Podcast: GLC’s approach to responsible investing (RI) and environmental, social and governance (ESG) factors

Ron Hanson, President and CIO of GLC, discusses Responsible Investing (RI) and the integration of Environmental, Social and Governance (ESG) factors into the selection and management of investments.

Christine: Can you feel good about you’re investments and get the returns you expert? Can you really mix morals with money? What role can the asset managers you choose play when it comes to contributing to a more sustainable global financial system?

Hello, I’m Christine Wellenreiter, Vice-President of Marketing & Communications at GLC Asset Management Group. On today’s GLC podcast we’re going to be answering those questions on a topic that is rapidly growing in interest – responsible investing, or RI for short.

If you know someone you think would also like to hear this podcast, like all of GLC’s podcasts, you can find and share this podcast through GLC’s website, Apple podcast, Google Play and Spotify by searching GLC Asset Management.So…let’s get right to it.

Joining me today in the studio is Ron Hanson, President and Chief Investment Officer, GLC Asset Management Group. Thank you for joining us.

Ron: Hi Christine, It’s great to be here

Christine: Ron, Before I circle back to those bigger questions I mentioned a moment ago, let’s start with why I specifically asked you to join me today, what role do you play in overseeing GLC’s RI approach?

Ron: First of all in my role as President and CIO I have responsibility for all of GLC’s business operations including oversight of our investment teams, and as it pertains GLC’s RI approach, I’m overall responsibility for the implementation, tracking and, our ongoing commitment to progress in improving our approach on all these items.

Christine: So what is GLC’s approach to RI? How would you define it?

Ron: I would say the foundation of our approach is the formal integration of ESG issues, ESG – that stands for Environmental, Social and Governance. Commonly grouped and referred to as ESG into our disciplined investment processes. In all our investment portfolios we are looking to identify both risks and opportunities arising from ESG related issues that would contribute to making better investment decisions. GLC utilizes the services of a leading third-party global RI research firm to assist in the ESG analytical process. This analysis can guide us to do further work on certain issues or to engage with a company on specific issues if applicable and encourage adequate disclosure.

Christine: So are we basically running stocks through a screen and calling it a day?

Ron: No. We believe it’s more than that in addition to considering ESG issues in each investment decision it’s not a set and forget it type approach.

Christine: What do you mean?

Ron: We are regularly monitoring all our holdings for changes both positive and negative on ESG related issues, and how it may or may not impact our investment thesis. This disciplined investment approach toward assessing all the market risks and opportunity factors is true for all investment portfolios. As it relates to ESG factors specifically, our process continues to evolve, including updates to our engagement policy and proxy voting guidelines. – both to include more specific intentions with regard to ESG considerations.

So one of the other things we did in the beginning was establish an RI policy and an RI Committee that meets quarterly – which provides another layer of oversight on our over RI activities. Good governance.  We also have procedures in place for monitoring our research activities, outcomes from engagement, as well as the current state and emerging risks and opportunities in our portfolio.

Christine: I like it. It’s more than just a ‘ticking the box’ approach – it’s a real ongoing commitment.  In addition to signing on to the UN PRI, GLC recently joined Canada’s Responsible Investing Association – what’s the purpose there?

Ron: RIA members believe the integration of environmental, social and governance (ESG) factors into the selection and management of investments can provide strong risk adjusted returns and positive societal impact – and this is our view as well.  It’s also consistent with promotion and working together to encourage and progress RI activities in the investment industry.

Part of the value of these organizations is their call for accountability from their members. Each year we complete the UN PRI Transparency Report which is accessible on both our website and the UN PRI’s.

Christine: Is incorporating responsible investing a new process for GLC? Something we’ve just begun to do?

Ron: No. It’s not new for us.  But it is important to make the distinction between RI and SRI whereas RI is aspirational in nature - meaning you are making ESG considerations in attempt to promote positive change, but not with the purpose of exclusion.

Christine: so by exclusion, you mean – hard stop, you won’t own a company that, generates significant revenue from alcohol sales?

Ron: That’s right.  when you hear about ‘SRI’, it tends to refer to explicitly excluding investments if they do not meet certain criteria not just with respect to product involvement but do they have a poor track record in this regard and have they been involved insignificant controversies–The two terms, RI and SRI, are similar,  So it’s worthwhile to clarify the difference.

At GLC, we already had some SRI, exclusionary, funds.  But what we did, starting in 2016 signing on to the UN PRI, is that we put structure around our defined RI approach, began to measure and publicly acknowledged the formal integration of ESG research in our due diligence process. However, our disciplined investment process has always involved the consideration of many of these issues. We just didn’t specifically call it ESG research, it was simply part of our due diligence.

Christine: So earlier in your career to be the portfolio manager for the mid-cap Canada fund.  Did you do this?

Ron: Yes. For example corporate governance is something we always looked at. Every time we make an investment we would have a view on management and the board and their governance practices. In other words, the consideration of these issues was done as a matter of course within our disciplined investment process. So much of this is not new or particularly difference for GLC.  

Christine: Does this apply to all the investment portfolios GLC manages?

Ron: Yes. Our RI approach and the applicable policies and procedures covers all our investment portfolios/strategies/mandates across GLC’s five investment divisions GWL Investment Management, London Capital, Laketon, Portico, and Portfolio Solutions Group.It is worth mentioning that GLC and its predecessors were also early adopters in this space when we launched a Canadian Ethics fund in December of 2000 now called Canadian SRI Equity Fund. Subsequent to that we have also created an SRI Bond Fund and SRI Balanced Fund.

As we noted earlier, specifically for these ‘SRI’ portfolios, we use a disciplined investment process using the traditional fundamental analysis, but we also add an overarching screen and exclude investments if they do not meet certain criteria from an ESG and product involvement perspectiveChristine: It’s most common to think about this from an equity-shareholder perspective, but can the same approach be used on the credit side – with bond portfolios? In GLC’s case, I’m referring to the Portico investment divisions.Ron: It is very similar. The primary difference is bond holders don’t have the ability to vote as an owner, but that doesn’t mean as a fixed income investor we can’t engage with a company to encourage best practices, or even avoid situations where we think ESG issues pose a risk that impacts our expected return and desire to own that security.

Christine: We’ve spoken broadly about our approach, but how does this actually play out for PMs?  Can you give me an example of a time when integrating ESG factors into a GLC portfolio manager’s analysis affected or influenced their decisions on holding a stock or bond from a given company?  

Ron: Sure one that comes to mind was raised within our Portico fixed income team. A consumer discretionary company was being looked at and considered because it had a good track record of credit quality, a strong market position, healthy balance sheet and solid free cash flow…so an attractive holding on these measures alone.  However, as our research into the company continued, there emerged reports of an investigation into unsourced funds - a possible indication of money laundering. While the company strongly denied this, they also had a policy not to meet one on one with investors & analysts.Long story short, these governance risks were factored into our overall look at the company and since we were not able to mitigate those risks to our satisfaction - we chose not to buy the bonds. We did not think investing in the company was in the best long-term interest of our investors, and these governance concerns played a significant role in that conclusion.

Christine: What about proxy voting and engagement issues…there’s a lot of talk about asset managers having a role to play in working with companies to affect positive change…do we do that?

Ron: Yes

Christine: What’s our approach to engaging with companies on ESG issues?

Ron: We believe active engagement with investee companies enhances our existing disciplined investment processes. So GLC, and by that I mean our portfolio managers and investment experts, will engage with corporate management teams, directly or indirectly through the voting process, on Environmental, Social and Governance (“ESG”) issues.As with the example we just discussed we actively look to identify opportunities to have open dialogue with company mgmt./investee companies with the aim of furthering our understanding of their ESG risk management policies, letting them understand the importance we place on ESG risks within our investment processes, or discussing and assessing their responses to negative controversies that risk shareholder value.All this is done with a focus on making the best decisions with regard to the anticipated long-term value creation from a successful engagement.

Christine: So, in addition to being the right thing from an ESG perspective, we think it’s the right thing to drive long-term shareholder value. Do you ever vote against mgmt. in a company on issues of the environment, for social change, and/or for governance related issues?

Ron: Yes, we do when warranted.In a relatively recent example, we had a situation where issues were arising with a companies’executive . compensation. In addition to our overall analysis of risks and opportunities with this holding, we dug deeper by meeting with the dissident group that  led the movement to address this  issue, and ultimately voted against the company management.  In this case, it brought about the changes we thought were important, and it resulted in a higher stock price as the market reacted favourably ot the news. Our vote mattered and we were able to translate that into a better return.Another way our RI approach pays dividends, is the attention it brings to these companies with respect to ESG considerations in their business strategies.  And the more they see asset managers like us asking and weighing these factors into our decisions of whether or not to invest in them, the more that puts a spotlight on the importance of companies seeking ways to improve their approach and policies when it comes to ESG matters. Earlier you asked what role asset managers play when it comes to contributing to a more sustainable global financial system? this is one of the major ways we do that.

Christine: It’s sounds like GLC has gone all in – incorporating it into all portfolios, all investment decisions, all the time at GLC? Why go that far? Why not just stick with a few funds that screen out the ‘sin’ industries and call it a day?

Ron: I believe we are taking a prudent approach and we are really driven from the perspective of maximizing risk adjusted returns consistent with the particular mandate. So upholding our fidicuary duty.You have to remember that each fund or mandate has many different unitholders with very diverse approaches or beliefs on these issues. Hence we need to be mindful that. But we do believe that shareholder returns and proper ESG practices are not mutually exclusive and we have learned over time with our experience managing the SRI mandates that when a company has poor ESG practices this can often lead to poor business results.

Christine: That’s a good point, and it nicely brings me to the ‘elephant in the room’ issues, and that is, does a focus on RI mean accepting lower returns?

Ron: No – as we have mentioned already – we have a fiduciary duty to investors to maximize total return within the prescribed guidelines of the investment mandates. And our focus doesn’t waiver on that… But a formalized RI approach like we have is an additive approach…meaning it only serves to augment our analysis, and not detract from our insight into a company’s risks and opportunities.More and more evidence is coming out to show that it does not negatively impact long-term returns…and we would argue, like in the case we mentioned above, a company turning to focus more on improving their efforts to lessen their environmental impact, improve their policies with regards to societal issues, and put good governance policies and practices in place – that this can actually  improve shareholder value.We have talked about the distinction between RI and SRI but if you look at the track records of our SRI Canadian Equity Fund and SRI Bond Fund which have been consistently above median within their respective peer groups over time.  Right from the beginning our approach to SRI started first with our disciplined investment processes and a solid investment thesis from a traditional sense.. and then we subjected the company to the SRI screen and analysis.Today I would argue our approach is even more integrated throughout our analysis…We don’t necessarily seek out the highest ranked companies on an ESG basis, rather we look at those factors in combination with the more traditional investment analysis. I believe that is also why we have had some success in this area.

Christine: Are you telling me that investors don’t have to choose between doing good, and achieving strong investment return?

Ron: If you’re invested in a fund managed by GLC or any of it’s investment divisions, No…you don’t have to choose one or the other – we believe we can deliver both.

Christine: One last question for you Ron.  Do you think people care? Do you think investors care that their fund managers are taking a Responsible investment approach to all their investment decisions?  RI has been around for a long time…why do you think it is suddenly starting to matter more?

Ron: I think people do care, and today there is an increasing focus on the environment and climate change, as well as governance social issues -   be it gender diversity in senior management or at the board level , the #me too movement, the opiod crisis, demographics and the growing influence of millennials. Just to name a few.This has all had an impact on the awareness of RI and sustainable investment.Historically investors have been somewhat relunctant to invest in exclusionary type products or SRI because of the perception that it would hurt returns. But one of the core tenets of RI is not necessarily exclusion, but identifying risks and opportunities and promoting positive change for sustainable global financial system.

Regulatory changes are starting to occur in terms of institutional mandates and on an individual investor basis we are seeing companies like MorningStar publish Sustainablity Ratings on funds.  Just a note of caution that the ratings are in their infancy and the methodology needs some work, but it will improve over time.More importantly, it is a clear indication of where this movement is heading and  at GLC we are very proud of  our efforts in this area and how we are positioned in this regard.

Christine: I think that’s a great place to end our discussion today. Ron, if people want to read more about GLC’s RI policy or engagement policy…where can they find that?

Ron: On GLC’s website. You’ll find all of that and more under the ‘who are we’ section of GLC’s website.

Christine: Thank you.

This podcast was recorded from our offices in London, Ontario on February 19, 2019.

Copyright 2018 GLC. You may not reproduce, distribute, or otherwise use any of this article without the prior written consent of GLC Asset Management Group Ltd. (GLC).

This commentary represents GLC’s views at the date of publication, which are subject to change without notice. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor.