The COVID-19 crash came on suddenly. Investors panicked when they realized the severity of the situation, and there was talk that we could be headed into a depression. Central banks including the Bank of Canada and the U.S. Federal Reserve stepped in quickly, providing liquidity to prevent the bond market from collapsing. Many of us were afraid that it would be a repeat of the 2008/09 crash, when sustainability got thrown on the backburner. Fortunately, it feels like this time is different, as leading economies around the globe are baking social and environmental concerns into their economic recovery strategies.

It’s fair to assume that more of that baking lies ahead in Canada, with the appointment of impact investing maven Michael Sabia as deputy finance minister in November. The Canadian government is also in the midst of creating a Sustainable Finance Action Council to help ratchet up action on that front, and the Bank of Canada is launching a pilot project with major banks and insurance companies to assess and understand climate risk.

South of the border, things are looking even more optimistic. After four years of a White House that dismissed climate science, we’re seeing an administration that actually treats climate change like the crisis it is. The nomination of Janet Yellen to the role of Treasury secretary is encouraging, since she just co-chaired the G30 Working Group on Climate Change and Finance with Mark Carney, former governor of the Bank of Canada. Yellen has made her position clear: “Carbon must be priced appropriately to internalize the costs of polluting the planet.” A carbon tax in the U.S. would be a catalyst for further sustainable investment gains.

Sustainable investors are happy right now. According to the most recent report from the Responsible Investment Association, 80% of responsible investment funds have outperformed the average of their asset classes this year. The biggest winners have been the “doing more good” funds that invest in sustainability themes like cleantech and renewable energy. Electric car shares have been particularly impressive, with Tesla up eightfold (it’s now worth two and a half times more than ExxonMobil) and Chinese EV maker NIO up 20-fold.

Investors should be cautious since it’s unlikely that green sectors will continue to grow at such a rapid pace, but it does indicate markets have accepted that a green transition is underway and explains why sustainable investments have performed so well.

In addition to terrific financial performance, we’ve also seen the sustainable investment ecosystem mature considerably. Corporations are tripping over each other pledging to be net-zero by 2050, and 2020 saw the launch of a record number of new sustainable investment funds, including new exchange-traded funds (ETFs) from BMO, BlackRock and Wealthsimple. Sustainable investors now have more choice than ever, and demand is growing. A global report from Morningstar shows that more than US$347 billion poured into sustainable funds in 2020, eclipsing 2019’s record $160 billion of inflows. Much of that growth was in Europe, but in Canada, 41 new sustainable funds and ETFs were launched in 2020 alone, more than double 2019.

According to the 2020 RIA Investor Opinion Survey, 75% of respondents want their financial services provider to show them sustainable investment options, but only 28% of respondents have been asked if they are interested. For those of you who have been dragging your feet on switching your investments, consider this a kick in the butt to get it done ASAP. Almost every bank and financial advisor now has sustainable investment products on the shelf, and the myth that sustainable investments underperform financially has been thoroughly busted. If your advisor isn’t up to speed on these options, it’s time to find a new advisor (RIA has a marketplace for investment advice) or explore do-it-yourself investing. I’m hopeful that the 2021 Eco-Fund Ranking will be a helpful resource as you evaluate the options and decide which approach is right for you.

Tim Nash is the founder of Good Investing.

Corporate Knights ranked more than 1,000 mutual funds and ETFs based on their financial and sustainability performance and ESG-aligned management commitments.

Here are the top scorers.

Methodology: Funds are scored according to 1) three-year net return percentile rank (50%), 2) weighted sustainability rating percentile rank based on analysis of their holdings (40%), and 3) fund-manager intention to manage the fund according to responsible guidelines (10%). If the fund is less than three years old, its final score is based on #2 and #3, which are grossed up proportionately to 100%. Funds that do not have an ESG mandate or are not operated according to responsible guidelines are automatically excluded from the ratings. Funds that score in the highest or second-highest quintile among category peers receive a five-tree or four-tree rating respectively.

* Holdings that are red-flagged automatically receive a 0% CK Sustainability Rating Score. Red-flag holdings include companies that are classified in the Corporate Knights database for one or more of the following criteria: access-to nutrition laggards, access-to-medicine laggards, adult entertainment, companies blocking climate policy, cement-carbon laggards, civilian firearms, controversial and conventional weapons, deforestation and palm-oil laggards, fossil fuels (energy), farm-animal-welfare laggards, for-profit prisons, gambling, gross corruption violations, harmful pesticides, illegal activity, oil sands laggards, severe environmental damage, severe human rights violations, thermal coal, tobacco, alcohol, companies blocking climate resolutions, companies financing misleading media, industrial meat, nuclear energy, and companies most exposed to ESG and business-conduct risks.

Sources: Corporate Knights Research, Fundata, Responsible Investment Association, Refinitiv, InfluenceMap, Norges Bank Investment Management (NBIM), Chain Reaction, NZ Super Fund, Stockholm International Peace Research Institute, American Friends Service Committee, Access to Nutrition Initiative, Access to Medicine Initiative, Motley Fool, animal welfare experts, Unearthed, Urgewald/GCEL, Media Matters, MVIS, RepRisk

The post 2021 Eco-Fund Guide: The Ultimate Guide to Responsible Investing appeared first on Corporate Knights.

Do-it-yourself investors who want to divest from fossil fuels can now purchase a single fund and get a broad mix of global stocks and bonds. The new iShares ESG ETF portfolios (available in Canada through any online brokerage) are part of BlackRock’s – the world’s largest asset manager – commitment to put climate change and sustainability at the centre of its investing approach. These portfolios are game-changers for sustainable investing, making it so much easier and more accessible for smaller investors who want to use a buy-and-hold strategy.

Up until a few years ago, DIY investors using exchange-traded funds (ETFs) had to go through the pain of buying stock ETFs and bond ETFs separately. Moreover, stocks were split up by geographic location, so we had to buy at least three or four different funds to get global exposure. The ETF industry has been steadily catching up, and I’ve watched as the Canadian Couch Potato model portfolios (the standard bearer for Canadian DYI investors) have quickly gone from five funds down to three, and now to a single “all-in-one” ETF from providers like Vanguard, iShares and BMO.

All-in-one ETFs, also known as “asset allocation” or “one-click” funds, are very similar to the balanced mutual funds that are so popular at the banks. Instead of buying separate funds for Canadian stocks, U.S. stocks, international stocks, and bonds, asset-allocation ETFs combine all those different asset classes in just one fund. All-in-one ETFs automatically rebalance as the market swings back and forth, ensuring that investors never end up taking too much – or too little – risk. Understandably, these all-in-one ETFs are very popular in Canada, with more than $4.5 billion under management.

Sustainable investment options have always lagged behind with these types of innovation in the investment world. When a pipeline activist came to me in 2014 demanding that not one penny go toward coal, tar sands or pipelines, I had to stretch my creative boundaries and cobble together a model portfolio using 11 different sector ETFs. Even funds labelled “ethical” and “green” generally contained fossil fuel holdings. So imagine my delight that iShares announced a lineup of ‘all-in-one’ ETFs based on their “ESG Advanced” series of sustainable funds.

According to its methodology brief, the iShares ESG Advanced funds exclude ethically questionable businesses, including fossil fuels, adult entertainment, alcohol, weapons, for-profit prisons, gambling, genetically modified organisms (GMOs), nuclear power, palm oil, predatory lending and tobacco. Additionally, the funds exclude companies from any sector with a major controversy or that have a poor environmental, social and governance (ESG) rating.

The most stringent of sustainable investors will still take issue with some companies in this iShares portfolio. The funds have what’s called a “home bias,” meaning that they have a deliberately high allocation to the Canadian stock market, so investors in these funds end up overweight in the financial sector. Big banks like RBC, TD Canada Trust and Scotiabank still feature prominently despite their massive investments in oil and gas, since they have a heavy weight in the Canadian market. The same is true with mining, since a disproportionate number of mining companies are listed in Canada.

These new ETF portfolios are just so cheap, simple and straightforward that they eliminate many of the trade-offs that sustainable investors previously had to contend with. Whether they win favour with every sustainable investor in Canada is another matter.

The post New BlackRock ETFs let Canadians divest from fossil fuels – sort of appeared first on Corporate Knights.

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.

Now is a really good time to look at impact investments as a way to further diversify your portfolio.

An impact bond is a loan to an organization – often a non-profit – that offers investors a financial return in addition to making a direct positive social or environmental impact. Each bond has a different minimum investment, interest rate, and maturity date. Different impact bonds will generate different types of impact.

Community bonds in Toronto include the Centre for Social Innovation (CSI)  (a co-working space for social entrepreneurs with three locations in Toronto) and Sketch (an arts studio with programming for at-risk youth in the Toronto Queen West neighbourhood). Green bonds include SolarShare – a co-op that builds community-owned solar projects – and CoPower – a company that finances low-carbon projects like geothermal heat pumps and LED retrofits.

Why should investors care?

Global financial markets are a roller coaster right now. Stocks are all over the place, and interest rates are so low that traditional bond yields aren’t keeping up with inflation. Impact bonds are quite beautiful in that they are completely uncorrelated to financial markets. I own both a SolarShare solar bond and a Centre for Social Innovation (CSI) community bond. Both of these bonds are completely unaffected by this crisis, and I expect them to continue paying me interest every 6 months like clockwork so long as the sun keeps shining and social entrepreneurs need a place to work.

Of course, investors need to evaluate the risk before they buy, and should only allocate a small portion of their portfolio to impact bonds.

What’s the downside?

Impact bonds are subject to three main risks:

• Liquidity risk: the investment is locked-in, usually for a period of 3 to 10 years
• Duration risk: the interest rate is fixed, so investors won’t benefit if interest rates rise
• Default risk: if the organization goes bankrupt, investors can lose some or all of their money

Impact bonds are too small to be rated by traditional bond ratings agencies, so default risk can be hard to discern.

CSI and SolarShare have never missed an interest payment, but investors should be careful not to invest more than they are prepared to lose.

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

The post Impact bonds offer a safe haven for investors appeared first on Corporate Knights.

For most, the default setting is to walk into their bank, buy mutual funds, and walk out as quickly as possible. The problem is that people rarely have any idea how much they’re paying in fees and they have no clue what companies are inside those funds.

That’s why the new trend is to purchase exchange-traded funds (ETFs) that have much lower fees and are much more transparent than mutual funds, making it easier for Canadians to invest with their values.

ETFs have surged in popularity over the last decade. What started as a niche offering for do-it-yourself investors has now become the most popular investment vehicle in Canada. ETFs represent about 11 per cent of the almost $2 trillion that Canadians have invested, but Canadian ETFs attracted a record $30 billion in 2019, outpacing the sale of mutual funds, according to the Canadian ETF Association.

While there were only a few sustainable ETFs a decade ago, the industry is evolving, and more sustainable ETFs are coming out every year.

Following RBC’s launch of six sustainability-themed iShares ETFs in 2019, BMO joined in this January, by releasing a new lineup of eight sustainable ETFs called ESG ETFs into the Canadian marketplace.

The two most popular strategies for responsible investors are sector exclusion (often called divestment) and the integration of environmental, social and governance (ESG) data.

Historically, responsible investing was heavily influenced by the Mennonite community in Canada, which meant that the most typical ethical fund exclusions were “sin sectors” like tobacco, alcohol, gambling and weapons.

In recent years, environmentalists started calling for investors to divest from fossil fuels; there is lots of momentum behind this movement. ESG integration is a little more nuanced, with companies being graded on their promises, policies and performance regarding ESG issues.

One critique of ESG integration is that it doesn’t consider the product or service the company is selling, which is why it should really be used alongside sector exclusion.

Nonetheless, BMO’s new ESG ETFs are impressive. The funds exclude tobacco, alcohol, gambling, conventional weapons and civilian firearms, any controversial weapons, as well as companies involved in severe controversies.

Additionally, by following the MSCI ESG Leaders Index methodology, they are employing one of the strongest ESG integration definitions I’ve seen among Canadian ETFs. Companies are ranked by ESG rating and the funds include roughly the top half of companies within each sector.

This methodology means that sector breakdowns will be the same as traditional ETFs but with only about half of the number of companies — those with the highest ESG scores.

Investors who want to divest from fossil fuels will be disappointed in the Canadian equity offering since oil, gas and pipelines are still included. For example, Suncor and Enbridge make up a combined 15 per cent of the BMO MSCI Canada ESG Leaders Index ETF (ESGA). Suncor and Enbridge both have decent ESG ratings, which is why they are still included in the fund.

Otherwise, their “all-in-one” ETFs make life easier for sustainable investors. For example, the BMO MSCI Global ESG Leaders Index ETF (ESG) is a combination of their Canadian, U.S. and Europe/Australia/Japan funds, while the BMO Balanced ESG ETF (ZESG) takes this global diversification and adds in Canadian bonds to create a balanced portfolio. This “all-in-one” approach is popular among traditional investors, so I’m thrilled to have it as an option for sustainable investors.

On the fee front, Canadians pay some of the highest investment fees in the world. The average mutual fund Management Expense Ratio (MER) is about 2.25 per cent. ETFs, by comparison, have an average MER of about 0.3 per cent and the BMO ESG ETFs have MERs that even lower, at 0.17–0.22 per cent, continuing the downward trend of management fees.

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

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Swiss-based Glencore plc (GLNCY) is a diversified company with three main segments: metals and minerals, energy and agriculture. The energy division owns mines in Australia, South Africa and Columbia that produced a combined 129.4 million tonnes of coal in 2018, including 118 million tonnes of thermal coal that was burned to generate electricity. The remainder is metallurgical coal that is mostly used to make steel, which makes it more difficult to replace – at least until new steel-making methods are mainstreamed. Overall, coal accounts for roughly 27% of Glencore’s overall profits.

Glencore, like all coal mining companies, is under pressure from investor groups like the Climate Action 100+ signatories to align itself with the low-carbon economy. The company released a statement early this year that showcased its support for the Paris Agreement and promised disclosure to ensure that “investments are aligned with the Paris Goals.” The company promised to limit coal production to 150 million tonnes per year, which is higher than current production levels, and to set a target of reducing greenhouse gas emissions intensity by 5% by 2020 compared to a 2017 baseline. Glencore has promised to release longer-term targets next year. Unfortunately, actions speak louder than press releases.

Glencore is moving ahead with its controversial United Wambo Coal Project in Australia, although the local Independent Planning Council (IPC) has stipulated that any coal exported from the mine can only  go to countries who have ratified the Paris Agreement. Glencore expects this mine to produce about 10 million tonnes of coal per year, which would keep the company below the self-imposed cap of 150 tonnes per year. A company spokesman told The Guardian that “as older mines in our portfolio come to the end of their economic life, all coal projects will be considered.” It’s hard to square these expansion plans with the promise to align investments with the Paris goals, so I’m going to have to rake Glencore over the coals for greenwashing.

Australia-based BHP Group (BHP), formally known as BHP Billiton, is the world’s largest mining company and owns coal mines in Australia and Colombia in addition to other sites that extract iron, copper, nickel and petroleum. BHP produced 72 million tons of coal in 2018, including 29 million tons of thermal coal. Thermal and steel-making coal account for 17% of BHP’s earnings.

Andrew Mackenzie, BHP’s CEO, hinted that the company might divest from coal during an earnings call in August. This followed reports in July that said BHP would be cutting thermal coal production next year. I wouldn’t normally give much stock to this sort of announcement, but I’m smitten by a speech that Mr. Mackenzie gave in London earlier this year about BHP’s response to global warming. “The evidence is abundant: global warming is indisputable,” he said. “The planet will survive. Many species may not.” These are striking words from a coal mining CEO.

BHP announced a short-term target to keep 2022 emissions at 2017 levels, and an ambitious long-term target of net zero operations by mid-century. The company has promised to release medium-term science-based targets next year. I like it when companies put money towards these targets, so I’m happy to see that BHP allocated USD $400 million to their Climate Investment Program with the goal of reducing emissions. A tangible example of this program is a project to replace gas with renewables at their Escondida copper mine in Chile. It’s too early to say how much of a leadership position BHP will earn as the mining industry grapples with climate risk, but I’m cautiously optimistic that they will live up to their promises and avoid the greenwashing trap that so many companies have fallen into. Time will tell whether or not my optimism is warranted.

Both BHP and Glencore extract minerals like nickel and copper that are used in clean energy technologies, so there is some potential upside to owning these mining companies as society transitions to a low-carbon economy. However, both companies have significant exposure to carbon risk (as the Guardian pointed out this week). That risk will keep most sustainable investors away. I’ll give this week’s challenge to BHP by a tiny margin since coal ­­– particularly thermal coal ­– ­­is a lower percentage of their profits. I’m hopeful that BHP will completely divest from their coal holdings and extend its lead, but I’ve been burned too often to take its announcements at face value.

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 Tim an email.

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

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