Improving investor returns with ESG

“If you look at the performance of the MSCI all-countries world index ESG leader index, that index has outperformed the general index by more than 1,000 basis points since 2008,” he said.

Cameron and his Tokyo-based team keep a close eye on environmental, social, and governance trends. They’ve found that one of the biggest challenges for forward-thinking companies is how to keep up with constantly evolving benchmarks.

“As [global investors] become more focused on ESG and require a higher and higher standard for the companies they invest in, requirements are becoming stricter and stricter,” he said. “Behaviour that five years ago was the industry norm, is no longer acceptable. That’s a huge challenge for companies.”

Cameron said portfolio managers should integrate ESG into their investment processes, saying he’s not a big believer in third-party ESG benchmarking.

“That kind of approach can quickly lead to a box-ticking exercise. That is sub-optimal,” he said. “ESG is not something that should be outsourced.”

He holds that fund managers, who have millions of dollars to invest in a company, have the potential to influence corporate behaviour in a way that third-party monitors simply can’t.

According to Cameron, companies generally have good control over their ESG scores — particularly when it comes to governance and social practices.

“These are internal to the company,” he explained. “The structure of its board, the way it interacts with stakeholders — that’s the governance component. Social is really about how the company treats its employees and the community around the company. Again, the company has a large degree of control over that area.”

He acknowledged that the environmental area is more difficult because it involves the entire supply chain — a complex web of potentially thousands of companies and dozens of countries.

“If you think of a consumer products company like Apple or Tesla, they both use lithium-ion batteries. A key component is cobalt, and there’s huge environmental and social issues with the mining of that cobalt,” he said. “So, environmental isn’t just about Tesla’s factory or Apple’s plant in California. It is about all the components that go into those products.”

Cameron pointed out that the research and development efforts made by consumer product companies like Apple and Tesla, as well as South Korea-based Samsung, have the potential to alleviate some environmental concerns.

“So, we’re focused on technology companies that can drive efficiencies in the way that we utilize scarce resources,” he said.

He is not as bullish on companies that are focused on raw materials, suggesting they could struggle in an ESG-obsessed world.

“It’s not just a question of environmental degradation, it is also appalling conditions for workers, and there’s still widespread use of child labour in mining in emerging countries,” he said. “Materials really has a big challenge, not just on the environmental side but also on the social side.”

Cameron said the ESG movement is ushering in a new era in corporate responsibility.

“We want to invest in companies engaging in good behaviour and, through our capital allocation, actually effect change,” he said. “This is a point that many people miss. We can actually push the companies to change their behaviour, which benefits everyone.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.