Genus Sustainable Investing Update

Wayne Wachell: [00:00:02] Hi, I’m Wayne Wachell. I’m the CEO and chief investment investment officer of Genus Capital. And with me is Mike Thiessen our director of Sustainable Investing. And today, we’re going to do a first quarter review for our fossil free and sustainable clients. Well, it was quite the quarter. The quarter start off in a real positive manner. The economy was turning around, the markets were doing well, and boom, they got hit by two black swans, the pandemic and a price war in the oil sector. And from that, we’re going to going to get a recession. Obviously, the economy is going to shut down for two 3 months and then try and reboot. And what we’re seeing from a forecasting perspective is due to economy shrinks by about 10 percent, probably another 2 or 3 in Q3 and then starts growing maybe 3 to 5 percent in Q4. We don’t see the economy really getting back everything It lost until early 2022. That’s right. That’s our best guess. It’s never been done before. We’ve never had a shut down and reboot within two to three months. So we don’t know what we don’t know.

Wayne Wachell: [00:01:09] The market panicked and plunged 35 percent. Most equity markets around the world. Oil was went below $20 and the Canadian dollar slumped 68 cents as we were hit hard because of the oil impacts, the Federal Reserve and other central banks came to the rescue very aggressively. They learned a lot in 2008 and they applied applied that in this case here and the scenario. They came in, they brought rates as your very quickly. They went to quantitative easing infinity. They’re buying corporate bonds, municipal bonds. They’re buying any risk out there? They’re buying it. And that’s helped turn the markets around. We’ve had a 50 percent retracement in the markets over the past. Over the past couple of weeks, which we’re really liking and and but still we have to it’s the hard part. The downturn in the economy and a downturn earnings and get through that. So,we’re hopeful, but there’s still a lot of things we have to deal with. A mess has to be cleaned up going forward. So Mike, how did these fossil free interest samples, side of things to this corner have this impact?

Mike Thiessen : [00:02:23] So of course, the fossil free funds were heavily impacted by the pandemic. It’s hard to really avoid the pandemic. But thankfully for the fossil free funds, we’re not holding oil and gas companies or companies with fossil fuel reserves. So that one black swan didn’t affect us actually relative to the market and actually helped us. So within within these portfolios, we did have to make some large adjustments within the first quarter. We are already underweight energy, not having any oil or gas. So we didn’t have to make any big shifts there. But coming into the first quarter, we were actually quite bullish on the economy and on the market. A lot of our economic signals were telling us that things were looking up. So we were overweight in equities and portfolios. We were we were buying more cyclical types of sectors and types of companies within our portfolios. But once we saw that the pandemic was starting to come out of China and start to hit other areas of the world. We quickly made a shift within our portfolios to sectors that we thought would do better in kind of the new paradigm that was coming out.

Mike Thiessen : [00:03:39] And we’ve got more defensive as well because we knew that this would heavily affect the economy. So we started to move into sectors like information technology. We had a big increase in our in our weights in I.T. also health care we thought would do well in this new paradigm. Can we decrease certain sectors like industrials, like financials, because we didn’t think that highly cyclical sectors like that would do as well with the economy contracting due to due to the pandemic. And we thought especially fin financials in Canada would have a rough time because financials in Canada are going to be hit by the pandemic. Plus, they’re going to be hit by the oil crisis, even though we’re we have fossil free accounts. The large Canadian banks are still going to be hit by this. So we we reduced our weighting there, especially among smaller Canadian financials, because we thought they would be possibly hit the worst by by this. And and so our sector rates remain quite similar to what they were on March 15 when we were kind of done our switches. But we have lowered the cash levels in our portfolio since then.

Wayne Wachell: [00:04:54] Ok. Thanks, Mike. Now, before we get into stable metrics and our performance, we thought we’d just do a quick review of what is fossil free. Our clients came to us seven years ago and said they didn’t want their money or capital contribute to climate change. And so the mandate was we divest from companies that are involved in extraction, processing and transportation of oil, gas and coal. And also we want to also will lower the carbon emissions 70 percent vs. the benchmarks. And why do we do this? Well, we do this for a couple of reasons for value, from a value perspective and from a financial perspective. Many clients, they want their portfolios aligned with their values. And so if they’re off their brands or their their background is associated with fossil. With fossil free, they want to see that in their portfolios as well. On the financial side is the big concern there, of course, is you’ve heard the term stranded assets. Mark CARNEY from the Bank of Canada, Bank of England been talking about that for years. And the issue there, of course, is if we all do comply with the Paris Accord, better leave half the fossil fuel reserves underground and stranded. That’s going to impact on values for oil companies, for financials, insurance companies, etc. So that’s a bit about why why we do what we do here. Looking at some of the we’re more than more than fossil free. We also include other screens besides fossil fuel. Maybe, Mike, you can go over some of the screens we employ besides fossil fossil fuels.

Mike Thiessen : [00:06:41] Sure. So we exclude certain products that are controversial or products that a lot of our clients have told us that they don’t want in their portfolios that don’t align with their values. So products like light weapons or gambling or or tobacco. One of the new screens that we just implemented was factory farming because some of our clients were concerned about factory farming. And then we also we also rate companies based on environmental, social and governance factors. And then we cut out the companies that are the poorest in these areas out of our universe. So we’re not able to invest in those. And beyond this, we also don’t invest in companies that are involved in controversies within the companies. So they may have controversies around their labor force and how they’re treating the labor force or maybe controversies around the communities that they’re working in. And we don’t want to be investing in companies like that either. So where we cut them out of our investable universe.

Wayne Wachell: [00:07:43] Ok. And you know how we compensate for removing energy stocks from your portfolio. We start our definition because we actually intend to hold more information technology, more financials, more consumer discretionary and more telecom stocks. And, you know, I just would say, you know, from a best perspective over the next 10 years, I would rather have a stake in technology and not in energy stocks. I think that’s a solid bet to take over the next 10 years, I would say. OK. Let’s go over the sustainability metrics. Looking at being fossil free dividend equity fund, the fossil free can glow in the fossil free high impact equity fund. Mike, over to you.

Mike Thiessen : [00:08:27] Ok. So in terms of fossil fuel reserves, of course for our fossil free funds, we don’t have any reserves which has really helped us during this time period and helps us against stranded asset risk, as Wayne was talking about. But the benchmarks do have significant fossil fuel reserves. You can see one of the benchmarks has two hundred seventy five million barrels of oil equivalent in terms of reserves. So it’s very significant relative towards zero for our fossil free funds. And then the middle bar graph is carbon intensity. So carbon intensity is the tons of carbon emissions per million in sales. So this can really vary from coal utility that might have ten thousand carbon intensity. So it means ten thousand tons per million in sales all the way to a tech company that might have fifteen or twenty tons per million in sales. So there’s a lot of a big range, but you can see that our fossil free funds all have under 60 for average carbon intensity. Even the dividend fund has down to thirty three. So quite low carbon intensity versus the benchmarks that have a hundred or two hundred forty and one hundred sixty five. So a big difference there. And we’re committed to be significantly lower than our benchmarks. And then on the right we have ESG rating. So environmental, social and governance ratings and these are ratings that are put out by data providers like the MSCI.

Mike Thiessen : [00:09:58] And so our funds have six point eight, six point four and seven point six rating out of 10 versus our benchmarks that have a 6.1 rating. And are our fossil free high impact equity fund has a seven point six rating. So that’s the highest rating of our funds. And really it makes sense because that fund is meant to invest in companies that are most impactful and are making a difference in the world. So they’re going to have a higher ESG rating. So also, when we’re measuring impact within our impact fund, we look at the percentage of revenue that each company is making in that fund that is coming from a product or service that is making an impact. And we look at impact if it’s linked to one of the 17 Sustainable Development Goals. These are goals that were set out by the U.N. in 2015. And they really vary from things like quality education to clean and affordable energy to climate action. There’s a wide variety of these goals and they’re meant to be goals for organizations, governments and businesses to try to accomplish to make the world a better place. So we want the average company within our impact portfolio to make 50 percent of its revenue or more from impactful products or services that can be linked to a sustainable development goal.

Mike Thiessen : [00:11:23] So we have some companies in there like Vestas Wind that might have 100 percent of its revenue coming from impact. And then maybe some tech companies that might have an energy efficiency project, maybe 20 or 30 percent is coming from impactful products and services. But on average right now, within that fund, the average company has impact revenue of 61 percent versus twelve percent for the MSCI World, which is our benchmark. And so are our fossil free high impact funds. Not only is making a lot of impact, but it’s also in the first quarter. Really? Excuse me. Really been our star performer for performance. So this fund is is investing in companies that have solutions to some of the world’s world’s biggest problems. So in times like like this with a pan pandemic, or if there was large issues having to do with climate change in the future, I believe that it would also perform really well. It’s really a hedge against these big world issues because we’re investing in companies that have solutions to these issues. So and in January, this fund was able to outperform the benchmark. In February, it slightly underperformed the benchmark as the market started to go down. But in March, this is when it really outperformed. It actually was up for March versus the benchmark. That was down about 8 percent.

Mike Thiessen : [00:12:56] So in the first quarter, our fossil free high impact fund was down about 3.6 percent, whereas our benchmark was down about 13 and a half percent. So it beat a benchmark by almost 10 percent, which is which is very significant. And we really see it as a hedge against climate change and other big world problems in the future. So looking at more performance, this is our fossil free CAN Globe Equity Fund. Really are our growth strategy for fossil free. And this is our seven year performance, almost seven years now. And you can see that performance has been up into the right until this last quarter. Of course, there’s been the pandemic, but still we’ve been able to outperform the benchmark over the past seven years. And even in the last quarter, the Fossil Free Can Globe Fund was able to outperform by over 1 percent in the quarter against the benchmark. And then are Fossil Free Institutional Balance Composite. So this is a compilation of our balanced fossil free clients that are institutions and against its benchmark, that is also a compilation of their benchmarks for each of these individual clients. And over the past seven years, almost seven years, we’ve been able to outperform the benchmark here as well, having a six point two percent annualized return vs. 5.7 about annualized return for the benchmark.

Wayne Wachell: [00:14:29] So before we close, Mike, how is this global pan pandemic really change the landscape for fossil free investing in sustainable investing?

Mike Thiessen : [00:14:40] Well, I think for for around the world, in every sector, people are looking at risk differently now, they’re realizing that there there was a lot more risk out there than people were really accounting for. And not only risk around, you know, health-cares, but also risk around oil and gas. And we think that these fossil free funds, especially the impact fund, are really a hedge against the kind of oil and gas related risk in climate change risk. So we think that people are going to be looking more into these strategies in the future, especially when they see how well these strategies will be  able to perform over this time period.

Wayne Wachell: [00:15:20] Ok, well, thanks, Mike. That was our sustainable and fossil free first quarter reviewed and results back next quarter. Thank you all.