Why ESG integration is active management 2.0

This article was produced in partnership with Manulife Investment Management.

While the explosion of ESG investment integration standpoint really took hold after the global financial crisis, it hadn’t been tested by a significant economic downturn – until the pandemic.

The good news for ESG advocates is it passed this test with flying colours. Not only was there no pullback from investors but, to the contrary, more funds flowed into the space as societal concerns around issues such as climate change, inequality, and health and safety, intensified the focus on sustainable investing.

Margaret Childe, Head of ESG, Canada at Manulife Investment Management, told WP this milestone backed up the stance Manulife Investment Management took back in 2015, when it became a signatory to the Principles for Responsible Investing (PRI) and focused, in earnest, on how it wanted to embed ESG best practice within its culture.

It developed a standalone ESG team as part of its risk function. Childe and her colleagues, with members in both North America and Asia, now sit side by side with Manulife’s investment teams across all areas of focus. She likened this to active management 2.0 where, given Manulife’s fundamental bottom-up approach to investing, the integration of environmental, social and governance issues is simply a natural extension of what they do.

She said: “Our ESG and investment teams provide that deep bench strength of sustainability and investment professionals to provide clients with local insights across a broad range of asset classes, and geographies.”

She added: “A lot of these issues are more forward-looking and require a different set of experience and expertise [to standard investment analysis]. The ESG team brings everything together for the investment teams to think outside of the box in terms of our typical ways of looking at companies.”

Integrating ESG factors in such a holistic and systematic way has brought Manulife Investment Management to the fore as sustainability becomes a key area of focus for investors. Having the foresight to set the team up six years ago speaks to the company’s belief that sustainability is critical for an effective investment process for both risk mitigation and creative offering.

Childe believes this marries nicely with fundamental investment approaches and means her team can be explicit about the incorporation of ESG factors, including its due diligence and engaging directly with investee companies. Overall, it’s an attractive proposition for advisors.

“This speaks to our deep bench and expertise on sustainability, as well as ESG’s inclusion as part of a holistic investment process for risk mitigation and alpha creation properties,” Childe said. “It also speaks to the changing beliefs and values of our client base on both a retail and institutional level.”

As a founding member of Climate Action 100+, an investor-led initiative to ensure the world's largest corporate greenhouse gas emitters take necessary action on climate change, Manulife Investment Management plays a key role in pushing these 167 companies to align with the Paris Agreement. This set the goal of keeping the global average temperature increase within a narrow window of preferably 1.5 degrees to get the world to carbon net zero by 2050.

As well as increasing regulatory pressure on emitters, the Paris Agreement also reflects the desires of the end investor but also a realization that if they have long-term goals, such as retirement or saving for a child's education, their ESG investments must provide the required returns.

To that end, advisors should be mindful of the difference between ESG integration and thematic ESG investing. The former represents Childe’s team’s core holistic approach – risk mitigation and alpha creation – and has a strong stewardship component. The thematic approach, on the other hand, has more of a sustainability objective that is incorporated into the makeup of a fund. The Manulife Climate Action Fund and Class, for example, aims to tackle climate change in two main ways: by helping to decarbonize the world and focusing on companies that they believe have credible reduction emission plans; and by investing in companies that are providing climate solutions for the transition to a low carbon economy.

Childe said: “One of the issues we have with ESG funds is that, at this point in time, although it's coming, there is no clear regulation as to what's required in terms of the definition of sustainability objectives, or how that's incorporated into the investment process, or even transparency as to how those objectives might be met.

“It’s really up to the investment advisor to look under the hood and qualify how that fund manager is achieving sustainability objectives, and how that might limit the fund or add to the funds ability to meet the financial return.

“ESG integration, therefore, is something that investment advisors should be requiring across all investments across the board from fund managers. Particularly from an active management perspective, it’s become fundamental to our collective investment approach.”

Manulife Investment Management takes it roles as stewards of clients’ capital extremely seriously. Its leadership in the field has been widely recognized, from being a signatory to PRI to also being the only Canadian investment manager placed on the PRI Leaders Group 2020^[1] for demonstrating a breadth of responsible investment excellence, and excelling specifically in the year’s climate reporting theme. The ESG team has also been named Best ESG Team in North America by Capital Finance International^[2] two years in a row, while Childe herself has been awarded a Clean 50^[3] award in Canada for her contribution to sustainability and finance.

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