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Major institutional investors are increasingly taking a surgical approach to investing rather than looking through a broad ESG lens.Nick Oxford/Reuters

Environmental, social and governance investing is evolving as big players seek to make more impact solving specific problems while aiming for strong returns.

Major institutional investors are increasingly taking a surgical approach, rather than looking through a broad ESG lens. That means buying assets that fit into themes, such as climate change, water conservation or diversity and inclusion. All have been brought to the fore over the past year and a half as the pandemic forced society to take a hard look at its vulnerabilities and search for fixes.

There’s no shortage of demand for investments that fit that mold. Last month, Toronto-based Brookfield Asset Management and U.S. private equity manager TPG announced they had raised a total of US$12.4-billion for impact funds dedicated to accelerating the shift to net-zero emissions economies around the world. These were interim fundraising results for the climate-focused funds, meaning these pools of capital will expand before they close and the managers start amassing assets.

As it stands, ESG as a screen for investing keeps gaining momentum among institutions. According to research by Coalition Greenwich, commissioned by global asset manager AGF Management Ltd., 47 per cent of North American and European asset owners – such as pension funds, endowments and foundations – factor ESG criteria into investments. That’s up from 20 per cent five years ago. That number is expected to hit 65 per cent in five years.

Meanwhile, 20 per cent have “significantly increased” and 44 per cent have “modestly increased” thematic sustainable investing – focusing on individual or related environmental and social issues – over the past three years, the survey of 151 asset owners revealed.

COVID-19 and the social upheaval that followed the murder of George Floyd prompted consumers to look harder at how companies deal with major issues, and this is flowing through to asset owners and managers, said Davis Walmsley, head of client relationships at Coalition Greenwich, and author of the report.

For growing numbers of investors, the next step is determining how to use the funds to be most consequential while generating sufficient returns. “Thematic investment has been a way that investors viewed as an opportunity to be a little bit more thoughtful,” he said.

Those institutions surveyed cited benefits of thematic ESG investing as: greater impact on the issue at hand, the ability to spot trends faster and the likelihood that returns on investment will beat benchmarks.

Themes loosely follow United Nations sustainable development goals such climate action, clean and affordable energy, sustainable cities and communities and gender equality, among others.

AGF’s Global Sustainable Growth Equity fund, for example, comprises companies with energy and power technology, waste management and pollution control, water and wastewater solutions and health and wellbeing. Its top three holdings are U.S. science and technology conglomerate Danaher Corp., Aptiv PLC – a supplier of electric and autonomous vehicle technology – and scientific instrument, software and consumables provider Thermo Fisher Scientific Inc.

Climate stands to remain a top focus among investors after the UN Intergovernmental Panel on Climate Change’s report this month, which spelled out in stark terms the need to take immediate action on emissions in the hopes of preventing the worst effects. The report precedes the UN global climate talks, set for November.

Not all asset managers are ready to abandon an integrated approach that measures investments with a full ESG yardstick. Leith Wheeler Investment Counsel Ltd. has not adopted a thematic approach, although it does provide funds that screen out certain sectors, such as fossil fuel producers. The vast majority of its clients are institutional.

A full ESG screen does not preclude investors from having an impact, said Lisa Meger, portfolio manager at the Vancouver-based fund manager. Indeed, there is value in using a large shareholder’s power to influence companies to make improvements in environmental or social areas through engagement with management and proxy voting, she said.

“If you take an integration approach, it’s not like you don’t pay attention to these emerging themes. You just target them differently,” Ms. Meger said.

Regardless of the approach to ESG investment, Mr. Walmsley said he expects more standardized corporate disclosure of such factors to become mandatory through regulation in North America, enforced by government bodies or stock exchanges. That, along with more extensive coverage by ratings agencies, will make it easier for asset managers to compare performance in a range of key topics.

“It’s going to be less and less about the trade-off between ESG investing and investment returns, and it’s going to be more about how ESG investing either enhances returns and reduces risk, such that it’s not really a trade-off,” he said.

Jeffrey Jones writes about sustainable finance and the ESG sector for The Globe and Mail. Email him at

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