Investors considering the NAACP Minority Empowerment ETF should think of it as a replacement for a traditional U.S. equity fund in their portfolios. Despite the strong financial performance and social-equity lens, there are some negative trade-offs to consider. The fund currently contains only 172 companies – well below the 500 companies in the S&P 500 – which makes it less diversified. And with only about US$4 million in assets under management, liquidity issues could arise.

In addition, the fund has a high management-expense ratio (MER) of 0.75%, well above the 0.09% investors pay to own the Vanguard S&P 500 Index ETF. Although this might seem like a money grab, Impact Shares is a non-profit organization that donates any net proceeds from the ETF to the NAACP. Unfortunately, these fees come out of investment performance, and investors don’t get a charitable receipt. There is an argument to be made that investors would be better off paying a lower management fee and making their own donations to charities, non-profits or crowdfunding campaigns.

The NAACP Minority Empowerment ETF is clearly a big step toward investing in racially diverse companies, but does it go far enough? A quick look at its list of holdings reveals some big head-scratchers, such as Amazon. The methodology lets the e-commerce giant through because it publishes workforce race and gender data. What’s telling is that African Americans represent 26.5% of Amazon’s workforce but just 8.3% of management and 10% of the board of directors.

Amazon is also dealing with labour disputes inside its warehouses, as employees voice concerns over minimal protections against COVID-19. The company is notoriously anti-union and has fired workers who have attempted to organize employees – including Christian Smalls, a Black employee who led a walkout in March asking for better sanitation in Amazon’s Staten Island, New York, warehouse.

Amazon’s inclusion in the NAACP Minority Empowerment ETF speaks to the challenge of supporting corporate-diversity champions while earning market-rate returns. Ultimately, conscientious investors will need to decide for themselves whether the ETF’s methodology goes far enough, and whether they would be willing to sacrifice the financial returns from Amazon’s growth.

Whether it goes far enough or not, I’m happy there’s an option for investors to support companies that are leading on diversity policies and minority empowerment. The NAACP Minority Empowerment ETF might not be perfect, but it is a clear step in the right direction. I’m hopeful that data will continue to improve as investors ask tough questions about how companies are addressing racial inequality.

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

The post Pandemic Portfolio: Spotlight on the NAACP Minority Empowerment ETF appeared first on Corporate Knights.

Financial markets seem to have found a comfortable trading zone, oscillating between the hope of a quick recovery and the fear of a second pandemic wave.

Federal Reserve Chairman Jerome Powell suggested in an interview that GDP could fall by as much as 20–30%, with unemployment hitting Depression-era levels. However, the Chairman also expects a quick recovery by the end of this year and noted the unprecedented response from central banks and governments to keep markets liquid and provide emergency benefits to struggling people and businesses. This mixed message has the bulls and bears of the market duking it out day-to-day, keeping prices relatively flat over the past month.

With uncertainty remaining, investors should hope for the best and plan for the worst. We examine two sustainability leaders that are positioned to grow if the economy reopens quickly and will continue to earn profits during a longer period of pandemic-induced economic pain.

Note: These are investment ideas, not recommendations. Speak to a financial professional before investing and ensure that any holdings are part of a more diversified investment strategy.

Unilever

Who hasn’t indulged in comfort food a little more often since the pandemic started? Well, if you think people are more likely to drown their sorrows in a pint of Ben & Jerry’s ice cream, then you might consider taking a closer look at Unilever. Unilever owns a whole bunch of well-known brands from soaps (Dove) and cleaners (Seventh Generation) to soups (Knorr) and ice cream (Ben & Jerry’s). Consumer behaviour has changed drastically since the pandemic and consumer staples companies like Unilever are quickly trying to figure out what changes will persist.

Unilever released its 2020 Q1 trading statement last month and reported that overall sales were flat. Hidden in this boring top line figure is a much more nuanced story. Sales of packaged foods, cleaning supplies and beauty products were up due to households ‘stocking up’ but Unilever’s food service business and restaurant sales were way down. Moreover, management noted that the use of beauty products like deodorant was down about 25%. Yes, we’re getting stinky working from home. Unilever seems like the perfect company for investors caught in the hope and fear dichotomy. The company is positioned to weather an ongoing storm but will also get a boost if the economy reopens quickly.

Unilever has set ambitious environmental, social and governance targets in its Sustainable Living Plan, like halving the environmental footprint of its products by 2030. The company’s sustainability reporting is top-notch and measures progress on issues like gender diversity, the health and hygiene of consumers and carbon emissions. Forty-sixth on the 2020 Corporate Knights’ Global 100 list of the world’s most sustainable corporations, I’m confident positioning Unilever as a global sustainability leader.

Unilever’s share price fell by 27% during the crash and is currently down about 11% since the start of the year. The stock is expected to pay a 3.39% annual dividend.

Cisco

Cisco is an American tech company that earns most of its revenue from selling infrastructure platforms made up of networking hardware like routers, switches and data centres. As more business happens online, Cisco has diversified to offer applications, security and technical support services. Cisco’s customers are mainly large corporations, and its revenues declined in March as hardware supply chains were impacted and companies cut back on major investments due to market uncertainty. However, security revenues grew and the use of Cisco’s WebEx video conferencing software tripled.

Large companies are quickly realizing just how important online infrastructure platforms are to continued profitability while everyone works from home, so I expect to see corporate investment in digital hardware pick back up whether or not the pandemic drags on. Even if the economy rebounds quickly, companies are noticing the benefits of an online workforce and many of the work from home and shop from home trends will persist. Cisco is heavily involved in the deployment of 5G networks throughout the world as it sells high-speed routers and switches that manage back-end data transfers. The company is hoping to build on its leadership in the Internet of Things space, and I expect this rollout to occur whether or not the pandemic persists in spite of the 5G COVID-19 conspiracy theories my uncle is posting on Facebook.

From a sustainability perspective, Cisco stands out as a leader in the tech sector. The company has assessed a wide range of environmental, social and governance issues based on both business and stakeholder importance, and has created concrete targets like impacting 1 billion people through social impact grants and programs by 2025 and cutting Scope 1 and 2 greenhouse gas emissions worldwide by 60% by 2022. Cisco publishes a thorough annual corporate social responsibility report to measure and track progress towards these goals. The company gets top marks from sustainability data providers Sustainalytics and MSCI, and is ranked fourth on the 2020 Corporate Knights’ Global 100 list of the world’s most sustainable corporations.

Cisco’s share price fell by 33% during the crash and is currently down about 11% since the start of the year. The stock is expected to pay a 3.2% annual dividend.

Tim Nash blogs as The Sustainable Economist and is the founder of Good Investing. This article was provided by Corporate Knights magazine.

The post Pandemic Portfolio: Two stocks positioned for an economic recovery – and a second COVID wave appeared first on Corporate Knights.

The Bank of Canada struck an optimistic note in its April Monetary Report, suggesting that “Canada’s economy will begin to recover as the health impacts of COVID-19 fade, businesses begin to reopen and gradually resume their operations, and people start returning to their normal lives.”

Of course, uncertainty remains over if, how and when the economy will return to pre-crash levels. The bank’s report highlighted unprecedented levels of monetary and fiscal stimulus but also noted concerns about historically low oil prices, a surge in unemployment and sharply lower business and consumer confidence.

Without the ability to forecast with confidence, we should prepare for the recovery period to drag on for some time and continue to examine greener companies that are expected to profit during a longer period of pandemic-induced economic pain.

Note: These are investment ideas, not recommendations. Speak to a financial professional before investing and ensure that any holdings are part of a more diversified investment strategy.

McCormick & Company

With restaurants closed, home chefs are having their moment. Unfortunately, we’re not all great cooks. I’m leaning heavily on my spice cabinet to make my home-cooked meals a little tastier. When in doubt, throw a little hot sauce in the dish! McCormick & Company is a spice and flavour manufacturer that sells a wide array of spices, condiments and sauces. You’ll likely recognize some of its popular household brands, like Old Bay seasoning, French’s condiments, Thai Kitchen and Frank’s hot sauce. The company is well positioned to benefit as families keep eating at home.

In 2017, McCormick set impressive sustainability goals, such as slashing its greenhouse gas emissions by 20 per cent, sourcing all herbs and spices sustainably, and committing to making 100 per cent of its plastic packaging reusable or recyclable by 2025. The company has a long way to go in meeting these goals, but I’ll give it the benefit of the doubt, since its environmental, social and governance (ESG) scores from the Corporate Knights research arm, as well as MSCI and Sustainalytics, are among the best in its sector. Furthermore, McCormick ranked 22nd on the 2020 Corporate Knights Global 100 Most Sustainable Companies in the World.

McCormick’s share price fell by 32 per cent with the rest of the market during the crash but has rebounded nicely and sits down just five per cent since the start of the year. The stock is expected to pay a 1.58 per cent annual dividend. (Scorecard below)

Northland Power

Renewable energy utilities are in the enviable position of having consistent cash flows, since they have long-term purchase price agreements that set a fixed price on the electricity they generate. Northland Power, headquartered in Toronto, is one such utility. With a mix of solar, wind and thermal (natural gas) projects, the company’s cash flows shouldn’t suffer if the pandemic’s stay-at-home orders persist.

Most of Northland’s facilities generate renewable energy, but about 26 per cent of its revenues come from natural gas. This will be a turnoff for some green investors, while others will appreciate a diversified approach. I’m disappointed that Northland has taken a step backward in its ESG data disclosure. The company produced a 2018 Sustainability Report but didn’t disclose any information for 2019. This lack of ESG disclosure could hurt them as investors increasingly incorporate the data into investment decision-making. Still, generating 74 per cent of revenues from renewable energy is enough to make me feel good about this stock.

Northland’s share price fell by 36 per cent during the crash but bounced right back and is up almost 13 per cent since the start of the year. The stock is expected to pay a 3.91 per cent annual dividend. (Scorecard below)

The post Pandemic Portfolio: Two stocks to watch as COVID-19 drags on appeared first on Corporate Knights.

The stock market’s reaction to the COVID-19 pandemic was swift and harsh, crashing more than 33% in about a month. The market has bounced back somewhat from those mid-March lows, sparking optimistic talk of a “V-shaped recovery,” where the economy quickly returns to normal, though RBC CEO Dave McKay suggests a longer downturn, with a “U-shaped recovery,” is more likely.

Bank CEOs warn that we should prepare for a recovery period that spills into next year, so let’s examine a handful of eco-friendly companies that will continue to profit during a longer period of pandemic-induced economic pain.

Note: These are investment ideas, not recommendations. Speak to a financial professional before investing and ensure that any holdings are part of a more diversified investment strategy.

Cascades

I would have never picked toilet paper to be the hot commodity as society faces a global pandemic, but here we are. Cascades is a Quebec-based company that makes tissue paper and packaging from recycled materials. The company is the most sustainable toilet paper manufacturer in Canada and is well positioned to take advantage of the growing demand for eco-friendly home-delivery and takeout packaging.

Long considered a leader in developing a closed-loop or circular economy, Cascades uses recycled fibres for 84% of its paper products. The remaining materials are sourced using a strict procurement policy that prioritizes fibre suppliers certified by the Forest Stewardship Council (FSC). In 2015, Cascades set ambitious sustainability targets for 2020, and I’m excited to see how much further they’ll push the targets with their next five-year plan. Cascades was #49 on the 2020 Corporate Knights Most Sustainable Companies in the World list.

Cascades’ share price didn’t dip much in the initial crash, and is up 16 % over the past two months. The stock is expected to pay a 2.54% annual dividend.

Microsoft

The pandemic is forcing everybody to work from home, and Microsoft — the world’s largest company — is perfectly placed to profit from this massive transition in our economy’s workforce. Consumer device sales will likely drop as unemployment rises and people are less likely to upgrade their phones and computers, but only about 36% of Microsoft’s revenue comes from personal computers and gaming. Its other segments include productivity and business processes and Intelligent Cloud. My instinct is that demand for these business-to-business segments will be resilient to the current economic current and will likely benefit as old-school businesses evolve to become completely or much more remote.

Microsoft is highly rated by environmental, social and governance (ESG) rating agencies including Corporate Knights, MSCI and Sustainalytics, and the company has pledged to become carbon negative by 2030. However, Microsoft did come under pressure last year when employees threatened to walk out after it signed a big contract with the U.S. military.

It’s hard to argue that Microsoft is leading us directly into a green economy, but it’s fair to classify it as “doing less harm” and ahead of the curve on corporate responsibility measurements.

Microsoft’s share price initially fell by 27%, but rebounded nicely such that it is only down 5% over the past two months. The stock is expected to pay a 1.19% annual dividend.

Brookfield Renewable Partners

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Brookfield Renewable Partners, the renewable energy division of Brookfield Asset Management that generates electricity through hydro, wind and solar projects, is well positioned to resist the current economic storm. (Full disclosure: The author owns shares of Brookfield Renewable Partners).

I consider Brookfield Renewable Partners pandemic-proof because the company’s revenue comes from multi-decade purchase price agreements (PPAs) to sell electricity at a pre-set price. Electricity demand is falling as factories are locked down, yes, but that doesn’t affect the price that Brookfield Renewable gets paid for generating electricity. The weighted average remaining duration of these contracts is about 17 years, so investors can reasonably expect the company to maintain consistent cashflows. Brookfield Renewable Partners seems to be on solid financial footing, having just raised $350 million in green bonds.

I’ve criticized Brookfield Renewable Partners in the past for not reporting sustainability data, so I’m thrilled to see that it’s produced a detailed ESG report for 2019. Now that the company is finally disclosing data, I expect it to start popping up more regularly on lists of sustainability leaders. About 0.2% of its energy generation comes from relatively carbon-intensive natural gas co-generation (also known as combined heat and power), so although it isn’t quite 100% renewable, I still consider it to be green.

Brookfield Renewable Partner’s share price fell by 30% like the rest of the market during the crash, but has recouped more than two-thirds of that loss in the rebound. The stock is expected to pay a generous 4.82% annual dividend.

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

The post Pandemic Portfolio: Three companies well-positioned to weather the crisis appeared first on Corporate Knights.