“I cannot say that all of these companies are talking
about [car] hacking risk in their notes to shareholders,
but I can tell you that all the companies we profiled
in that shortlist are betting on that part of the race.”
well on the indicator that looks at sustainable products and services,
including lithium ion batteries.
CIO: What would be your advice to a CIO as far as measuring
the risk involved with the production and the environmental
Morrow: I should stress that, when we’re doing our research, we’re
not typically looking at many of the factors that one expects a CIO
would be looking at in terms of balance sheet strength, cash flow
generation and price analysis. But you could definitely blend the
two and do a fundamentals analysis to come up with a shortlist of
companies with exposure to this theme. And then you could take a
deeper dive and overlay their strategies for dealing with the types
of risk that we’re talking about. So, for toxic chemicals, there are
wide differentials in how companies are positioned on these types
of issues. Like big gaps in environmental management systems, how
rigorously environmental policies are enforced, the extent to which
they monitor their suppliers on their environmental performance.
CIO: Tips to help due diligence?
Morrow: We’re seeing a trend where a lot of this information is actually migrating to the MD&A discussion in the annual report, and
10Ks in some cases as well. So, as I like to say, it’s not just what’s being
disclosed, it’s where it’s being disclosed as well that’s important.
There’s also the Carbon Disclosure Project, a firm based in
London, which provides a whole inventory of corporate energy and
greenhouse gas emissions data.
CIO: What are some good questions to ask companies?
Morrow: What are you doing to prepare for a two-degree world?
What’s your climate change strategy? And then, you know, setting
up a dialogue to explore ways for companies to develop more responsible environmental or social practices, and most importantly, how
these strategies can be in shareholders’ financial interest. There’s a
whole body of literature on the benefits that actually come out of
those types of engagements.
CIO: What would be your advice to a CIO who’s investing over,
let’s say, a five-year horizon, on how to consider water scarcity
in due diligence?
Morrow: I think it depends on a bunch of factors, but for sure, I think
CIO: And are there certain countries that are especially of
it’s something that is not inconsistent with fiduciary duty. There’s just
so much evidence coming out now that water shortages can have an
impact on production. I would say the first thing to do is to look at
the industry in which the company operates. Some industries are just
fundamentally more exposed than others, because they use a ton of
water: Banks, not so much, but mining companies? Absolutely. There
was a report recently released that said water is the number one issue
right now for mining companies.
concern when it comes to water scarcity?
Morrow: There are a few basins in China that are particularly
problematic. Even parts of the US still – it’s often a question of how
equally it is distributed across the country. And whether the government changes the regulations.
CIO: Do you think water will be part of disclosure in the future?
Morrow: Yes, I do. I think what happened to carbon will happen to
water. The big problem with water is it’s not priced according to its
value, because it’s complex, but I think if water costed more, there’d
be more incentive to use it efficiently.
CIO: Any big risks that are little known that CIOs should be
aware of when it comes to ESG investing?
Morrow: There are lots of risks out there that I think, when you look at
the world through an ESG lens, can help bring some risks onto the radar
that might otherwise not be on it. Human capital and water should
definitely be on a CIOs radar. There’s a growing body of evidence
to show that companies that do well on holistic ESG measures: good
environmental programs, good social, good governance policies, make
better long-term financial bets. In some cases, researchers found that
companies that score well on ESG metrics tend to attract and retain
better employees, tend to suffer less regulatory penalties, tend to be
better at managing customer relationships, tend to be generally more
efficient. You can sometimes think about ESG for a proxy for efficiency,
if you can see where I’m coming from.
Like a company that manages energy efficiently, even though it
might not be a huge cost relative to other costs, is probably doing
other things efficiently too, so some people think about ESG as a
proxy for overall efficiency.
CIO: And could you apply that to countries with good ESG
Morrow: It’s a little bit different with countries because it has more
to do with resources and different gaps in strategy, but yes, you could
make the parallel in the sense that there are definitely large differentials in terms of environmental policy and things across countries. CIO