Joe Connolly says there's been a separation of Environment, from Social and Governance
Passionate advocates for ESG will say it has come a long way. When it comes to benefits and pension plans, companies have started to incorporate them into their strategies and integrating them into investments and policies. Over the last five years, the “E” has been “somewhat separated” from the ESG.
“There’s a number of reasons for that,” says Joe Connolly, senior vice president in the investment consulting group at Hub International. “[Not only] is it incredibly important to tackle climate challenges and invest in decarbonisation, but it's become more quantifiable. What a lot of plans are starting to do is add the review of ESG into their portfolio analysis. That means looking at data sets for the E, the S and the G, identifying specific holdings that the investment managers have.”
If one was look at ESG research and to better understand how to identify ESG criteria, Connolly highlights the data which finds it’s best to have a conversation with investment managers and to encourage them to invest in a way clients feel is in their best interests.
“What has happened is that it's incredibly diverse, so it becomes very client specific,” Connolly says. When considering divesting of fossil fuels as an example, Connolly notes that it has been really concentrated among universities. Not only are universities and student bodies more vocal, but university administrations have started to integrate ways to improving the environment, and to address climate change - everything from recycling or using different sources of energy.
“They looked at it as a way of working with the investment managers to divest of fossil fuels,” Connolly says.
Whether corporations are investing in ESG or not, Connolly notes in 2016, FSRA highlighted it as a requirement for pension plans that are registered to explain how they adhere to ESG. “Between then, and now, almost every investment manager has a policy surrounding ESG in describing their framework, describing how it is part of their investment thesis to selecting or not selecting different companies to put into a portfolio and it has become table stakes,” he says. For now, however, “it's something that each plan has to consider if it's right for them.”
“The task is to help identify which firms or which managers are doing a better job than others and that's where it becomes very specific to the individual client,” Connolly adds. If you're a university, the likelihood is you want to divest of fossil fuels. If you're not a university, you may look at energy transition, and seeing how things are improved. To do that, you have to have a baseline and then see how the carbon emissions are reduced quarter by quarter, year over year, in order to get to specific goals.”
As to who has found better success with fossil fuel divesting, that is, those who decided to divest in oil and gas or those who decided to pull out, is an ongoing debate, according to Connolly. At the beginning of COVID, while economies were slowing down, so did the demand for energy at an accelerating pace. Portfolios that had oil and gas did not do well, which resulted in a shift to technology and healthcare that did much better.
“As we started to move out of that period, money started to go back into the oil and gas companies as the economy improved and we saw the reverse happen,” Connolly said. Connolly adds looking ahead to 2050, if we're supposed to be divesting or reducing our carbon emissions, then what will happen is they will not be as attractive. As the world starts to move to renewables and other sources of energy, the expectation is that other investments will become more attractive.”
Connolly notes that ESG, as a topic, has engaged several investment committees. “They really have kind of embraced it,” he says. “The challenge is how to define what is important for their individual institutions. That's where some universities have made a leap into looking at diversifying of fossil fuels but many are still gathering information, monitoring their portfolios to see what parts of the ESG are of concern. It’s still a very challenging world to drill down into the information.”
