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A deeper look at ESG integration

We believe in investing responsibly—and ESG integration is a big part of that.

This Q&A discusses our Multi-Asset Solutions Team’s approach to ESG integration at Sun Life Global Investments. 

ESG integration is the inclusion of environmental, social and governance considerations (ESG) in the investment analysis and applying the analysis to the investment decision process.

Since we are a manager of managers, and do not select individual companies or stocks, ESG integration for us means looking at how our sub-advisors integrate ESG into their portfolios. 

Our sub-advisors may use a combination of tools to analyze quantitative and/or qualitative ESG considerations, spanning multiple themes within the ESG categories. The table below shows examples in each category.

 Environmental

 Social

 Governance
  • Energy consumption
  • Pollution
  • Waste
  • Human rights and discrimination
  • Community engagement
  • Employee health and safety.
  • Quality of management,
  • Board independence,
  • Conflict of interest
  • Executive compensation

Each sub-advisor may have different views on what constitutes positive, negative or material ESG considerations and each sub-advisor may have a different ESG assessment of an issuer, sector, industry, or geography.


Where does ESG integration fall within the responsible investing spectrum?

Responsible investing is a spectrum—and (to date) there are no agreed upon classifications in our industry. The spectrum and definitions continue to evolve as new solutions and innovations are developed.

In order to provide clarity on how we approach responsible investing, we have classified established investment approaches into the categories below. With ESG integration, the primary goal in a portfolio is to deliver competitive returns, while embedding environmental, social and governance (ESG) factors into the investment-decision making process.

It is important to note that (unlike Screening) ESG integration does not prohibit specific investments in any business, sector or geography.

A chart depicting Sun Life Global Investments’ Responsible Investing spectrum. The chart defines and compares six different responsible investment approaches: Ethical (values-based) screening, ESG integration, ESG negative screening, ESG positive screening, sustainability-focused, and impact first investing. The first five categories have a primary objective of achieving competitive returns. The last two (sustainability-focused and impact first) have a primary objective of societal and environmental impact—which means that sustainability-focused investing overlaps and has two equally important primary objectives. In addition to each category within the spectrum, it is important to consider whether an investment manager is an active steward and engages with sub-advisors and/or underlying companies to influence ESG policy. You should also consider whether they have an explicit net zero glidepath embedded in their strategy.

We have a responsibility to investors who trust us to act with honesty, in good faith and always in their best interest. This responsibility is the foundation for all our investment activities. Factors such as regulatory change, climate risk and opportunities, and corporate responsibility can have a material impact on an investment’s performance, which is why we consider ESG issues across our investment process. It’s part of sound risk management and we believe it can help create opportunities for growth and alpha generation. As a manager of portfolio managers, our selection of sub-advisors is at the core of our investment process. We assess potential sub-advisors based on a number of factors, including organizational resilience, strategic alignment, systems and analytics, team/resources, and more—all of which naturally extend to a multitude of ESG considerations

Our assessments of a sub-advisor’s ESG approach (or their ability to implement their ESG/sustainability strategy over time) focuses on three key pillars:

1.    their firm-wide commitment,

2.    the implementation of ESG considerations as part of their strategy, and

3.    their approach to active stewardship.

These three pillars allow us to better understand where a sub-advisor is on their ESG or sustainability journey. Individually, each pillar can allow us to identify a sub-advisor’s strengths and weaknesses.

Instead of focusing on an aggregate external assessment, or leveraging/analyzing external ratings, we look across a broad range of criteria independently that fall under our three main pillars.

Our proprietary framework strives to use qualitative and quantitative information obtained from both internal and external sources. Considerations include whether the firm has/is:

  • Put in place an executive-led governance and oversight structure
  • Working towards solidifying existing data and support systems
  • Committing to broadening and deepening awareness of ESG and ESG-related considerations (including upskilling of investment professionals)
  •  Fostering a culture of collaboration

We escalate and engage as needed. This is consistent with our approach to manager research more generally. It reflects our belief that implementing ESG considerations in each individual investment process helps to sustain and improve the investment value proposition.

Since ESG practices, regulations, data etc. change so rapidly, we put strong emphasis on continuously advancing our practices, and we hold our sub-advisors to the same standard. We’re all on a journey regarding ESG; the tricky part is that we’re not all taking the same route. Our open architecture model provides lots of insight; it allows us to observe evolving practices across sub-advisors, geographies, and asset classes. 

 

"We put strong emphasis on continuously advancing our practices, and we hold our sub-advisors to the same standard."

 

Yes, we do. Our ESG evaluation framework, which we refer to as our ESG Heat Map, consists of the three key pillars mentioned above (firm-wide commitment, strategy implementation, and active stewardship).

We ground this three-fold perspective in our belief that ESG integration is an evolving and necessary journey. Collectively, the three pillars in our investment process allows us to better understand where an investment manager lies on their ESG or sustainability journey and direction of travel. Individually, each pillar lets us see strengths and weaknesses.

Firm commitment is the key pillar. This includes a well-defined ESG philosophy and governance framework, which reflects a firm’s culture. Following that, addressing strategy-specific considerations reveals deeper insights, so we can embed ESG factors in research and investment decisions.

We also look for a formal and effective governance framework around proxy voting and engagement, including ESG considerations. This in the context of supporting overall investment objectives of respective portfolios and speaks to responsible ownership. And we value adoption of normative codes, such as PRI, which can help support alignment, transparency and the continuing evolution of ESG activities.

We know that policies and procedures don’t necessarily translate into actions. We strive to look beyond top down, firm-wide ESG initiatives and marketing. This last point is really important. In fact, through our research across investment managers globally, we’ve found that the link between a firm’s objectives and portfolio level activities is not always as strong as perhaps we’d like to see. This is why we often probe individual investment decisions. What we want to see is proof that ESG considerations are embedded and accepted as information empowerment.

While manager selection and oversight is core to our ESG integration work, we consider ESG broadly across our investment process.

For example, as part of our strategic asset allocation decision making, we looked for structural growth opportunities in many sectors, including water, agriculture, and renewable energy. As a result, we added a renewable resources sleeve to our Sun Life Granite Solutions. We based this investment decision on our analysis, which suggested stronger expected-risk-adjusted returns and a broader set of alpha opportunities, including evolving regulation, technology, and consumer preferences.

ESG considerations may also influence how we define or constrain investment opportunity sets. It can also influence where we express a strong preference for active management. We are generally agnostic between active and passive management. But, we believe that active management can help support implementing effective ESG in our portfolios, especially in less efficient markets such as emerging markets, smaller-cap equity and higher-yielding fixed income. This is partially due to information asymmetry and the even stronger need for interpretation of prospects.

Given our manager-of-manager structure, the day-to-day investment and proxy voting decisions for individual securities, reside with the various sub-advisors that we select. That said, probing on individual holdings (whether new additions, liquidations, or on potentially controversial issues) can deepen insights and allow us to better understand mindsets.

Just as we can examine ESG implementation from looking at underlying holdings, we may ask sub-advisors for explanations or case studies for specific proxy votes or individual holdings, particularly for some of the more controversial holdings/voting activity. Our goal here is not to override our sub-advisors, but to:

  •  reinforce our beliefs (that we believe ESG considerations are decision-useful),
  • communicate our stance (that we continue to be committed), and
  • demonstrate that we do expect our sub-advisors to become increasingly more vigilant, proactive, and transparent with respect to their proxy voting and stewardship practices. 

 

"Our goal here is not to override our sub-advisors, but to reinforce our beliefs and communicate our stance."

 

Some recent inquiries around proxy votes included votes against increased climate risk disclosure and/or strategy, diversity, equity and inclusion (DEI) disclosure, and mandated board diversity. At the individual security level, enquiries included probing on:

  • major oil companies on their decarbonization path,
  • longer-term viability of sovereigns based on ESG criteria,
  • Indigenous Community welfare,
  • and much more.

Engagement (or dialogue) is typically the first step when we identify a perceived gap between firm-wide ESG ambitions and strategy realization. There are certain challenges investment managers (or our financial landscape) face, some of which are not within their control. One such challenge is structural issues, otherwise known as systems, as short-term incentives, policy, and regulations tend to influence behaviour. Another reason is that it can be very challenging to navigate through the vast array of ESG information. It can be even more challenging to assign a financial metric or outcome to pre-identified, financially-material ESG factors. There are other reasons, but this explains why we generally focus our attention on firm-level accountability, resources and upskilling, and the dissemination of ESG information.

For example, we have engaged with managers:

  • to encourage them to become signatories to the Principles for Responsible Investment;
  • to provide rationale for specific proxy votes and investments in the context of ESG;
  • to explain quantitative ESG scores below peers or benchmark, and
  • to persuade/influence them to include ESG considerations in the rationale for certain change requests to investment guidelines.

These engagement activities, coupled with information obtained, allow us to better grasp where firms, and more importantly, investment teams are on their ESG journey.

We view divestment as a last resort.  Our approach aims to identify potential issues up front, before making investment decisions. We know a sub-advisor’s level of commitment when we hire them, and we continue to evaluate this regularly. We expect our sub-advisors to continually strengthen their ESG commitment, just as we continue to. If a sub-advisor doesn’t keep evolving their ESG strategy, or keep apace with our expectations—and if our engagement efforts do not yield results—we would ultimately have no choice but to divest from a sub-advisor or strategy.

We have demonstrated this in the continuous evolution of our portfolios over time. These include changes to our strategic asset allocation and underlying investment managers and strategies.

 

"Our processes are designed to identify potential issues up front, before making investment decisions."

 

Since much of our ESG integration approach is at the sub-advisor level for us, most of our funds include this ESG integration approach, including most of our multi-asset solutions. Those not in scope include funds that invest in passive or comparable instruments (for example, ETFs).  For detailed information on each Fund’s approach to ESG, or how we integrate ESG considerations, please read the prospectus.

Yes. This includes participating in cross-business committees and providing comments on various industry initiatives and consultations. We also take part in educational initiatives such as webinars to grow awareness of the importance of ESG considerations in manager evaluations, providing a glimpse into potential resources.

In 2014, Sun Life signed the Principles for Responsible Investment (PRI), and as a member of the Sun Life group of companies, we also endorsed the PRI principles. In 2021, SLGI Asset Management Inc. became a member of Responsible Investment Association and joined the Net Zero Asset Managers Initiative.  In 2022, SLGI Asset Management Inc. became a signatory to the PRI as an investment manager, demonstrating our commitment to incorporate environmental, social and governance factors into investment decision-making. As well, we joined the Institutional Investors Group on Climate Change (IIGCC) in 2022.

To learn more about cross-industry and ESG organizations that SLGI Asset Management and Sun Life are connected to, please visit our industry engagement page.

The SLGI Investment Oversight Committee, which includes our Chief Investment Officer, oversees activities under our ESG Policy and supporting procedures. Various functional areas are accountable for ongoing implementation.

We have established dedicated personnel on our Multi-Asset Solutions Team to focus on this area: Head of Responsible Investing & Manager Research, and Director of Responsible Investing. They work in consultation with Sun Life’s International Investment Centre to support ESG considerations in our manager research and monitoring activities. They report their findings to the SLGI Investment Oversight Committee on a quarterly basis. 

For those responsible for the integration and monitoring of ESG considerations, it forms an important part of annual employee goals and performance reviews. In this way, a portion of their remuneration is directly dependant on successfully integrating ESG considerations into investment decisions.

Reporting is a key area of focus for us, including details of our ESG philosophy, policy, and procedures. We are also developing periodic reporting on broad ESG metrics across our platform. We also provide commentaries to support continuing dialogue and engagement on this evolving topic. We will be reporting to the PRI and reporting on our Net Zero Asset Manager commitment and roadmap.

As is required by regulation all fund proxy-voting records are available on our website. 

 

"Reporting is a key area of focus for us, including details of our ESG philosophy, policy and procedures."

 

1 unglobalcompact.org
2 ific.ca 

Information contained in this article is provided for information purposes only and is not intended to provide specific financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard and does not constitute a specific offer to buy and/or sell securities.  Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by SLGI Asset Management Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.

Please note, any future or forward looking statements contained in this article are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors before acting on any information contained in this article.