During the summer of 2020, in the midst of COVID quarantines, economic shutdowns, and social and political unrest, one story jumped out to catch my attention. At the end of August Brookfield Asset Management announced that Mark Carney was joining their management team as a vice-chairman responsible for their environmental, social and governance (ESG) investment strategy.
Carney has been an advocate for active financial investment on environmental issues for a long time. This appears to be the perfect opportunity for him to continue that work.
In addition to his role at Brookfield, Carney is also the UN special envoy for climate change and finance.
When making the announcement, Brookfield chief executive said, “Building on our track record in renewable investing, Mark will help accelerate our efforts to combine better long-term outcomes for society with strong risk-adjusted returns… (his) insights and perspectives will add tremendous value to our global investing activities for the benefit of our investors.” Media “on both sides of the pond” made a note of the story and took the opportunity to discuss its meaning and context.
The Most Famous Chair of the Bank of Canada — Ever
Mark Carney is probably the most famous chair of the Bank of Canada there has ever been. If a central banker can also be a rock star, then Mark Carney is definitely that central banker.
Although he also has British and Irish citizenship, Carney was born in the Northwest Territories and grew up in Edmonton, making him a true Western Canadian. After 13 years with Goldman Sacks, Carney joined the Canadian Department of Finance and the Bank of Canada. Mr. Carney came into the role of Governor of the Bank of Canada just as the financial crisis of 2007-08 struck.
His role in handling that crisis helped Canada to survive the crisis more effectively than other countries. In 2011 he was even named Reader’s Digest “Editor’s Choice for Most Trusted Canadian.”
First Non-Briton as Chancellor of the Bank of England
Then, in a search for new challenges, Carney was appointed as the new Chancellor of the Bank of England in 2012 – the first non-Briton in bank history. And in that role, he served to calm financial markets hit by the uncertainty of the BREXIT decision. COVID-19 struck just as Carney stepped down in March of this year. Both times Carney was praised for his stickhandling (a quaint Canadian colloquialism) of the crisis. Troubling times were made a bit easier by his calm demeanour and sensibilities.
Carney Moves to Brookfield
Mr. Carney’s new role will allow him to continue to address the role that finance plays in society as a whole. It’s a commitment that appears to be central to Brookfield’s investment and business strategy. When describing their responsibility as a company, Bruce Flatt clearly states: “We operate long-term assets and businesses across the globe. This approach dictates both our investment strategy and our commitment to environmental, social and governance (ESG) practices. We believe that value creation and sustainable development are complementary goals. Throughout our operations, we are committed to practices that have a positive impact on the communities in which we operate.”
Just What is Environmental, Social and Governance
Brookfield calls it environmental, social and governance (ESG) investment strategy. Elsewhere you might see it called socially responsible investing (SRI). In the end it’s pretty much the same thing. According to Wikipedia: “Environmental, Social, and Corporate Governance (ESG) refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business.” In many ways, ESG puts meat on the bones of Socially Responsible Investing. ESG attempts to review and advocate specific corporate strategies it believes benefit humanity, the environment, and ultimately corporate success.
Wikipedia lists climate change and sustainability as environmental concerns. As these issues grow in importance, their impact on the corporate bottom line will grow. When assessing a company’s environmental record and strategy, you are ultimately also evaluating its prospects for long-term success. “The long-term view is becoming prevalent amongst investors.”
All companies play a role in society as a whole. The way that companies address that role also has an impact on their long-term profitability and corporate success. That can include:
- promoting diversity in their recruitment and hiring practices,
- addressing human rights concerns in their actions within local communities and in the wider supply chain,
- ensuring effective consumer protection principles are in place
- acting on concerns for animal welfare in the testing and development of products
Corporate Governance Concerns
Issues regarding the ultimate corporate climate are addressed here. This category includes the issues of corporate structure, employee relations, and compensation both for executives and employees.
Sustainable Funds are Taking Off Under COVID
According to Morningstar, sustainable funds are seeing record growth. Growth was being seen in 2019, but it had grown even greater in 2020. By mid-year sustainable funds had witnessed a net inflow of $20.9 Billion, essentially equivalent to all of 2019 ($21.4 Billion). And far outstripping any other year on record.
The results for 2019 actually were 4 times that of the previous highest year. The uncertainty we have seen throughout 2020 emphasizes the impact that issues identified in ESG strategizing can have.
The Morningstar article closes by saying: “It won’t take much in the way of additional ESG fund flows to set a calendar-year record for the fifth consecutive year. Sustainable funds continue to perform well relative to conventional funds in a year of great uncertainty caused by the pandemic and other issues like the movement for racial justice and the upcoming election. These issues have underscored the need for investors to consider ESG-related risks in their portfolios and have affirmed the value of sustainability within the mainstream of investing.”
ESG and SRI can only grow in prominence
Fundamentally the issues being addressed under ESG reflect a good way of doing business. By following these principles, companies and these entities that invest in them can count on a smoother ride in the future with fewer public relations snafus or upset and diminishing markets. Addressing social and environmental issues head-on is an effective business strategy.
Businesses can lead the fight against racial inequality, help to address the growth in wealth inequality, and even pursue active solutions to climate change. The refreshing part is that in the long run good social policy is also good financial policy.