We may commute less, socialize online more, shift some of our consumption online, and hold more cash for a rainy day than before. These behavioral changes will likely accelerate many preexisting structural trends, challenging some business models and revenues, while boosting others.
One investing trend that is clearly receiving a boost as investors come to terms with the coronavirus shock is sustainable investing. Sustainability has delivered better risk-adjusted performance throughout the crisis than the broad market and, looking at indices over nearly a decade, exhibits similar, if not better, results than found in traditional equity investments in Canada, other developed markets and emerging markets (see the chart below). This has attracted inflows but the assets under management in sustainable funds remains small. In Canada, sustainability has doubled from just over C$5 billion in 2014 to over C$10 billion today, according to data from Bloomberg and the Investment Funds Institute of Canada (see the second chart below).
Unsurprisingly, investors are closely following how companies are managed during the coronavirus and how they treat their employees, customers and the communities within which they operate. Increasingly, this “social license to operate” extends to the public policy sphere. Corporations, especially those receiving relief funds to manage cash-flow and liquidity problems, face greater scrutiny from regulators and policymakers on a wide-range of sustainability concerns: balance-sheet management, dividend payments, share repurchases, climate change-related disclosures and executive pay. Canada’s Large Employer Emergency Financing Facility announced early last week imposes many of these same constraints on businesses that receive federal support.
Investors are not only looking to hold companies with strong environmental, social and governance scores for their operational excellence and to potentially align their values with their investing goals, but there is also evidence that the trend to divest companies with large carbon footprints is also gaining momentum. This has serious implications for Canadian energy companies. Just last week, the world’s largest sovereign wealth fund in Norway announced that it will divest and blacklist four of Canada’s largest energy producers (Suncor, Canadian Natural Resources, Cenovus, and Imperial Oil) for not meeting its emissions criteria. A Stanford study published in the August 2018 edition of “Science” ranked Canada’s oil output the fourth most carbon-intensive of 90 countries surveyed. This move adds fuel to the fire for a Canadian oil industry already plagued by numerous acute and structural challenges: a lack of takeaway capacity made potentially worse on Monday when U.S. presidential hopeful Joe Biden pledged to block the Keystone XL pipeline project, increasing pressure on governments globally to tackle climate change, and tightening access to capital.
Flows into sustainable assets are still in their early days, and we believe that the full consequences of a shift to sustainable investing are not yet in market prices. The trend to sustainable investing may have even been accelerated by the pandemic. This implies a return advantage may be gained over the long transition as we note in our report: Sustainability: the tectonic shift transforming investing.
Kurt Reiman is a Managing Director and BlackRock’s Chief Investment Strategist for Canada. Kurt is a regular contributor to The Blog in Canada.
Daniel Donato is an Associate within BlackRock’s Toronto office.