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May 07, 2011
The State of Sustainable Investment in Canada
    by Robert Kropp

The Social Investment Organization publishes its biennial study of sustainable investment in Canada, and reports that despite the impact of the financial crisis the uptake of sustainable investment strategies by asset managers has increased.

In 2008, when the Social Investment Organization (SIO) released its previous study of sustainable investment in Canada, the global economy had not yet been rocked by the financial crisis. The study reported a 21% increase in sustainable investment since 2006, most of it from asset growth by pension funds.

In the two years since then, of course, the global economy has sunk into recession, a condition reflected in the findings of SIO's latest
review, published this week. During this most recent two-year period, pensions and endowments "employing ESG (environmental, social, and corporate governance) integration, ESG proxy voting or corporate engagement, or economically targeted investment" lost $60 billion in value.

Pension funds comprise approximately 85% of Canada's sustainable investment activity. Overall, however, the review states, "SRI (socially responsible investment) has held steady, showing resilience in the face of the unprecedented turmoil in the capital markets brought about by the credit crisis of 2008," suggesting that as the market continues to recover, "there are signs that SRI stands to benefit from the current context."

"Virtually all the assets included in the pension funds are considered broad SRI," Eugene Ellmen, Executive Director of SIO, told "ESG integration approaches, proxy voting policies, shareholder engagement, and sustainable investments in infrastructure, real estate, and private equity make up 85% of the $530 billion we've identified."

"Every two years, we're heartened by the progress that the large institutions are making," Ellman continued. "For example, the Caisse de depot (a Quebec-based pension fund with $171 billion in assets under management) is developing a fundamental analysis tool based on ESG factors. The tool uses their data on ESG rating of companies to rate companies that are leaders and laggards, and calculates a risk premium on companies they've identified with ESG concerns. Then they can put that into a cost of capital calculation and assess what the fundamental value of a company is."

With data provided by ESG research firms, Caisse de depot will then provides its investment managers with the rating, which it expects to be incorporated into investment decision-making.

"They're still in the early stages of testing, but so far the results are good," Ellman said. "This is the kind of work that will become mainstream in the future. Analysts will take those ESG ratings, plug them into their spreadsheets, and it will have an impact on investment portfolios."

"We're seeing more and more of this fundamental analysis," he continued. "Once this becomes widespread, it will affect the cost of securities. Fundamental ESG risk will get priced into investments, and the companies that hold the highest ESG risk will be expensive for investors."

For sustainable investment to have maintained market share in Canada in the face of significant losses in assets by pension funds—"All of the funds included in the 2008 report are included in 2010," the study reports—other areas, such as the investment management industry, had to experience gains. And between 2008 and 2010, the assets invested sustainably by asset managers in Canada increased, from $38 billion to $46.3 billion.

"The screened accounts of asset managers are up significantly," Ellman said. "I think this reflects greater institutional demand for socially responsible investments among high net worth individuals, universities, foundations, and religious institutions; a wide range of investors who want investments that speak more clearly to their concerns about environmental sustainability and social responsibility."

Core SRI strategies, which consist of both positive and negative screening of companies, comprised $36.2 billion of sustainable assets invested by asset managers. The remaining $10.1 billion reflect the integration of such broad strategies as ESG integration, shareowner engagement, and proxy voting.

Retail investment, especially in the form of renewable energy income trusts, was up significantly in 2010 as well, Ellman observed. "There were three drivers. One was tax considerations. They receive favorable tax treatment until 2011, so we'll see what happens then. A lot of them are converting from trusts to corporations."

"Another driver is the price of oil. As the price of oil goes up, the demand for renewables goes up," he continued. "And there have been some important policy changes that have provided incentives for renewable energy growth. The Ontario Clean Energy Act provides a fee and tariff program for renewable power producers, and we expect that the regulatory environment will continue to favor renewables."

Other areas of sustainable investment studied by SIO include impact investing and clean tech, both of which were found to increase by 2010, according to the study. Impact investing, which was identified for the first time in the 2010 report, represented $4.45 billion of the sustainable investment total.

"Examples of impact investing include community investing," the report stated, "Or financing that is provided to businesses with a social purpose or enterprising (i.e. revenue-generating) nonprofits."

Citing the
Cleantech Group, SIO describes clean technology as "a diverse range of products, services, and processes, all intended to provide superior performance at lower costs, while greatly reducing or eliminating negative ecological impact, at the same time as improving the productive and responsible use of natural resources." In 2010, clean tech investment grew slightly, from $1.1 billion to $1.4 billion.

"Clean tech is a small part of the overall picture, but it's growing quickly and will become a bigger part of SRI in the future," Ellman said.

One way in which SIO's report differs from the
2010 Trends Report published by the Social Investment Forum (SIF) last November is that the latter calculated the amount of sustainable assets dedicated to shareowner engagement. In its report, SIF found that more than 200 institutions and investment management firms, with $1.5 trillion in assets, had submitted proposals.

Asked about the state of shareowner engagement in Canada, Ellman said, "Shareholder engagement in Canada is very active. All of our major members are involved in shareholder campaigns on campaigns like operations in oil sands, executive compensation, environmental reporting, and human rights issues."

There is rising support for such shareowner proposals in Canada, Ellman said.


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