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  4. Episode 24: Canada's ESG Arena

Guest speakers:

Dustyn Lanz, CEO at the Responsible Investment Association, and Kelly Gauthier, Managing Director at Rally Assets

Canada's ESG Arena: Spotting positive trends despite crisis and best vector for impact investors

Episode 24 | Duration: 21 minutes

The global crisis does not seem to trigger a decline in sustainable finance. In fact, in some cases, it's quite the opposite. Tune in the interview with Dustyn Lanz, CEO at the Responsible Investment Association, and Kelly Gauthier, Managing Director at Rally Assets, to learn more about the current situation in Canada and explore timely tips for impact investors.

  • Keesa Schreane [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 ESG 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 2020. 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 and COVID and how they are developing and the responsible investing community, taking a special look at Canada. Our guests today are Dustyn Lanz, CEO of the Responsible Investment Association, and Kelly Gauthier, a managing director and partner at Rally Assets. Dustyn and Kelly, thank you both for joining.  

    Keesa Schreane [00:01:04] 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?  

    Dustyn Lanz [00:01:14] Thanks. Thanks, Keesa. Yeah. Climate change has been a major driving force in the adoption of responsible investing in Canada and I believe worldwide. Canadian Federal Government commissioned an expert panel on sustainable finance to help align Canada's financial system with a sustainable future. And last summer, the extra 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 felt that it put Canada on the sustainable finance map, so to speak, and the federal government welcomed these recommendations. But we haven't really seen a concrete commitment from the Fed to actually implement them yet. 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. 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 system for market participants to have a common set of language to talk about transition and sustainable finance. And so the CSA group, a standard body here in Canada, is working on that taxonomy. We've also got some work happening on a Canadian version of the climate action. One hundred plus. So this would be an investor coalition that would collaborate to engage with companies to help improve their environmental performance and reduce emissions. And we're also seeing some work 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 expert panel report, which you can find online. And we just right now, we're hoping that the federal government catches up and plays a supportive role.  

    Keesa Schreane [00:03:02] So just getting to that sustainable finance in that common language that we talked to, that you talked about, how will that benefit the institutional investor community when they're looking for sustainable finance opportunities, opportunities in the ESG space? What will that common language do to support them or to ease their efforts?  

    Dustyn Lanz [00:03:24] Well, I think when we're talking about building a large market, standardization is critical, particularly when it comes to language. So that clients know what they're getting. And so that the regulators are talking about the same things that the market participants are talking about. So I just think that having a common language is fundamental and foundational to driving sustainable finance forward.  

    Keesa Schreane [00:03:50] OK, great, great. And let's get into speaking of driving sustainable finance forward about the oil markets, which I guess 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 happened with the oil markets in April, the impact it had on alternative energy, and particularly the alternative energy market in Canada. Do you see that progressing as a result or how do you see the impact taking shape?  

    Dustyn Lanz [00:04:21] I think it's a little early to start to see major market impact across sectors, but I can say it's certainly been a rough ride for the Canadian energy sector, 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 people going back to work. But this does present us with an opportunity to think about what that recovery looks like. The energy transition is already a discussion that's been happening. And I think we're going to see more focus on the transition to support a recovery that is sustainable for many decades. And that does point to renewables and diversifying our energy portfolio as an alternative. I mean, the sun is still shining in the wind still blowing. Wind and solar have certainly been subject to the same disruption as every other sector with delays and supply chain issues. But many of the companies operating in renewables are looking at a 10-year time horizon for profitability anyway. So a few bad quarters are seen as just a speedbump for many of these companies. In fact, the IEA, the International Energy Agency, forecasts that renewables will be the only part of the global energy system that's actually going to grow this year. So I think it's hard to attribute that to the crisis per say, or to the oil shock, but the outlook is pretty good for renewables right now.  

    Keesa Schreane [00:05:44] And with that in mind, what we're looking at growing this year with all the resources being deployed around COVID right now. What do you think is the impact of 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 do you see that playing out?  

    Dustyn Lanz [00:06:15] So I got a sneak peek at a forthcoming survey from a Canadian consultancy firm, which actually found that Canadian institutional investors remain committed to ESG and in fact, many believe that if you will actually become more important as a result of the pandemic.  

    Dustyn Lanz [00:06:32] In addition, there were 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 response investment funds have been outperforming the broader market in Canada and the U.S. So there is still a strong momentum there. Another sort of anecdotal indicator, I mean, unfortunately, we had to cancel our annual conference this year the Canada's national conference on responsible investing. But we replace it with a virtual conference. And we actually seeing that we're on track to have a record turnout with around 700 participants, which is up from 500 last year when we had a physical conference. So all signs are still pointing to growth and growing interest in responsible investing.  

    Dustyn Lanz [00:07:16] Great, very interesting. I think a lot of communities, organizations are seeing the same sort of phenomena that 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 on to impact investing in general and what we're seeing happening now. Kelly, I want to bring you into this as well as Dustyn. 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? 

    Kelly Gauthier [00:07:56] So I think there's just there's so many of. Right. You talk about pivot underway. I mean, I think our entire way of life is on pivoting at the moment. And, you know, within the response on impact investing communities, you see a broad spectrum of approaches, whether you are talking about different asset classes that investors focus on or different investment thesis or the depth of impact...responsible and impact investors are generally long term investors. So you're unlikely to see this group of investors, you know, selling anything quickly or, you know, any panicky moves within the private markets, which is part of the spectrum that we consider. There's no secondary market for those investments for the most part. So those are going to go anywhere. And those are usually longer-term holds that are going to sustain this volatility fairly well.  

    Kelly Gauthier [00:08:50] And I think that impact investors also want to see their managers manage through this. They want to support them and they want to allow them to move into the recovery. That said, you know, opportunistically impact, investors are going to look at strong sectors and sectors where there is in 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. And so the situation has cooled things off over the last few months. So, you know, I think we'll see certainly a move towards low carbon that's proved to be very resilient in the last few months and definitely talking up the oil shocks and what where those sectors are at. Dustyn, I'm not sure if you'd want to add anything to that? 

    Dustyn Lanz [00:09:52] Yes, sure. Thanks. I mean, we've seen over 300 investors with some nine trillion in 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 the 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. 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 and it becomes a vicious circle. And what we need is a virtuous circle. We need an economy that works better for people in financial markets to support that, which really points to opportunities in impact investing.  

    Keesa Schreane [00:10:53] That's a great point Dustyn, specifically around the income inequality and how that relates to this. If we look at the retail investors. the retail investment community. And look at what their desires are, from their perspective, as an institutional investor will work on their behalf. But those institutional investors who want to generate Alpha are looking at strong company fundamentals. But along with those company fundamentals and generating alpha, they also want to invest in creating a stronger economy, more equitable economy, especially now. And they all still want to invest 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?  

    Kelly Gauthier [00:11:36] Yeah, so I think at Rally we think about sort of sustainably meeting basic needs, so not just meeting those basic needs, but as we go forward doing it in a sustainable way. And that's really about addressing those most fundamental needs for survival. Clean water, food, housing, health care, medical care. And when we think about that, we use the Sustainable Development Goals as a framework. And so there are a number of goals within that framework that speak to the basic need peace, whether it's goal number one, which is no poverty or zero hunger, clean water and sanitation, sustainable cities. These are all goals that focus on the basic needs issues. And so that's the way that we think about investing into those into those basic needs that are being drastically affected during this crisis.  

    Kelly Gauthier [00:12:29] So that way we can play a really important role in supporting and defending access to those needs and basic human rights beyond the types of interventions that we'll see from governments and the philanthropic community. And I know there are some obvious plays in those sectors. But also some less obvious ones. Obviously, we have need health care and there are health tech and innovation pieces. We've seen an increased need for things that we didn't know are going to be so essential, like personal protective equipment and other health care supplies. So those are all places where we can fundamentally support those basic needs, but also mental health, right? Innovation and tech enablement for serving mental health systems and addictions, food systems. Right here we are grocery shopping and eating in different ways than we have in the past. And if we think about the disruptions to some of our food system, power, accessing food and through that supply chain, from agriculture to production and processing and even delivery of that food, there's tons of opportunity there to think about how we support and invest into those basic food systems. And then I think the last piece that has been really critically identified here, too, is around affordable housing and sustainable affordable housing. And so not just at a median affordability level, but also as we're seeing effects within homeless communities and the most vulnerable and how being unhoused has had critical impacts on the way that this virus has spread and the depth of crisis in various cities and countries.  

    Kelly Gauthier [00:14:08] 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 of those things into account, including financial materiality and treatment of employees as well as those other areas that are very important right now?  

    Kelly Gauthier [00:14:39] Well, I mean, obviously, cash flow is paramount right now, and when you look at it at a company and those companies that investors are certainly scrutinizing those cash positions and the runway. We need companies to survive this crisis. We need them to get back to earning the revenues that have been deferred and we need them to flourish. And so, you know, I love that you both just brought in the ethical treatment of employees. And I think that's really one of the defining issues for companies through this moment in both big and small companies have been massive impacts. Right. We've seen from huge layoffs on one end of the spectrum, to really extraordinary protection and support for workers from other companies.  

    Kelly Gauthier [00:15:25] So decent work which goes beyond just protecting employees jobs and keeping them employed and the broader economic impacts of that. But also what is decent work? How do we get equity and work? How do we look at workplace conditions and benefits and fair pay and the ratio of, you know, your median worker to executive compensation? And if you look at those things, you know, for large public companies, too. And there'll be massive brand implications here 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 how that allows them to go forward.  

    Kelly Gauthier [00:16:04] So then if you think about the best sector for impact investors in supporting the recovery, you know, obviously this has been a very sectoral story. Some sectors have thrived and become essential for the new way that we're living right now. Other sectors have shut down almost entirely. So depending on the type of investor you are, there are different things that you can do in the public market. And, you know, we've already talked about health care in tech, both health care and also all the tech that is supporting this new remote life that we're living, whether that's from network education or socially. Those are some really interesting plays to think of as an investor.  

    Kelly Gauthier [00:16:46] And if you have the ability to invest in private markets, invest in the small business. And I know we've seen that these small businesses need more than wage subsidies and rent deferrals. And what the government 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 in the U.S. and Canada, have talked about a 40 to 70 percent risk number of businesses closing permanently within the next month. And that's a tapering impact on our ethnic community, both from an investor perspective and from a liveability perspective. What is the fabric of our communities and are our lives going to look like if we lose those businesses, let alone from an economic perspective?  

    Keesa Schreane [00:17:33] It's interesting. Every topic that you raise. 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, etc.. ethical treatment of employees. Where do we see the data gaps? I know, Dustyn, 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?  

    Kelly Gauthier [00:18:21] I mean, I think the challenge of managing at this moment right now, practically speaking, is that the data is evolving as the situation evolved. And as soon as we have some data and we've identified gaps, or needs here, it's moving so quickly that I think it'll continue to evolve. And I think you'll see there's lots of response that's happening today. And that response is going to look different a month from now and six months from now. And as the situation evolves.  

    Keesa Schreane [00:18:51] So finally, to wrap things up. What type of investments will be framed in terms of preventing future pandemics? 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 that's where the focus is going to be in the future.  

    Kelly Gauthier [00:19:17] Yes. I mean, I think it's an interesting question. Certainly, you know, I don't know if we know where we're going to 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 going to take some hindsight, certainly. I think we can certainly question the cost that we seem to help here Sunday and public health. Well, there is definitely a policy angle to this. And in terms of what those cuts look like, whether they're at the provincial or state level or nationally, there's certainly going to be some interesting data coming out of that.  

    Kelly Gauthier [00:19:52] I think that in terms of opportunity, a lot of investors are certainly going to be looking at health tech and what predictive and preventative technology could have allowed earlier detection or better and faster testing and better communication, not just within any one nation, but globally. And so I think there definitely is a really interesting opportunity there to look at. And then I would also say that I think it's a question, unfortunately, of preparation for another wave or another virus. I think this, you know, up until this moment, the stories and the warnings about something like this happening were very much sort of a conspiracy theory. And I think a lot of folks didn't really take them too seriously. And I think that will most certainly change, though, if we think about what another wave or another virus could do. And where were we prepared or where we were not prepared? 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 making sure we have what we need within our borders or at least decent access and then a plan for how to get to that.  

    Keesa Schreane[00:21:01] So last word there. Thank you so much. Dustyn Lanze and Kelly Gauthier, appreciate you joining.