As Dustyn Lanz steps down from his position as CEO of the Responsible Investment Association after eight years with the organization, he shared insights in a Q&A with Investment Executive.
What is the biggest environmental, social and governance (ESG) development you’ve seen in the past eight years? To what do you attribute this?
The ESG space has gone parabolic over the past few years, so it’s hard to narrow it down to just one big development. I think Canada’s Expert Panel on Sustainable Finance was a game changer because it started a conversation about what sustainable finance means in the Canadian context, and it provided a blueprint for the ESG community to identify and leverage opportunities.
For example, the panel recommended that Canada’s asset management community should establish a platform for institutional investors to engage with high-carbon emitters. That inspired the RIA to work with the Shareholder Association for Research and Education, Ceres and the UN-backed Principles for Responsible Investment to establish Climate Engagement Canada, which is definitely one of the biggest ESG developments we’ve ever seen.
The Canadian Investor Statement on Diversity and Inclusion and the Canadian Investor Statement on Climate are also high on the list. Since we launched the D&I statement in 2020, it’s been signed by over 50 investors managing about $4 trillion in assets, and the climate statement we just launched before COP26 has already been signed by 36 investors managing some $5.5 trillion. These collaborative initiatives are moving the market, and I love seeing the industry take big steps forward like this together. National collaboration is something we do well in Canada, and we don’t see it happening on this scale in other markets.
What area of ESG has moved most slowly? To what do you attribute this?
I get a little sad when I look at retail market adoption. It’s great to see the uptick in assets flowing to ESG funds since the pandemic started, but it’s still just a drop in the bucket. Investor education is a barrier here, but, as an industry, we need to meet investors where they are. We need to make it easier for investors to understand this stuff.
I think players in the financial services sector are really good at innovating and finding ways to differentiate their products and services, but when you push innovation and differentiation far enough, you end up with jargon that’s overwhelming to non-specialists. This obviously leads to confusion, and confusion leads to investor inertia.
Leading advisors are doing ESG training and talking to clients about responsible investments, but most still aren’t. So, when you combine investor inertia with advisor inertia, the drop in the bucket becomes easier to understand.
Innovation is great, and differentiation is essential to compete, but we need to channel those forces in ways that help the investor, rather than confuse them.
What is your response to ESG backlash, resistance and concerns about greenwashing? How has this response evolved over the past eight years?
I assume you’re talking about [Canadian entrepreneur] Tariq Fancy and the like. [Editor’s note: In this essay, Fancy invited rebuttal to his ideas.]
Every single head of ESG in the country is terrified by the risk of their asset management firm being called a greenwasher. And, as asset managers do, they’re going to manage that risk. In practice, this means they’re going to avoid actions that could lead to a credible greenwashing claim.
In other words, very few asset managers in Canada, if any at all, are intentionally misleading investors because it’s not worth the risk.
The problem comes down to the jargon and complexity of responsible investing. The drive for innovation and differentiation are contributing factors here.
In addition, many people see ESG on a fund and they assume this means the fund should be perfectly green and exclude anything that’s not. But the world isn’t perfectly green and sustainable, and investors can play a role in making it more sustainable through engagement.
Just look at the case of [activist investor] Engine No. 1 and Exxon Mobil. If Engine No. 1 had sold its shares in Exxon, it wouldn’t have been able to get three climate-conscious directors on the company’s board. Whereas selling its shares would have had zero impact on Exxon and the climate, engagement had a huge impact on the company’s climate governance. And corporate sustainability starts at the top.
This example shows how funds don’t need to be composed of strictly green holdings to make an impact. Taking a stake in a company and voicing concerns over ESG issues can be highly impactful while enhancing long-term shareholder value.
A large part of your tenure at RIA has involved education. What would you recommend as the “next-level” areas of education for eager students?
I think impact investing is going to be the next big differentiator for asset management firms, so I expect to see more and more focus on impact measurement. Investors increasingly want to know the impact of their investments, so there will be a growing number of opportunities for professionals with sound knowledge of impact measurement and reporting. Impact education is a big opportunity.
What’s your best advice to our readers (inclined or not toward responsible investing)?
All Canadian investment professionals should be familiar with the impending Transition Finance Taxonomy, as this framework is going to unlock a new market for financing Canada’s energy transition. The taxonomy is expected to be delivered by the end of this year.
I would also suggest that investment professionals should be familiar with the work of Canada’s Sustainable Finance Action Council and the Net-Zero Advisory Body. These initiatives are shaping the future of sustainable finance in Canada. The RIA is hosting Transition Finance Week from Nov. 29 to Dec. 3 to cover these topics and more.
For advisors, I would suggest that your clients are likely warmer to conversations about responsible investment than you may think. Climate change, diversity and other ESG issues are top of mind for so many people these days. Don’t worry if you’re not an expert in these topics; research has repeatedly shown that your clients will likely appreciate you bringing it up. Of course, if your clients show interest, you’ll likely need to invest in some education at some point. But it costs absolutely nothing to see how your clients feel about sustainability, and bringing it up could be the difference between losing and retaining a client.