In conversation with Aaron White – how are investment products evolving toward sustainability and impact?

Dominique Barker: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape with a view on addressing current issues in a concise format to help you navigate and take action. I’m your host, Dominique Barker. Please join me as we explore today’s most pressing matters with special guests that will give you some new perspective and help you make sense of what really matters.

Aaron White: And so this is really a key element of growth for specific ESG strategies. And so at CIBC, it’s our responsibility to make our clients’ ambitions a reality. That means providing them with solutioning that aligns with their values.

Dominique Barker: Hello. Aaron is VP, Sustainable Investments at CIBC Asset Management. He works with the investment team to further all of their ESG policies, process development, and he takes care of distribution into the institutional and retail markets and consults on various issues related to ESG. He’s got over a decade of experience in investment distribution. I used to work with him. I would always go to him with any questions related to the different channels. So welcome today, Aaron.

Aaron White: Thanks for having me, Dominique.

Dominique Barker: So what are the trends that you’re seeing in asset management today and what sort of innovation are you seeing and what should investors see coming down the line?

Aaron White: Well, I think one of the trends that is being missed in the scheme of all of the product solution that’s hitting the market is EDG integration. The rapid growth of UN PRI signatories at over four thousand today, representing over one hundred and ten trillion of assets and now about half the institutional assets globally. This ultimately means that basic ESG integration is becoming table stakes. And we’re starting to see a lot more unique asset classes that are integrating ESG considerations into their process. For example, at CIBC Asset Management, we’ve now integrated ESG risk into our active currency business, which is not an area that you will typically see investment managers incorporating those considerations. Thematic investing is another area that is garnering a lot of momentum. I think that’s because investors find it easy to understand the exposure that they have and the perceived outcome with their investments. You think about a clean energy fund, for example. That’s very simple for an investor to understand what the ultimate investments within that vehicle will be and then what their perception in terms of the outcome and what they’re trying to accomplish is. But probably the biggest trend in terms of emerging trends is through impact investing. We’re not seeing a lot of strategies hit the market in the space because there’s still a lot of work being done in the background in terms of how we do impact measurement, whether it’s related to the UN SDGs, whether it’s related to specific outcomes and how we would ultimately track and report on that. But this is an area where I think is going to become the future of ESG investing when it comes to clients looking to align values with their investments.

Dominique Barker: And I could add to that. I moderated a panel last week and the Rise Fund, which is a six billion private equity impact fund. Steve Ellis, one of the co-managers for the Rise Fund, talked about how impact. I think a lot of people assume that it’s young people who care about impact, but really impact has been quoted by all demographics, not just young people. Would you agree with that, Aaron. What are you hearing in the field?

Aaron White: I would one hundred percent agree with that. Our conversations range demographics from what you would expect a young tech multimillionaire who is a millennial and has the values you would expect them to have, but more importantly through to individuals who have worked hard their whole lives, have achieved fifteen to twenty five million dollar net worth that recognize they’re not going to be able to spend it all and have some ambition to do more with that capital, but aren’t ready for full philanthropy. And they’re focused on how they can achieve some of these outcomes that align with those values with their investment capital, whether that means concessionary returns or not. For them, it’s about more than the investment return.

Dominique Barker: Ok, so let’s just unpack some of that, because that’s a lot there. And by the way, you mentioned the PRI, Principles of Responsible Investing, and actually that was the subject of our last podcast, so if you want to take a look at that, we did an interview with Fiona Reynolds, who’s the CEO of the PRI. When you talk about integrating ESG in currency, and actually I remember being part of some of the early discussions a few years ago. And what’s really interesting there is just the country’s risk to physical risks of climate change. Can you talk about that? Because I thought that was really interesting. I think it was looking at flooding risks, is that right?

Aaron White: Yeah, that’s one of the many factors that we consider as part of that process. So there’s a lot of things like social mobility, the ability for gender equality within a country that really leads to positive outcomes in terms of that country’s ability to compete on the global scale. Climate is certainly a major factor there, how close you are to coastal regions, whether or not you’re in an area that has the potential for extreme drought, all of these factors ultimately impact the country’s purchasing power parity and how they compete on a global scale or ultimately will compete in 10 to 20 years. And that’s the heart of ESG analysis. It’s trying to uncover material non-financial risks to, in this case, a country’s currency, but broadly to the issuer’s debts, ability to repay that debt or the equity valuations.

Dominique Barker: And that’s I guess if we think about it, the central banks have really made climate change part of a key risk that they’re looking at. And that’s exactly why the currency team at CIBC Asset Management would be looking at climate risk, for example, and other risks, as you mentioned, including gender. Maybe we just talk a little bit about some of the product innovation that we have here at CIBC. Maybe you can talk about some of the funds that you’ve just launched. And I believe there’s some really cool innovation related to that.

Aaron White: Yes, I think that leads to another trend we’re seeing in the industry. So maybe I’ll share the trend and then talk about the product solutioning. In particular on the institutional market, we’ve been seeing a significant push towards divestment and we could sit here today and argue whether the merits of divestment versus engagements and facilitating climate transition. But ultimately when a university endowment’s stakeholders, the student population, the professor population, pushes for divestment, the institution has really no choice but to fill the stakeholder demand. And we’re seeing that across different institutions. We’re seeing that push through into the retail market as well. And so this is really a key element of growth for specific ESG strategies. And so at CIBC, it’s our responsibility to make our clients’ ambitions a reality. That means providing them with solutioning that aligns with their values. If divestment is in alignment, then we feel that it’s our role to fulfil that solutioning. And so we’ve put forth some asset class specific solutions that divest based on revenue thresholds from fossil fuel involvement, a core plus Canadian fixed income strategy, a global equity and a Canadian equity strategy. And these will be the building blocks for three valid solutions that will meet five investor profiles, so we feel is targeted at the bulk of our client base who’s focused on this initiative. What we think is a little bit unique from what some of our competitors have been doing in the space is they will also be ESG best in class strategies. What we’ve done is using our proprietary methodology. It’s shrunk the investable universe to only the top 60% of ESG quality issuers or companies on a sector relative basis. And that’s a really important part to talk about, because if you look at, I mentioned some of these rating agencies, the varying methodologies, many of them will compare against the broad universe. Some will compare on a sector relative basis. But we feel it’s important to reward companies and issuers that are leading the charge within their sector and not to penalize them based on the sector with which they operated in. And so this will reward those companies and issuers that are doing good within their sector, will align with our clients’ values and intent in order to have better quality ESG profiles within the portfolio. We’ll divest from fossil fuels. And then another unique element of this is because we feel our clients that are investing in this type of strategy are focused on climate transition and facilitating change will be donating depending on the investment vehicle, either 5% of our fee or five basis points of AUM within the strategy to institutions, charities, foundations that are focused on facilitating that climate transition. We’re really excited about that element. We’re the first in Canada to offer this.

Dominique Barker: Yeah, I was going to say I don’t think I’ve seen that before.

Aaron White: It’s really important to note, too, that this is not coming at the expense of our clients. We’re not increasing fees with this strategy. We’re in alignment or less than our comparative strategies that are broad benchmark focused. This is really coming off of CIBC’s bottom line, in order to align ourselves with our clients’ values.

Dominique Barker: So we’re recording this on the morning of June twenty third and just this morning, Bloomberg Green updated us on some news. The SEC is really taking a look at ETFs, Exchange Traded Funds and making sure that there’s not greenwashing and trying to hold accountable some of this passive investment. Now, what you’re talking about is active investment management, meaning there’s some stockpicking involved. How do you guard against greenwashing and how do you ensure that the products have that credibility for the market and is answering to what our clients want?

Aaron White: This is probably the largest issue we face in the investment management business today when it comes to sustainable solutions and ESG investing in general. The SEC isn’t alone in this. The OSC and OSFI have been increasing their enquiries and have been reaching out to asset managers across Canada in order to understand how they integrate ESG into their process, but more importantly, to ensure that there’s appropriate disclosure to investors to ensure that they are getting what they say they’re getting, and this has really been the genesis of the sustainable finance disclosure regulation in Europe, which is a hot topic in the business today, where they have really focused on disclosure to investors and alignments and a product classification system. So we obviously don’t have anything like that here in Canada, which makes it a struggle for investors who maybe don’t necessarily understand specifically what their strategy is trying to accomplish and is actually accomplishing. And so I think we can look towards Europe in terms of what we can expect from domestic markets here in Canada and also the US markets and what the SEC may ultimately create in terms of that product classification system that creates full transparency for investors. So in Europe, you have really three ESG product solutions on the spectrum, article six, eight and nine, each of which goes further and further into the ESG investing spectrum and has very robust disclosure requirements that are openly accessible to European investors and really simplify the due diligence process for advisors and clients when they’re looking for sustainable investments. That’s going to come to Canada eventually. And I think it will likely be built on that framework. But in the meantime, what we can do as investment managers to ensure that clients do get what they’re trying to accomplish with their investments, with their investment solution, is really increase that transparency. And so with our investment strategies that we’ve launched here in Canada, we’re going to create an investment principles document that explicitly outlines what the strategy is, what it isn’t, what clients can expect in terms of the very specific thresholds of exclusions from a fossil fuel perspective, how we rate securities on an ESG basis, how that ultimately filters through to portfolio construction, universe construction, so that our clients can really understand what it means to be investing in a CIBC sustainable solution.

Dominique Barker: Right. And it’s interesting because you’re suggesting that Canada will follow Europe, which is very regulated, and so far the Canadian market has been privately driven. And what I mean by that is, for example, our transition taxonomy on the bond side. And I know the US is really looking to us to see if we’re successful in that. And so it’s interesting that you’re suggesting that we may end up going more rules based. And I don’t know, I think that I personally, actually Aaron, and I would put that up for debate. We’ll see where it lands. But I think what’s really important is just being really clear with our clients. Maybe, Aaron, you could end on your own personal ambitions to reduce your own footprint or reduce inequalities in society. It’s a question I ask all of our guests. What are you doing yourself personally?

Aaron White: I think when people approach the subject or topic, they think they have to make these monumental changes in their life in order to accomplish their goals. You know, as an individual making small, incremental changes that really don’t impact your everyday day to day can have extreme reverberating effects. So my wife and I, we talk about this all the time. We focus on making some of those small changes. We’ve been slowly cutting out the amount of meat that we consume within our meals. And that doesn’t mean that we have to go vegan or vegetarian. But you reduce portions. In particular red meat, which is really, really bad in terms of emissions. We also focus on energy reduction within our transport and home, so we try and drive a lot less. We live downtown, which allows us the ability to walk more. We focus on doing that also, even just simple things like a smart thermostat where you really focus on, especially in off peak times, reducing the amount of energy used. So these are things that everybody can accomplish in their day to day life. It doesn’t really impact us in terms of a monumental shift in how we live. But it can have major impacts, especially if more and more people start doing this.

Dominique Barker: And that’s why ESG integration is so important in investment decisions. Because you can hear from what Aaron’s doing, and we’re hearing that from all our guests, everybody is making small changes in consumer behaviour, which will eventually have an impact on revenue or expenses for companies. And that’s why ESG integration ends up with better investment decisions. Aaron, thank you very much for your time today. And best of luck with all of the new products that you’re coming out with. I really look forward to catching up with you next year and seeing how everything has gone. Thank you very much.

Aaron White: Thanks for having me.

Dominique Barker: Please join us next time as we tackle some of sustainability’s biggest questions, providing different perspectives to help you move forward. I’m your host, Dominic Barker, and this is The Sustainability Agenda.

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