Episode Transcript
Speaker 0 00:00:00 The responsible investing community came into 2020 with a strong focus on climate change. Climate change was finally taking center stage in the e s G conversation, especially post Davos. All eyes and many resources were around investing while being mindful about climate and environmental concerns. Well, obviously this changed by quarter 2, 20 20. Global focus shifted toward covid 19. We're still dealing with it. We're still going through it, and we are still coping. But today we're discussing the convergence of these two themes, climate change, covid, and how they are developing in the responsible investing community. Taking a special look at Canada. Our guests today are Dustin Lanz, c e o of the Responsible Investment Association, and Kelly gk, managing director and partner at Rally Assets. Dustin and Kelly, thank you both for joining.
Speaker 1 00:01:00 Thanks for having us. Thank Keith so much for
Speaker 0 00:01:02 Having us. Sure. Dustin. Let's first talk about the efforts around climate change that we saw in the early part of 2020. What makes the Canada region a standout use case?
Speaker 1 00:01:14 Uh, thanks. Thanks, Keith. Uh, yeah, so climate change has been a major driving force in the adoption of responsible investing in Canada, and I believe worldwide. Um, Canada's federal government commissioned an expert panel on sustainable finance to help align Canada's financial system with the sustainable future. Uh, and last summer, the expert panel released a series of recommendations for the government to accomplish that. And so this was a huge moment for sustainable finance in Canada. We really, uh, felt that it put Canada on the sustainable finance map, so to speak, um, and the federal government welcomed these recommendations. Um, but we haven't really seen a concrete commitment from the feds to actually implement them yet. Um, and I think there are a number of factors that have slowed things down. Obviously, the pandemic, we've also had an election last fall, so I think there's a bit of a grace period there.
Speaker 1 00:02:03 But in the meantime, we are seeing market participants trying to move forward on a number of the key recommendations. For example, one of the recommendations was to develop a taxonomy or a sort of a classification, uh, system for, for market participants to, uh, have a common set of language to talk about, uh, transition and sustainable finance. And so, uh, the CSA group, a standard body here in Canada is working on that taxonomy. Uh, we've also got some work happening on a Canadian version of the climate action 100 plus. So this would be an investor coalition, uh, that would, uh, collaborate to engage with companies to help, uh, improve their environmental performance and reduce emissions. And we're also seeing some work, uh, behind the scenes right now to help close data gaps when it comes to climate change. So there's a lot of great activity happening in Canada flowing from that extra panel report, which you can find online. Uh, and we just, right now we're hoping that the federal government catches up and, and plays a supportive role.
Speaker 0 00:03:02 So just getting to that sustainable finance and that common language that we talked, that you talked about, how will that benefit the institutional investor community when they're looking for sustainable finance opportunities, opportunities in the E S G space? What will that common language do to support them or to ease their efforts?
Speaker 1 00:03:24 Well, I think, uh, when we're talking about building, uh, uh, a large market, standardization is critical, uh, particularly when it comes to language so that, uh, um, so that, uh, clients, uh, know what they're getting. And so that, um, I mean, so that regulators are talking about the same things that the market participants are talking about. So I just think that, uh, having a common language is, is fundamental and foundational to, to driving sustainable finance forward.
Speaker 0 00:03:50 Okay, great. Great. And let's get into, um, speaking of driving sustainable finance forward, um, talk about the oil markets, which I guess is the, um, which is going in the opposite direction, but oil markets had a really big surprise for some folks. Some folks I guess, expected it in late April. And let's talk about the impact that what happened with the oil markets in April, the impact that that had on alternative energy, in particularly the alternative energy market in Canada. Do you see that progressing as a result? Or how do you see the impact taking shape?
Speaker 1 00:04:21 I think it's, um, it's a little early to, to see major market impact, uh, across sectors, but I can say it's certainly been a rough ride for the Canadian energy sectors, specifically oil and gas. Of course, in Canada, that sector makes up a large part of our economy, so we do want to see a recovery and, and people going back to work. But this does present us with an opportunity to think about what that recovery looks like. Uh, energy transition is already a discussion that's been happening, and I think we're gonna see more focus on, on transition to support a recovery that is sustainable for many decades. And that does point to, to renewables and to diversifying our energy portfolio. Um, as for alternatives, I mean, the sun's still shining and the winds still blowing. Um, you know, wind and solar have certainly been subject to the same disruptions as every other sector with delays in supply chain issues.
Speaker 1 00:05:13 But many of the companies operating in renewables are looking at a 10-year time horizon for profitability anyways. So a few bad quarters are seen as just a bump, a speed bump, uh, for many of these companies. In fact, the en um, the I e a, that's the International Energy Agency forecast that renewables will be the only part of the global energy system that's actually gonna grow this year. So, um, I think it's hard to attribute that to the crisis per se or to the oil shock, but the outlook is pretty good for renewables right now.
Speaker 0 00:05:43 Okay. And with that in mind, with what we're looking at growing this year, with all the resources being deployed around covid right now, how, what do you think is the impact, or what will be the impact in terms of the momentum that we gained, particularly in the impact investing area around climate change and around focusing resources and energy into climate change? Do you see a huge shift coming at the end of the year? Do you think people will not allow that momentum to be shifted, but will continue how you see that playing out?
Speaker 1 00:06:15 So, uh, I got a sneak peek at a forthcoming survey from a Canadian consultancy called Melan, um, which, uh, actually has found that Canadian institutional investors remain committed to E S G. And in fact, many believe that ESG will actually become more important as a result of the pandemic. Um, in addition, there were, there's been data from a number of sources showing that despite the huge volatility in Q1, assets actually continued to flow into responsible investment funds. And these responsible investment funds have been outperforming the broader market in Canada and the us. So there's still a strong momentum there. Um, another sort of anecdotal indicator, I mean, unfortunately we had to cancel our annual conference this year. That's Canada's national conference on responsible investing, but we replaced it with a virtual conference. And we are actually seeing, um, that we're on track to have a record turnout with around 700 participants, which is up from 580 last year when we had a physical conference. So all signs are still pointing to growth and growing interest in responsible investing.
Speaker 0 00:07:15 Mm-hmm. <affirmative> great. Very interesting. I think a lot of the communities organizations are seeing the same sort of phenomena when they were having in-person events versus the digital events. There's a lot more access now. So that sounds like it's definitely on par. And let's move into impact investing in general and what we're seeing happening now, and Kelly, I'd like to bring you into this as well as Dustin, does the responsible investing community have a covid investment plan? So is there a formal response or a specific investment pivot that's underway in response to covid, or is it something broader that the impact community is focusing on?
Speaker 2 00:07:51 Um, so I think there's just, there's so many pivots, right? You talk about, about pivots underway. Uh, I mean, I think our entire way of life is on, is pivoting at the moment. Um, you know, within the responsible and impact investing communities, you see a broad factor of approaches, whether you are talking about different asset classes that investors focus on, or different investment thesis or the depth of impact. Um, responsible and impact investors are generally long-term investors. So you're unlikely to see this group of investors, um, you know, se selling anything quickly or, um, or, you know, any panicky moves, um, within the private markets, which, um, is part of, of the spectrum that we consider. There's no secondary market for those, um, for those investments for the most part. So those aren't gonna go anywhere, and those are usually longer term holds that are gonna sustain the volatility, um, fairly well.
Speaker 2 00:08:44 And I think that impact investors also wanna see their managers manage through this. They wanna support them, and they want to, um, allow them to move into the recovery. Um, that said, you know, opportunistically impact investors are gonna look at strong sectors and sectors where there's some greatest need. And where valuations have now also come down a little, there was a lot of conversation as we came into 2020 about valuations being high. Uh, and so this, this situation has, um, cooled things off over the last few months. So, you know, I think, you know, we'll see certainly a move towards, uh, low carbon, uh, that's proved to be very resilient in the last few months as Des was talking about some of the oil shocks, um, and what, where those sectors are at. Um, and, and I think investors will be looking at carbon within their portfolios very carefully going forward as we see, um, how those sectors look to recover and, and what, you know, bailouts or assistance are, are provided within those sectors. Justin, I'm not sure if you'd wanted to add anything to that.
Speaker 1 00:09:46 Yeah, sure. Thanks. I mean, we've seen, uh, over 300 investors with some 9 trillion assets have now signed the investor statement on Coronavirus response. And so these investors, they want companies to prioritize health and safety, to provide opportunities for paid leave if needed. And they also want to see companies maintaining employment, and that's a really big one. They're asking companies to look after their people and to take every measure possible to retain their workforce, because more unemployment will only deepen the crisis. And on that note, we should be mindful that economic inequality is a major contributing factor to the depth of this crisis. Uh, and so I think we have to start seeing widening inequality as a systemic risk, just like climate change, because less income quickly becomes less demand and less consumption, which of course reduces economic growth and that impedes profitability for companies. Um, it, it becomes a vicious circle in what we need is a vir, um, virtuous circle. We need an economy that works better for people and financial markets to support that, which really points to opportunities in impact investing.
Speaker 0 00:10:47 That, that's a great point. Dustin specifically are around the in income inequality and how that relates to this. If we look at, um, the retail investors and retail investment community and look at what their desires are from their perspective as an institutional investor who are working on their behalf, for those institutional investors who want to generate Alpha are looking at strong company fundamentals. But along with those company fundamentals in generating Alpha, they also want to invest in creating a stronger economy, more equitable economy, especially now. And they also want to invest in opportunities that meet people's basic needs during this pandemic. If they want to do all of that, where should they look? What sectors, where should they be looking?
Speaker 2 00:11:31 Yeah, so I think at Rally we think about sort of sustainably meeting basic needs. So not just, um, meeting those basic needs, but as we go forward doing it in a sustainable way. Um, and, and that's really about addressing those most fundamental needs that of in for survival, clean water, food, housing, healthcare, medical care. Um, and when we think about that, we use the sustainable development goals as a framework for doing that. Um, you know, and so there are a number of goals within that framework that speak to the basic needs piece, whether it's, um, goal number one, which is no poverty or zero hunger, clean water and sanitation, sustainable cities. These are all goals that focus on this, the basic needs issues. Um, and so that's the way that we think about investing, um, into those, into those basic needs that are being drastically affected during this crisis.
Speaker 2 00:12:24 So investors can play a really important role in supporting and defending access to those needs and basic human rights, um, beyond the types of interventions that we'll see from government and the philanthropic community. And I, you know, there are some obvious plays in, in that, those sectors, but also some, some less obvious ones. Obviously we have, um, have need in healthcare and there are health tech and innovation pieces. Um, we've seen, you know, increased need for, um, things that we didn't know were gonna be so essential, like, you know, personal protective equipment, um, and other healthcare supplies. So those are all places where, um, we can fundamentally support those basic needs, but also mental health, right? Innovation and, and tech enablement for, for serving mental health systems and addictions, um, food systems, right? We are, we are grocery shopping and eating in, in different ways than we have in the past.
Speaker 2 00:13:13 And if we think about the disruptions to some of our food systems, how we're accessing food, um, you know, and through that, that supply chain from agriculture to production, um, processing and even delivery of that food, um, there's tons of opportunity there to think about how we support and invest into those basic food systems. Um, and then I think the last piece that has been, um, really critically identified here too is around affordable housing. Um, and sustainable, affordable housing. And so not just at a, at a, you know, median affordability level, but also as we're seeing effects within homeless communities and the most vulnerable, and how being unhoused has had, you know, critical impacts on the way that this virus has spread and, and the depth of crisis in various, uh, cities and countries.
Speaker 0 00:14:03 So if we're looking at those institutional investors who are really looking at those themes and those topics, but they also are looking through the lens of financial materiality as well as how ethically companies are treating their employees. Does that narrow the field? And if so, are there specific sectors that really focus on taking all those things into account, including financial materiality and treatment of employees, as well as those other areas that are very important right now?
Speaker 2 00:14:32 Mm-hmm. <affirmative>? Well, I mean, obviously cash flow is paramount right now, and when you look at it at a company and, um, those companies and investors are certainly scrutinizing those cash positions in the runway. Um, we need companies to survive this crisis. We need them to get back to earning the revenues that have been deferred and, and we need them to, um, to flourish. And so, you know, I, I love that you, you and both Justin have brought in the, the ethical treatment of employees. Um, and I think that's really one of the defining issues for companies through, um, through this moment. And both big and small companies have seen massive impacts, right? We've seen huge layoffs, um, on one end of the spectrum, right? To, you know, really extraordinary protection and support for workers, um, through, through from other, from other companies. And so we, in the impact space talk about decent work, um, which goes beyond just, uh, protecting employees jobs and keeping them employed and the broader economic impacts of that.
Speaker 2 00:15:30 But also, what is decent work? How do we get equity in work? How do we look at workplace conditions and benefits and fair pay, um, and the ratio of, you know, your median worker to executive compensation. And so as we look at those things, you know, for large public companies too, um, there'll be massive brand implications here, um, that will help or hurt their future revenues in terms of how they behave and what sort of character they display in this moment and, and how that allows them to go forward. So then if you, you think about through the best sectors for, for impact investors and in supporting the recovery, um, you know, obviously this has been a, a very sectoral story. Some sectors have thrived, um, and become, you know, essential for the new way that we're living right now. Other sectors have shut down almost entirely.
Speaker 2 00:16:19 So depending on the types of investor you are, there's, there's different things that you can do in the public markets. Um, you know, we've already talked about healthcare and tech, uh, both, you know, health tech and also, um, all the tech that is supporting this, uh, new remote life that we're living, whether that's from, you know, work education or socially, uh, those are some really interesting plays to think of as an investor. Um, and if you have the ability to invest into private markets, invest into small business, and I know we've seen, uh, that these small businesses need more than wage subsidies and rent deferrals and, and what the governments can do for them. There's a number of them that are at risk of closing permanently. I think the numbers that I've seen in the last few weeks, both, um, in the US and Canada, I've talked about a 40 to 70% risk number, um, of businesses closing permanently within the next month. Um, and that's a staggering impact on, uh, on our, our s and new community, both from an investor perspective and from a livability perspective. Uh, you know, what is the fabric of our communities and um, and our, our lives gonna look like if, if we lose those businesses, let alone from, from an economic perspective.
Speaker 0 00:17:28 And it's interesting, every topic that you, that you raised, Kelly, really comes back to data being a huge backbone. That's how we get information. That's how we're able to make these intelligent decisions to be able to support our economy in different ways, small businesses, et cetera. Ethical treatment of employees. Where do we see, um, the data gaps? I know, Dustin, you talked a bit about that earlier in terms of some of the things that your group is working with. Where do we see data gaps that still need to be filled?
Speaker 2 00:17:55 Uh, I mean, I think the challenge of managing in this moment right now, um, practically speaking, that the data's evolving as the situation evolves. And so as soon as we have, uh, some data and we've identified, you know, gaps or needs here, it's moving so quickly that I think it, it'll continue to evolve. And, and I think you'll see there's lots of responses happening today, and that response is gonna look different a month from now and six months from now, um, as the situation.
Speaker 0 00:18:26 So, so finally, to wrap things up, what type of investments will be framed in terms of preventing future pan pandemic? So do you have a top three that you can share with us? And that could be top three sectors, it could be top three types of investments, but where do you really see the new framework is going in terms of preventative methods around pandemics? Because we're hearing a lot about vets where the focus is going to be in the future.
Speaker 2 00:18:52 Yeah, so I mean, I think it's an interesting question. Um, certainly, you know, I don't, I dunno that we know where we're gonna end up in terms of the factors that we might have been able to identify that could have prevented us from getting where we are today. I think that's gonna take some hindsight. Um, certainly I, I think we can certainly question the cuts that we've seen to healthcare spending and public health. So there's definitely a policy angle to this, um, in terms of what those cuts have looked like, whether they're at the, you know, provincial or state level or nationally. Um, there's certainly gonna be some interesting data coming out of that. Um, I think that in, in terms of opportunity, a lot of investors are certainly gonna be looking at health tech and what predictive and preventative technology could have allowed us earlier detection or better and faster testing, um, better communication, not just, you know, within any one nation, but globally.
Speaker 2 00:19:45 And so I think there's definitely some really interesting opportunities there to look at. Um, and then I would also say that I think it's a question, you know, unfortunately of preparation for another wave or another virus, I think this, um, you know, up until this moment, the, the stories and, and the warnings about something like this happening were very much, um, sort of a conspiracy theory. And I think a lot of folks didn't really take them too seriously. And, and I think that will most certainly change. So if we think about what another wave or another virus could do and, and are we, where were we prepared and where we were not prepared, um, I believe we'll see a bit more of a move towards local production. And so in different sectors, there's been different impacts there, but, um, making sure we have what we need within our borders or, um, at least decent access and a plan for how to get to that.
Speaker 0 00:20:36 So last words there. Thank you so much, Dustin Lands and Kelly Gucci, appreciate you joining.
Speaker 2 00:20:44 Thanks for having us. Thanks for having me.
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