Canso has an overriding duty to act in the best interests of its clients. This fiduciary role requires it to incorporate all value drivers in its bottom-up fundamental investment research process. The sustainability of borrowers’ business models is critical given the long-term nature of Canso’s investment activities, and the willingness to hold bonds to maturity. Canso believes environmental, social, and governance (ESG) issues can affect the long-term performance of issuers included in the investment portfolios it manages. In recognition of this, Canso became a signatory to Principles for Responsible Investment (PRI) in 2019.
Oversight of ESG is governed by Canso’s Responsible Investment Committee, which reports to the CEO and to the Board. The committee is responsible for setting Canso’s ESG strategy, maintaining accountability for its external ESG commitments, and ensuring that its ESG integration process is consistently applied by research analysts. The committee is comprised of the Chief Strategy and Operating Officer, Vice President Investment Research, and senior members of the Portfolio Management team. It is chaired by a Portfolio Manager with a mandate to promote best practice, and to provide thought leadership to staff and clients.
Responsibility for the implementation of Canso’s ESG process sits with each member of the investment team. Canso structures its research coverage purposefully so as to ensure knowledge is spread across the firm. It does not allocate analysts to its coverage list by industry or rating. Similarly, it does not segregate ESG due diligence but requires that all team members take ownership for making sure that ESG considerations are fully incorporated into their investment analyses.
Canso’s ESG integration process requires an ESG assessment to be made in every credit review, whether an initiation or a surveillance report. That assessment involves a separate analysis of each of the ESG factors individually, with particular attention given to the subset of environmental, social and governance issues that are most material to business and financial performance, as guided by the Sustainability Accounting Standards Board. The focus is on determining the impact of these issues on a company’s cash flows and ultimately its Canso Rating and Recovery. Canso judges whether ESG risks are fairly priced, and whether client portfolios are compensated for the risks they assume. It is Canso’s experience that when companies move to address weaknesses in their corporate practices, including practices related to ESG considerations, these inflection points may represent attractive investment entry points.
Canso believes that the quality of company reporting is crucial in order for investors to properly understand the risk profile of their investments. ESG disclosures continue to lag the transparency, consistency, and granularity of financial disclosures. Canso sees the formation of the International Sustainability Standards Board, operating under the oversight of the IFRS Foundation, as a positive development in this regard as it will set a global baseline for sustainability disclosures, with requirements to lift over time. However, there is still an information gap to be bridged. Canso is advocating for positive change through its membership on the Canada Bond Investors’ Association (CBIA) ESG Committee. It has also bolstered its internal ESG research capabilities by adding a reputable third party ESG data provider that it believes provides a market-differentiated solution. This provider uses artificial intelligence and alternative data sources to create predictive insights, and it does this without imposing a vendor-based ESG opinion. Canso is able to integrate the underlying quantitative data into its own proprietary in-house framework to derive its own ESG opinions. This is consistent with Canso’s approach to credit ratings, where it does not rely on external rating agencies but makes its own independent assessments.
Canso as a fixed income manager is focused on an asset class that has traditionally been less active in ESG engagement compared to equity. However, Canso recognizes that bondholder engagement is significantly more active than it used to be, and is set to get even more so given that (i) the size of the debt market is much larger than the public equity market, and (ii) because bonds are term instruments, companies need to refinance through the issuance and reissuance cycle. This creates a point at which bondholders have the leverage to push for change. When appropriate, Canso will:
- Engage issuers on ESG factors of concern (e.g., in run-up to issuance);
- Collaborate with other bondholders for more effective engagement, normally through the CBIA and the CBIA ESG Committee;
- Engage the company on governance concerns during debt restructurings; and,
- Vote proxies in accordance with its Proxy Voting Policy.
This ESG Policy is reviewed annually in order to keep pace with industry developments, and to ensure that it reflects current investment practices at Canso as its ESG approach evolves over time.