Clearly, there is increasing demand for more responsible financial products because we’re witnessing an increase in the supply of eco-responsible investment products. The laws of supply and demand are at work in the sustainable investment space!
Indeed, when a financial institution comes up with a new product offering in this space, it’s a good sign! Desjardins recently launched three new investment funds that set out to reduce our environmental footprint:
1 The Desjardins SocieTerra Environmental Bond Fund;
2 The Desjardins SocieTerra Cleantech Fund;
3 The Desjardins SocieTerra American Equity Fund.
To learn more about these products, Ethiquette met with Rosalie Vendette, Senior Advisor Responsible Investment at Desjardins. The following interview was conducted in French on June 13, 2016.
Ethiquette: You’ve just launched an Environmental bond fund – does an environmental bond differ from a green bond?
Yes, there is a difference, the Green Bond is a dedicated term. If I remember correctly there is a certification attached to this concept and some specific criteria. The environmental bond is a term that encompasses a broader concept of this type of product.
How then would you define an environmental bond?
They are bonds, so debt securities whose proceeds are used to mitigate climate change and promote sustainable development around related topics such as energy efficiency, development of renewable energy, sustainable waste management, preservation of biodiversity, sustainable transport, sustainable water management and climate change adaptation. These bonds are issued by many types of organizations, including governments, and corporations.
Does the fund invest in government and corporate bonds that are considered more responsible than others for the environment? What are the selection criteria?
Fund management is carried out by the firm Mirova, where two managers work to design portfolios based on their own ESG [environmental, social and governance] analysis and credit. Without going into the details, investments must be used for development projects focused on reducing climate change or promoting sustainable development. These fund managers have been operating in the area for many years and regularly communicate with issuers of environmental bonds, which allows them to better know their respective positions and to assess each case in depth. One of them is also on the executive committee of the Green Bond Principles.
Does the Desjardins environmental bond fund need to respect international standards like the Green Bond Principles to qualify as environmental bond fund?
It is not mandatory for environmental bonds to comply with international standards like the Green Bond Principles or the Climate Bond Initiative. The choice of an environmental bond portfolio managers was to offer greater flexibility in the management of the fund. There may be several equally interesting avenues that are not certified so far and we hope that managers can explore such options.
Could you talk about the underlying assets (companies or governments) that the fund holds and the reasons for their inclusion?
I have to say that it is very early to give the exact holdings because the fund will be launched tomorrow. We’ll have more information about it as of June 30. That said, we think for example of Apple, Bank of America or the Government of Ontario, all of which have intentions to implement environmental projects. Although these securities are not necessarily included in the fund, they could possibly be held by the fund.
You say that your new Desjardins SocieTerra Cleantech Fund is the first mutual fund in Canada to offer individual investors the opportunity to finance innovative technologies and solutions in the field of energy efficiency and the environment. Is it correct?
This is indeed the first time that this type of product is available in the form of a mutual fund. The Desjardins SocieTerra Environmental Bond Fund is also the first of it’s kind available in mutual fund format. The cleantech market is a market that has been around longer, while the market for environmental bonds is a very new but rapidly growing market. In both cases, neither of these products were available at the retail level. So that’s why we consider this the big news – the launch of these funds in mutual fund format makes them available to individual investors.
Can you tell us more about the selection criteria and the impact assessment for the Cleantech fund?
Indeed, more and more of our customers are interested in responsible investment, so we’ve taken our product offering a step further by adding thematic funds, which focus on specific themes related to sustainable development and climate change. The Desjardins SocieTerra Environmental Bond Fund finances projects, while the Desjardins SocieTerra Cleantech Fund invests in companies that seek to optimize resources through clean technologies. Faced with challenges such as the increase in population and living standards, poor infrastructure, limited natural resources, pollution, etc., the portfolio manager tries to choose companies that will address these specific challenges. Specifically, the Fund seeks strong companies in 4 main categories: 1) energy (energy efficiency, renewable energy), 2) water (infrastructure, sanitation, and pollution control), 3) Food and forestry and 4) waste (management and waste treatment, etc.).
The Fund manager measures the positive impact of the companies every year. However, we do not know the impact of our strategies since they will be launched tomorrow, but for example, in the past year targeted companies would have helped avoid the emission of 1.1 million tons of CO2 in the atmosphere and contributed to the treatment of 57 billion gallons of water. It is indeed our intention to monitor the impacts of the companies in the fund.
Can you give us some examples of companies that make up the portfolios and the reasons why they have been selected?
Again, unfortunately, it is too early to give exact company names, but I can give you examples of companies that may be in the Fund. While it this is not a criterion in itself, they are usually companies with mid and small capitalization. Companies such as Xylem and Ovivo – a Quebec company – which specialize in sustainable water management technologies; EDP Renovaeis, specializing in solar and wind energy; ORMAT Technologies, geothermal; Vestas Wind Systems in wind; Horiba, for pollution control; Tomra Systems, in terms of waste management (designed the mechanism to “swallow” the cans into the machines at the supermarket) and finally Borgwarner, to respect energy efficiency.
What about the returns and risk of these funds? Do they respond to any investor profile?
Yields are always relative to the asset class and risk profile, but these funds are quite comparable to products in their asset class — the Desjardins SocieTerra Environmental Bond Fund is similar in risk-return profile to other bonds, and the Desjardins SocieTerra Cleantech Fund should show similar risk-return profile to “Global Small Cap Equity” funds.
As for the risk, it depends on the product. A bond product is typically less risky, while equity technologies will be riskier. These products are components of the Societerra portfolios, and depending on the investor risk profile different portfolio weightings are available. For example, the conservative investor profile (the least risky) the Societerra Portfolio could have a higher percentage of assets in environmental bonds, and a very low percentage in cleantech. For investors, the solutions are available separately but also combined giving a little exposure to each via the Societerra portfolios. This allows for a greater diversity of approaches in terms of responsible investment (exclusion, ESG integration, thematic investing, shareholder engagement).
As for of the new Desjardins SocieTerra US Equity Fund, the portfolio manager, ClearBridge, uses a “best of sector” (or “best in class”) strategy for stock selection, retaining companies whose performance on social, environmental, and governance are superior to that of other companies in the same industry. Can you give us examples of companies in this portfolio, and why they were selected?
ClearBridge indeed uses the “best of sector” strategy as the dominant approach, but they also undertake dialogue with companies. Among the companies that could potentially end up in the US Equity fund are Alphabet Inc., Apple Inc., US Bancorp, Lowe’s Companies Inc., CVS Health Corp, Microsoft Corp, Costco Wholesale Corp., Nike Inc., NextEra Energy Inc Ecolab Inc, etc. Note that these securities are not necessarily held in the fund, I’m simply offering them as possible examples.
The process works like this: the manager looks at a group of US companies, in this case, it uses the Russell 3000 index – which has roughly 3000 companies. It initially reduces the number of companies in which it may invest with quantitative analysis, using mainly financial criteria. The manager then proceeds to a selection from the new pool of companies using environmental, social, and governance criteria. ClearBridge gives a score to each company according to a set of information collected by their analysts internally, and they consider the companies in the portfolio to be the best in their specific industry. The portfolios contain a high proportion of AAA, but some AA and a few A-rated companies, according to the classification manager. The portfolio is thus constructed using best in class, but then shareholder engagement and dialogue are also used to best manage the companies in the portfolio.
Unfortunately, it is too early at this stage to give specific examples of performance.
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