Better investing with ESG analysis

Environmental, social and governance factors can help build better portfolios. 

Not long ago, many people inside and outside the financial industry believed they had to sacrifice returns if they chose to invest in sustainable, socially responsible companies. Today, it’s widely accepted that good corporate behaviour on environmental, social and governance (ESG) issues correlates with superior long-term performance.[1]

After all, companies that are proactively aware of future risks can develop strategies to address them – and, with solid risk management in place, those companies are in a better position to generate higher risk-adjusted returns. Would you invest in a technology company without a cybersecurity plan? How about an airline without a strategy to improve fuel efficiency? Far from being a “nice to have,” good ESG practices can be an important indicator of both a company’s downside risk and its growth potential. 

Margaret Childe, Manulife Investment Management’s Director of ESG Research and Integration in Canada, cites an influential 2005 report, Who Cares Wins: Connecting Financial Markets to a Changing World, produced by the United Nations Global Compact,[2] that may have been the tipping point for investors’ acceptance of the importance of evaluating ESG alongside other indicators of a company’s strength. 

“The idea was that embedding ESG factors into capital markets makes good business sense and leads to more sustainable markets and better outcomes for decades to come,” says Childe. “That really shifted investors’ views on sustainable investing: you’re no longer being penalized for your values and potentially taking a below-market return due to your negative screens.”

ESG integration at Manulife Investment Management

Manulife Investment Management is working to thoroughly integrate ESG analysis into our investment process, with support from senior executives and robust governance that strives to ensure ESG activities are globally consistent. “It’s about properly considering ESG factors as part of [each investment team’s] due diligence, as part of the ongoing risk monitoring of the portfolio and also as part of their active ownership, or the engagement and proxy voting that may occur,” says Childe. 

Our evaluation of ESG factors assists our investment teams in their assessment of the

quality of a company's management and the effectiveness of its governance structures.

SHORT-TERM AND LONG-TERM MATERIALITY OF ESG FACTORS

The ESG work that we do examines the factors that we believe will have a material impact on a company. Childe notes that there’s a lot of “noise” around ESG – many different key performance indicators contribute to a company’s ESG score – so it’s important to unpack the information to get a good understanding of a company’s risk exposures. For example, water scarcity may have a significant impact on a drink bottling company, but next to no impact on a financial services firm.

Manulife Investment Management teams have the flexibility to use ESG analysis in the way that best suits their decision-making process. “Some want to quantify ESG risk and ask the in-house ESG specialists to help collect and analyze relevant data,” says Childe. “Others look at ESG ‘megatrends’ – such as climate change, an aging population or automation – and draw on the ESG team’s expertise to determine how these systemic developments could influence their portfolios.”

Portfolio managers also engage the ESG team to help them appropriately apply their understanding of a company’s ESG issues through active and responsible stewardship. That may mean meeting with company management to learn more about their ESG risk mitigation strategies or using proxy voting to help shape a company’s direction. It’s important to note that being an actively engaged investor doesn’t always mean supporting change; sometimes proxy voting maintains the status quo.

Manulife Investment Management

received an A+ from the United

Nations–supported Principles for

Responsible Investment for its strategy

to integrate ESG considerations into its

business practices.

As an example, we recently engaged with a large mining company whose shareholders had introduced a resolution asking the company to distance itself from a lobbying group that had a bad reputation around climate risk. “When we spoke with the company in question, we wanted to understand why it was part of that lobbying initiative, and what it was doing to change how the lobbying group was approaching climate risk,” says Childe. The company explained that it had helped instigate change within the lobbying group, with a new CEO and different rhetoric. “We felt comfortable about the company’s position and the activities it was doing to mitigate that risk from involvement in those lobbying activities, and so we didn’t support the shareholder resolution.”

ESG-ready means future-ready

ESG integration makes sense for us on a number of levels. It can provide additional information to help build better portfolios, it allows us to engage constructively with the companies included in investment funds, and it also positions Manulife to better meet the needs of future investors. After all, millennials have different investment priorities from baby boomers. A 2016 study by the Responsible Investment Association found that millennials are 65 per cent more likely than boomers to give weight to ESG factors in their investment decisions, and more than twice as likely to seek out investments that help solve environmental and social challenges.[3] 

Overall, integrating ESG analysis into the investment process is a natural extension of Manulife Investment Management’s emphasis on fundamental research – while also supporting strong investment decision making in a changing world. 

For more information, visit manulifeinvestmentmgmt.ca.

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[2] Manulife Investment Management, Sustainable and Responsible Investing Report, 2018