Our focus today is an approach to non-financial risk management that has become more and more prevalent: responsible investment (RI).
This is an approach that can generate long-term added value for investors, as we saw in our FÉRIQUE monthly Responsible investment: a tool to create wealth.
The recent growth of RI in Canada is impressive. The assets affected by this approach climbed from $589 billion to $945 billion between 2012 and 2014, representing a growth of 61% over two years1.
But what are today's hot topics on this matter?
Many RI issues have been in the spotlight in 2014 and continue to make headlines in 2015. This is the case, for example, with oil transport by rail and the labelling of GMO ingredients.
The following governance issues2 are likely to be the subject of debate, particularly at the next annual meetings of the companies involved.
A recurring theme in recent years has been excessive executive compensation at certain companies. Many shareholders would like CEO compensation evaluation measures disclosed. Others suggest that the ratio between CEO and employee compensation (internal equity ratio) should be used to limit executive pay.
The Security and Exchange Commission (SEC) may soon introduce a rule forcing US companies to disclose new compensation data, including the internal equity ratio.
Besides contributing to the issue about executive compensation, stock options also represent a serious governance risk. This form of variable compensation could lead to riskier decisions or a greater focus on short-term goals to rapidly raise the value of stocks.
In the coming months, many Canadian companies may face shareholder proposals for the gradual elimination of this type of compensation.
More and more shareholders have their doubts about the management’s ability to consider environmental, social responsibility and risk management issues in their long-term decisions. They propose adding a number of members with this particular expertise on the board of directors to better manage this type of risk.
This year, a total of 10 companies in Canada could be targeted by shareholder proposals with this goal. The presence of qualified directors in these areas could eventually become a standard.
When opposing certain aspects of a company's governance, shareholders may require changes to its board of directors. They may attempt to elect their own candidates or get a seat on the board in order to gain some control over the company.
For more and more companies, the election of directors has led to proxy fights. Opponents try to consolidate the proxies of as many shareholders as possible to elect candidates of their choice to the board. In 2014, more than one-third of Canadian companies adopted an advance notice policy for nominating directors to better control the exercise of voting rights in light of these proxy fights.
RI has been an integral part of FÉRIQUE Funds’ business practices for nearly 10 years. This factor broadens their overall approach to investment risk management. In fact, it enables them to promote better practices in this area, increasing the likelihood of solid medium- and long-term financial performance for the companies in which they invest.
FÉRIQUE Funds RI approach ( (in French only) is based on three components:
This tool allows shareholders to positively influence the companies in which they invest. The FÉRIQUE Funds voting policy (in French only) is based on three principles: long-term profitability, accountability and transparency. FÉRIQUE Funds also strive to encourage companies to behave more responsibly to protect the long-term assets of their shareholders and provide them with solid returns.
Incorporating ESG criteria into conventional financial analysis enables FÉRIQUE Fund managers to paint a more complete picture of companies and the risks and investment opportunities associated with them.
FÉRIQUE Funds promote a collaborative approach with their managers, without excluding any names from their security selection or giving them any direction.
This strategy aims to actively influence companies to improve their ESG practices in different ways, such as sending letters or meeting managers and filing shareholder proposals.
At present, Gestion FÉRIQUE's interventions, as the manager of the FÉRIQUE Funds, primarily target governance issues. The organisation believes that good practices in this area generally raise the bar on practices in other spheres of company activity.
Since assets influenced by this approach are growing, responsible investment has become an increasingly significant force for change. The issues under debate are numerous, and Gestion FÉRIQUE participates in them in accordance with its Responsible Investment Policy.
By making environmental, social and governance issues a priority, Gestion FÉRIQUE fulfills its mission of contributing to the financial health of engineers in their best interests.
To learn more about responsible investment at Gestion FÉRIQUE, visit the Responsible Investment section on this website.
1Source: Global Sustainable Investment Alliance (GSIA), Global Sustainable Investment Review 2014.
2Source: Groupe investissement responsable, Enjeux sociaux, environnementaux et de gouvernance d’entreprise 2015.