Environmental, Social, and Governance (ESG) Integration in Canada

In September, CFA Institute and Principles for Responsible Investment (PRI) released two new reports — ESG Integration in the Americas: Markets, Practices, and Data, and Guidance and Case Studies for ESG Integration: Equities and Fixed Income. These reports were the result of a series of surveys, global workshops with CFA Institute members and other financial professionals, and ESG research conducted by CFA and PRI.

Below, we highlight our findings about the current state of ESG integration in Canada; future blogs will look at other individual markets covered in the reports.

We received survey responses from 84 financial professionals located in Canada and held a workshop in Toronto for CFA® charterholders and other financial professionals to obtain their input on the current state of ESG integration in Canada.

As in all of the markets we visited, corporate governance is the ESG factor most often integrated into the investment process. Fifty-two percent of survey respondents claimed that governance factors are “often” or “always” reflected in share prices, while only 30% say the same of environmental factors and 26% say the same of social factors. Fewer respondents felt ESG factors “often” or “always” impacted corporate bond yields, with governance continuing to dominate.

This dynamic changes somewhat when we asked survey respondents to consider how ESG factors will impact share prices and bond yields in five years’ time, that is, in 2022. When asked how often these factors will impact share prices in five years’ time, 48% of respondents think environmental and 41% of respondents think social factors will be considered “often” or “always,” nearly the same percentage (54%) as those who think governance factors will impact share prices. When the question turned to the future impact of environmental and social factors on corporate bond yields, one-third of survey respondents think that these factors will “often” or “always” impact bond yields in five years’ time (32% and 33%, respectively).

On a somewhat surprising note, we learned from workshop participants that although they believe the use of ESG in the investment process is growing, and that firms in Canada are concentrating more on ESG integration than ever before, a number of them are envious of the resources they see firms in the United States devoting to ESG analysis. They note that investment banks and institutional investors south of the Canadian border have ramped up their ESG analysis capabilities at a faster rate than have their Canadian cousins.

ESG integration in Canada appears to be carried out mostly on an ad hoc basis: only 19% of the portfolio managers or analysts responding say that they “often” or “always” include material ESG issues in equity analysis. This number drops to 8% for credit analysis. However, if we add those that “sometimes” include material ESG information in the analysis process (i.e., “always,” “often,” or “sometimes” consider), the numbers rise to 73% for equities and to 50% forfixed income.

The main drivers of ESG integration in equity investing are the same in Canada as they are globally: risk management (65%) and client demand (51%) run well ahead of fiduciary duty considerations (32%). For fixed income, the main drivers of ESG integration are similar: risk management (61%), client demand (42%), and fiduciary responsibility (33%).

For equities, the most frequently cited barriers to ESG integration are limited understanding of ESG integration (54%), lack of comparable and historical data (36%), and concern about negative returns and tracking error (31%). This latter concern arises from a common misconception that ESG integration consists only of negative screening, thus limiting the investment universe. We encountered this misperception at every workshop we held, with about one-fourth to one-third of workshop participants equating ESG integration with negative screening.

For fixed-income, the most frequently cited barriers to ESG integration are the lack of comparable historical data (32%), followed by a limited understanding of ESG integration (30%), and a limited amount of ESG research from sell-side and brokerage firms.

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