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According to the Global Sustainable Investment Review of 2018, the global market for sustainable investing increased 25% between 2016 and 2018. The review stated that in Canada, the main reasons for the increase were risk reduction, followed by solid performance and increasing demand from investors for more sustainability.

Several non-financial rating agencies, including MSCI and Sustainalytics, have emerged to respond to the demand for the quantifying environmental, social and governance (ESG) factors. In 2014, Novethic analyzed 40 of these agencies with respect to various specialty areas and activity types. It found that several agencies produced ratings that are not always correlated with one another or based on a common range of values, contrary to traditional rating agencies.

The Canadian Derivatives Institute met with Vincent Beaulieu, head of risk and sustainable investments at Fiera Capital. He discussed the issues currently facing sustainable investments.

“Clients expect more and more to see a minimum level of integration of environmental, social and governance factors,” Beaulieu said. To that end, Beaulieu is tasked with assessing the performance and risk of investments using a centralized approach to ensure that Fiera’s asset managers have the right tools and knowledge for their investment decision-making.

For example, in the fundamental analysis of an investment, most investment teams study two aspects of a security: the traditional financial review of a company, as well as “a complete assessment of headwinds and tailwinds this company faces,” Beaulieu said. “It’s often at this level that E, S and G criteria will be considered.” He added that Fiera, as a signatory of United Nations Principles for Responsible Investment, demands a minimum level of ESG integration within its teams and must report annually on its efforts across its investment platform.

Depending on the objectives and values of a client, a whole range of sustainable investment strategies can be implemented, from negative filtering (e.g., excluding companies that generate more than 10% of their revenue in sectors such as armaments, pornography, gambling, alcohol, tobacco, etc.) to positive filtering (i.e., best-in-class companies) and impact investing.

What role do non-financial rating agencies play in the development of this approach? Since 2016, Fiera Capital has adopted the MSCI ESG Research approach. Fiera’s asset managers use ESG research reports based on MSCI methodology and can also directly obtain raw data on certain factors. According to Beaulieu, selecting a non-financial rating agency “depends on [the rating agency’s] coverage, its price, and the assessment of the data by the managers,” including whether the data is compatible with the Fiera team’s approach and other tools at its disposal, such as FactSet or Bloomberg.

Why do we see convergence between credit rating agencies, but not between non-financial ones? “Credit rating agencies have existed for a long time, and despite them starting to integrate ESG factors in their credit ratings, they ultimately aim to answer one single question: can the company reimburse its creditors?” Beaulieu said.

Further, the convergence of non-financial ratings is complicated by the fact that different agencies have different objectives. Currently, there is no agreement on the selection of ESG factors and the weighting of those factors. The question is, what is the relative importance of one ESG factor compared to another? “Agencies use triggers that are so different that the aggregation of all these ESG factors can lead to ESG scores that are consequently extremely different,” Beaulieu said. Analyses often focus on financial materiality, but “an ESG criterion lacking financial materiality does not mean that it should necessarily be disregarded.”

Timeliness seems to be a major issue for the ESG sector. “Access to information and its proliferation on social networks means that certain issues have more financial impact than before,” Beaulieu said. One recent case of this was Ubisoft, even though the impact on its financial health was hard to fathom.

Finally, one current challenge is access to data: that is, better disclosure of company data, better data aggregation by rating agencies and better education for asset managers on the meaning and long-term impacts of the information provided.

“This is a cascade effect beginning with asset holders, who will give us ever more precise management mandates as a function of their interests and current standards,” Beaulieu said. “This cascade then carries over to companies, as we will have more frequent conversations with them because we need to uphold our mandates. As these conversations evolve over time, companies will be moved to ask themselves questions on what to measure and to disclose.”