Khanchit Khirisutchalual
Interest in ESG funds has been growing for some time. But will that momentum continue amid fears of slowing growth and energy security concerns? Greg Bonnell speaks with John McHughan, Climate Risk Analyst at TD Asset Management, about the emerging trends for the ESG sector.
Transcript
Greg Bonnell: Investing with environmental, social, and governance concerns in mind has been a growing trend. But amid fears of slowing economic growth and risks to energy security, will that momentum continue? Joining us now for more, John McHughan, Climate Risk Analyst at TD Asset Management. John, welcome to the program.
John McHughan: Thanks, Greg. It’s great to be here.
Greg Bonnell: So this has been an interesting space and one that’s been building momentum over the years. But it’s always interesting in times of turmoil, which we’re definitely in right now, in some of the risks that are presented out there. For consumers and for companies, what does ESG investing look like in this environment?
John McHughan: Sure, you’re absolutely right. It’s been a very challenging year for the markets overall. And for ESG, this is the real kind of first challenging market we’ve seen since it’s become a part of the mainstream investment language. And so yeah, certainly, with its challenges, folks are wondering how it’s going to hold up over the course of the year. And it’s not just from an economic perspective. Right now, you’re seeing some politicization of ESG in the United States, some states really pushing back on the concept, as well as energy security looming large in Europe, all of which is creating headwinds for the space. But you know, I’d say, encouragingly, so far, we’re seeing some positive signs of resilience for ESG investing overall. First of all, if we just look at interest in the space, relative to normal funds, or non-sustainable funds, ESG has actually continued to see inflows throughout the course of the year, globally. It’s slowing inflows. It hasn’t grown like it has in recent years, which is to be expected. But whereas, the non-sustainable funds, we’ve seen outflows starting to happen, particularly in the third quarter.
So I think that bodes well as a sign of just interest in the space. But you know, everybody’s interested in performance too. And so what we see so far within the US, when we look at a broad-based ESG US index, it’s actually outperformed the S&P by 5% this year. It’s only down 19%. This was as of Friday. So everything’s green today. But as of Friday, it was only down 19% versus the S&P, which was down 24. Similar story in Canada so far, not quite as much out-performance, but it’s remained relatively steady with the S&P TSX index. So far, ESG has proved to be resilient in the face of this market downturn. We’re not through it yet though. So we’ll continue to watch the space, and see how investors feel about ESG.
Greg Bonnell: Now, the energy security component of all this, and obviously, critics of ESG have sort of grabbed on to that piece of it, it is interesting. And we know that there’s parts of the world, including probably Europe first and foremost, that are facing some pretty serious concerns. At the same time, does ESG investing have to be the enemy of energy security, as some people have framed it?
John McHughan: No, I don’t think so. And I would say most people within the space wouldn’t think so as well. Certainly, there are folks within ESG investing that really push the climate agenda hard. And anything that would increase global emissions should be avoided. In our case, we view it from a couple of different lenses. There’s the economic lens, but there’s also the human lens here. When folks can’t heat their homes, or can’t afford to heat their homes, it’s going to cost them a fortune, there’s a human element there that should be incorporated within ESG. And we should be able to provide energy security people need to be able to last through the winter this year. From our perspective, it’s been certainly a challenging few months in this regard. We are starting to see coal plants reopen, which is the number one enemy of climate change. But again, politicians are doing what they need to do to keep their people heated and happy in what could potentially be a cold European winter. From a Canadian perspective, unfortunately, there’s not a lot we can do to help out. At this point, Europe is really in need of gas. And Canada, unfortunately, right now doesn’t really have a good way to get our natural gas to Europe.
Currently, the only real way to do it is to ship it from Alberta down to the Gulf Coast, and then via tanker over to Europe. So it’s not the most effective or cost efficient route to get there. I’m sure you’re aware of the LNG terminal that’s being built up in BC that won’t come online for a few years. And even then, that’s positioned to go to Asia, not Europe. So unfortunately, there’s not a lot we can do. And I guess the question for governments, companies, and folks in Europe and Canada to wrestle with right now is, should we build that infrastructure now to get that natural gas to Europe? Not really certain about when it will come online, and if that demand will still be there. Or should we look to cleaner forms of energy, and getting those to Europe? And so I think that’s what you’re starting to see. We just saw the German Chancellor meet with Trudeau in Newfoundland. And they set up a pact to export clean hydrogen from Canada’s east coast to Europe, which will likely come online around 2025 if everything goes well. And so we’re starting to see that long-term forecast. It’s going to be hopefully more positioned towards renewable rather than continued use of fossil fuels.
Greg Bonnell: When I think about ESG, and sort of like building in that direction, sometimes, I simplify either what the politicians are saying we need to do and what the corporate world is saying. Now, of course, governments can change, perhaps, every four years, even before that, if you have a minority government. What seems to be the stable situation now, the corporate commitment to ESG, or the political commitment?
John McHughan: That’s a really good question. You know, I’d say we’re starting to see — it almost goes hand-in-hand. Right now with the government that’s in Canada, they have a very strong and ambitious climate agenda. And because of that, the corporate commitments are following suit. We’ve recently seen a potential cap on oil and gas emissions in Canada. And so oil companies — energy companies are racing to keep up with that. But at the same time, I can tell you from our engagements with energy companies, which is obviously a focus of the E portion of ESG, there is a real focus and interest on decarbonizing their businesses. They know that this is the trend the world is going, and that in order to remain competitive, they have to lower the carbon intensity of the energy they’re producing. So they can do that in a number of ways. But to be perfectly frank, I do believe that the commitment is there, and we are seeing earnest attempts from large emitting companies to lower the carbon footprint.
Greg Bonnell: You did mention the fact that E being the environmental component of the ESG, does it overshadow the rest? Many times, when we have these conversations about ESG, I sort of forget that, oh yeah, the social and the government is a part too.
John McHughan: Yeah, no, it’s a good question. I’d say historically, probably E has been the — absorbed the most attention from ESG. That’s probably because climate change is tangible, and people can really see and feel the effects of it right now. And so it’s a top of mind for everybody. But it’s not to diminish the role of S and G. And I think as we were talking about entering a period of economic downturn, G is particularly important. So those companies that are well governed, those are the ones that are positioned to do the best in an economic downturn. They should have the strongest risk management practices in place, and be able to withstand potential downturns like this. So while E is important, it’s certainly not to take away from the importance of S and G as well. And we see it a lot right now.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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