Responsible Investment in 2020: A Shift in Focus

As 2020 was getting underway, many investing experts predicted that the environment would be a top responsible investment theme. Then COVID-19 came along, shifting much of the focus to how companies are responding to the crisis with their business practices.

"Just before the pandemic, climate change was the biggest topic, but it's taken a bit of a back seat now to some of the social factors," says Melanie Adams, head of RBC Global Asset Management's responsible investment operations.

Social factors refers to the "S" in Environmental, Social and Governance (ESG), a form of responsible investing that takes into account how companies manage risks and opportunities related to the environmental, social and governance portions of their operations. ESG is used to measure and evaluate things like a company's impact on the environment, its governance, as well as how it treats its employees, customers and the communities it operates in.

Adams says a couple of social factors in particular have been front and centre since the pandemic started to spread throughout Canada in mid-March.

"In all sectors, employee health and safety became a key focus, including how companies are treating their employees and what they are doing to protect their health," she says. Safety measures such as hand-washing and hand-sanitizing stations, social-distancing protocols, increased benefits for front-line workers and additional sick days are all good examples.

Another major social factor that's been affected by the global impact of the pandemic is supply-chain management.

"It was a big deal for companies if they didn't have a diversified supply chain and one of their suppliers had issues. How would this impact their business models?" Adams says. "That's a key issue we've been looking at in our investee companies," she adds.

In addition to looking at supply-chain risk and how companies are able to access their required raw materials, "business continuity planning has become critical to assess how companies are handling the pandemic and how they will adapt going forward," Adams says.

With the rapid move to remote working for many people across the country, cybersecurity and data privacy issues have also seen a lot of attention under the "S" category of ESG. Adams says it's important to consider how companies are able to protect confidential information in a work-from-home environment, as well as how firms involved in different technologies related to COVID, such as tracking apps, manage the risks.

While "S" has been a major theme so far in 2020, governance – the "G" – has also been an important component, particularly in light of the Black Lives Matter movement and systemic racism issues.

"We know diverse boards bring a broad array of experience to the table, which can help assess risk at a company more accurately. Studies have shown that more diverse boards and senior management can lead to better financial performance," Adams says.

Larry Fink, head of investment management firm BlackRock Inc., wrote about the importance of board diversity in his annual letter to company CEOs a few years back, highlighting how it benefits a company.

"Boards with a diverse mix of genders, ethnicities, career experiences, and ways of thinking have, as a result, a more diverse and aware mindset. They are less likely to succumb to groupthink or miss new threats to a company's business model. And they are better able to identify opportunities that promote long-term growth," he wrote.

New federal legislation in Canada should make it easier for investors and shareholders to find out more about the diversity of boards and senior management teams of regulated firms. For all annual meetings held on or after January 1 this year, companies governed by the Canada Business Corporations Act are required to report on the representation of women, Indigenous peoples, persons with disabilities and members of visible minorities. The government says companies can also disclose information about additional groups they believe contribute to the diversity of their boards or senior management teams.

While environmental factors may have been placed on the backburner in light of recent events, how we move forward with the rebuilding of economies will be important for climate issues. "How we are thinking about climate change risks and opportunities, and how that's incorporated into the way we are rebuilding the economy, will be very important," Adams says.

Overall, Adams believes that 2020 has shown the importance of looking beyond only traditional financial factors. "How companies are addressing a lot of these risks to their businesses, and how they will come out of this more resilient than ever will be key for many investors."

For more on responsible investing, check out A Better World.