Sustainable Investing Solutions For DIY Investors

A growing number of investors are concerned about the environmental, social, and governance (ESG) aspects of economic activities and want their investment portfolios to reflect this concern. This demand has been met by the investment industry with an explosion of new mutual funds and ETFs described as sustainable and socially responsible.

However, as the landscape for sustainable investment products grows, investors need to look with a critical eye to ensure that what’s under the hood (the investment methodology) aligns with their values.

Last July, CIBC Asset Management launched a suite of sustainable ETFs designed to help DIY investors build their own sustainable portfolios. The product suite includes three individual ETFs representing Canadian equities, global equities, and Canadian bonds. It also includes three all-in-one ETF solutions for conservative, balanced, and growth investors.

I reached out to Aaron White, Vice-President, Sustainable Investments at CIBC, to get his take on these issues and more. Here’s our Q&A session:

CIBC Sustainable ETFs

1. Sustainable or responsible investing can mean different things to different investors. How did CIBC determine the appropriate ESG criteria for these funds? Is there a lot of turnover in these funds?

This is a great point and highlights the challenge facing investors looking to integrate their values with their investment portfolios. With no two solutions being the same, investors can find it confusing to navigate the market and really must do an extra layer of due diligence and understand the methodology that drives the responsible or sustainable outcome.

CIBC Asset Management undertook a consultation with our existing clients to understand what criteria were most important to investors. We developed a methodology that offers broad exclusions that we believe aligns with a diverse group of investors seeking more sustainable investments. The funds will typically be lower turnover due to their focus on higher quality ESG companies.

2. What’s the difference between positive and negative screens and how did CIBC use these to build their sustainable funds?

Negative screening refers to restricting the investible universe by excluding companies based on their business involvement. Positive screening, on the other hand, focuses on investing in companies based on favourable characteristics. 

For example, with CIBC Asset Management’s Sustainable Investment Solutions, our portfolio uses a combination of both. We restrict investment in industries like tobacco, alcohol, gambling, adult entertainment, weapons, recreational cannabis, and fossil fuels. The specifics of how we determine the companies to restrict are outlined in our publicly available framework. 

We then employ positive screening by implementing a “best-in-class” approach, where portfolio managers will only invest in companies who relative to their sector peers are median or better at managing ESG risks as determined by our own primary research. We believe this approach provides investors with values alignment by avoiding companies with certain business involvement and produces a portfolio of high quality companies that have strong peer relative ESG characteristics.

3. Do ESG investors sacrifice returns by investing with their values? How do ESG funds compare to similar non-ESG funds over time?

First, I think we need to reframe what it means to be an “ESG investor”. The term has become a catch-all that does not clearly define what it means to invest responsibly and has created a lot of confusion for investors. 

ESG is primarily focused on uncovering non-financial factors that are financially material to a company and ensuring that those considerations are integrated into the holistic assessment of a company and industry. This leads to more informed decision making and we believe to better results for clients. This type of investing does not restrict in any way the investment universe. 

There are then investment solutions that are focused on delivering additional outcomes to investors beyond financial returns. These include negative and positive screening that we have already discussed but also include thematic and impact investing. Depending on the specific strategy that an investor selects the investment universe may be constrained or the opportunity set more narrowly defined.

Ultimately, investors need to weigh their non-financial objectives alongside their financial goals to determine an appropriate approach that meets their holistic needs. Some investment options that are more restrictive may perform very different from a broad benchmark and may narrow the set of available investments. 

For example, an investor who chose to not invest in traditional energy companies due to their personal values would have outperformed from 2015-2021 and would have underperformed over the last 18 months. An investor who chooses to align their investment portfolio with their values must understand the implications and how the decision may impact their portfolio over a cycle.

4. Let’s talk about portfolio construction. I’m a big fan of all-in-one products, and I see that CIBC offers three all-in-one sustainable ETFs, depending on the investor’s risk profile (conservative, balanced, and growth). You also offer three individual ETFs (Canadian bonds, Canadian equities, and global equities), presumably for investors to construct their own portfolio weightings. Do you see these as core portfolio holdings, meaning investors can properly diversify with a single all-in-one ETF or a selection of the three individual ETFs?

Yes, we believe that our balanced portfolios provide broad enough diversification to meet the needs of the majority of investors. These all-in-one solutions are tactically managed to take advantage of market opportunities as they present themselves. This allows investors to select a portfolio that matches their risk tolerance and take a set it and forget it approach. 

For investors that would like to be a bit more hands on, our three core asset class options allow them to customize a portfolio that meets their unique needs and complement those core positions with other solutions.

5. The clean energy ETF (CCLN) looks interesting. Is this an add-on, more speculative play for investors looking for exposure to the clean energy sector? Is there a manager at the helm, or does the clean energy index follow a more systematic approach to stock selection?

We view the clean energy ETF as an add-on for longer term investors that would like to participate in the opportunities presented by the climate transition. Investors in this industry need to be prepared to weather volatility as there has been significant speculation in the space.  However, we believe that a patient investor that is committed to the long term can significantly benefit from the structural tailwinds afforded by government regulation and the pressure to transform our energy system.

While the index follows some systematic guidelines, our energy specialist team in Denver, headed by Lance Marr is responsible for the oversight of the index. The intent is to ensure investors have a pure play exposure to the companies and industries that will be the leaders of the new clean energy economy.

6. As ESG investing becomes more mainstream there’s concern about so-called greenwashing. How would you say that CIBC and its sustainable investment strategies represent a commitment to ESG mandates and is not just following a popular investing trend?

At CIBC Asset Management, we believe in authenticity and transparency. Investors need to understand exactly what you’re trying to accomplish and then you must do what you say. On this basis, we have published the framework that outlines the exact methodology that underpins our sustainable investment solutions. This allows investors to understand exactly how the investment universe is constructed and whether that aligns to their values and personal goals. 

We also produce monthly commentaries, annual ESG and Stewardship reporting, and various pieces of thought leadership, which allows our investors to understand our firm’s beliefs and how we are actioning those beliefs in the market. We believe this transparency allows investors to judge our authenticity and make an informed decision when choosing to invest with us.

7. Finally, tell us about impact donations and where that money goes.

We felt it was important to align the causes our organization participates in with the values of our clients. To this end, we are donating a portion of the management fees we earn from our Sustainable Investment lineup to charities and non-profits that are focused on facilitating the climate transition.

In 2021 we donated to the Pembina Institute, a Canadian think tank that advocates for strong and effective policies that support Canada’s clean energy transition. We are excited about continuing to grow our annual charitable footprint and contribute to facilitating a just energy transition.

Final Thoughts

Thanks to Aaron White for taking the time to answer my questions about sustainable investing and CIBC’s approach to its Sustainable Investing Solutions.

Readers can learn more about CIBC’s sustainable ETF products here.

Again, these funds include:

• CIBC Sustainable Canadian Core Plus Bond Fund (CSCP) – MER 0.40%
• CIBC Sustainable Canadian Equity Fund (CSCE) – MER 0.60%
• CIBC Sustainable Global Equity Fund (CSGE) – MER 0.75%

And the all-in-one ETFs:

• CIBC Sustainable Conservative Balanced Solution (CSCB) – 40% stocks / 60% bonds – MER 0.65%
• CIBC Sustainable Balanced Solution (CSBA) – 55% stocks / 45% bonds – MER 0.70%
• CIBC Sustainable Balanced Growth Solution – 70% stocks / 30% bonds – MER 0.75%

This article was sponsored by CIBC Asset Management. All opinions are my own.