Let’s get ethical: Scotia iTRADE launches tool to help DIY investors with sustainable investing

Even though Scotia iTRADE has a predominantly red logo, it appears that they’re banking on investors seeing this online brokerage as being green thanks to a new sustainable investing push.

Earlier this year, Scotia iTRADE launched an interesting tool for DIY investors interested in socially responsible investing by introducing a sustainability research add-on to its online trading platform. The sustainable investment tool, developed by Sustainalytics, offers information on three key company components—environmental, social and governance (ESG)—that the DIY investor can use to guide their investment choices.

Observant Scotia iTRADE clients have undoubtedly already noticed the barrage of ads online as well as the new addition to their online platform (screen capture below) seamlessly incorporated into their ‘Quotes & Research’ page. DIY investors can see at a glance how a company is performing against its peers in terms of its ESG measure.

Currently, the tool holds information across 20 industries and 1200 companies from the TSX and the Russell 1000. So, although the universe of companies covered is limited, with tens of thousands of publicly listed companies globally, presumably coverage and range will improve as more companies begin reporting ESG measures.

Scotia iTRADE may already be anticipating an expansion since the onscreen drop down menu of industries already offers more than 40 picks. Options range from ‘Aerospace & Defense’ to ‘Utilities’, with choices in-between such as ‘Automobiles’, ‘Chemicals’, ‘Consumer Services’, ‘Healthcare’, ‘Oil & Gas Producers’, ‘Steel’, ‘Textiles & Apparel’, and ‘Transportation’, to name just a few.

The overall ESG gives a score from 1 to 5, “laggard” to “leader” (a single “green leaf” with an ESG score in the bottom 5% of the industry to five “green leaves” with an ESG score in the top 5%). There is also a ranking of the company’s level of controversy with respect to “customer incidents.”

DIY investors who want more information can also download a multi-page ESG report that details how and why the company has earned its score in each area of environmental, social and governance activity. In this way, DIY investors can decide whether the company’s organization and business structure aligns with their own views and support them, or not, with their investment dollars.

Interestingly, Scotiabank, parent to Scotia iTRADE, has an ESG report score of 61 (out of 100) and is considered an ‘average’ performer when it comes to ESG, with a relative rank of 100. Among the risks cited in the ESG report is a significant governance controversy arising from a class-action suit naming Scotiabank (and 22 other banks) in a money laundering and market manipulation investigation in the US. Ironically, where investors set their own ESG threshold might preclude them from using Scotia iTRADE at all (being a subsidiary of Scotiabank). If DIY investors felt strongly enough about ESG, then this bank-owned brokerage’s score of 61 may or may not be acceptable.

Screenshot of ESG snapshot report

A quick tour of the platform shows that the onscreen tool is easy to see, read and navigate, and the downloadable PDF document that details the ESG of a company is well laid out and comprehensive. That said, there are a few limitations too, the most important being that readers might find that comments made by the report are not thoroughly referenced.

For example, the Bombardier ESG report claims that their CSeries aircraft’s lighter weight and “other aviation techniques” can allow for “20% fewer carbon emissions during flight.” The reference to “other aviation techniques” is vague, and the carbon emissions reduction claim needs a reference the reader can trace.

That said, sustainable investing issues are complex to distill down to a short format and the layout of these reports may simply indicate a lot of information crammed into too few pages. Striking a balance between depth of coverage and readability is a challenge when the information’s scope is so broad.

Another feature of interest is an ‘Equities Screener’ page if DIY’ers want to view more companies with similar ESG values.

On the ES page, the ‘Sustainable Investing’ button, lower left, is marked with a bright red & white “NEW” notice, hard to miss on an otherwise grey and white page, as the screen capture, below, illustrates. Here is also where investment criteria get really interesting for the DIY investor—and possibly controversial.

Screenshot from screener with sustainable investing feature

DIY investors have long been able to include fundamental criteria such as the sector, country and various valuations on price and returns when looking to invest, but now investors can also screen for ‘Business and Human Rights’, ‘Bribery & Corruption’, or ‘Military Contracting’. These criteria are considered extra-financial concerns, deemed by most corporations as “noise” in terms of investment interests and by only a few as a “signal” that speaks to a company’s values and is reflected in its stock worth.[i],[ii]

The DIY investor should decide whether these criteria are important to them, or perhaps more, financially influential to a stock’s value. What’s the return on investment (ROI) on diversity hiring or labour relations in terms of a company’s performance on the stock market? Does it matter that they recycle? Or offer healthcare? Can these components even be teased out of a stock valuation?

Indeed, recent research shows that they can, and the white paper prepared for Scotia iTRADE by Sustainalytics draws on the 2016 Harvard study’s findings.

The study separates immaterial issues from material ones; that is, issues that are not generally reported as part of a company’s financial filings, but that do have impact on its corporate value (material issues) from ones that do not. The study found that corporations addressing material issues while ignoring immaterial ones outperform companies that address both material and immaterial concerns by 4% and companies that address neither by almost 9% (8.90).[iii]

Possible impacts of sustainable investing on advisors

Ironically, the notion of sustainable investing or ESG-based investing is itself not without controversy, especially for advisors or individuals who make investment decisions on behalf of others.

In the US, the Department of Labor has struggled in giving direction through its Interpretive Bulletins on the consideration that financial advisors should give to non-monetary issues aka economically targeted investing (ETIs), socially responsible investing (SRIs) and ESGs when advising on investment concerns for publicly held trusts.[iv] Its latest issuance on the matter of the Employee Retirement Investment Security Act (ERISA) and ETIs, IB 2015-01, says that ETIs may be considered when financial considerations between choices is otherwise equal.

Regardless, the issue of ETI and ESG criteria utilized when choosing investments has been argued as far as the US Supreme Court.

In its 2014 unanimous ruling that fiduciary duty was breached with the introduction of ETI or ESG criteria, the judge stated that public trustees must act solely for the “financial benefits” of plan members rather than pursue “non-pecuniary benefits” such as “employee ownership of employer stock.”[v]

This argument has been further argued in a 2016 US law paper, where the authors note that the legislation guiding trustees for ERISA requires them to invest funds “prudently,” “diversely” and “loyally.”[vi] According to this argument, anything else opens the doors to influence that might adversely impact the decision making process and possibly introduce extraneous factors that unduly influence the trustee.

The bottom line

There is some compelling evidence to suggest ESG impacts company value. What value these tools that provide this information to DIY investors offers must wait to be seen.

The issues in the US while distant, could influence policy here, where a number of provinces are now considering tightening up fiduciary responsibilities of financial advisors to guidelines similar to their US counterparts. Further, it does add an interesting twist into the conversation around what constitutes influence and recommendations – something Canadian discount brokerages (as order execution only entities) and investment industry regulators are currently wrestling with.

For the moment, however, Scotia iTRADE continues to double down on its marketing efforts to trumpet the ESG banner. In doing so, they are not only highlighting that there are now tools that can help investors make more ethically informed investments but they are also getting other Canadian online brokerages asking whether this is something that could help inspire DIY investors to vote (and trade) with their dollar.

End Notes

[i] “ . . . the number of companies issuing sustainability reports has grown from less than 30 in early 1990s to more than 7,000 in 2014, while the United Nations Principles for Responsible Investment (UNPRI), as of 2014, had 1,260 signatories with $45 trillion in assets under management.” Mozaffar Khan, George Serafeim, Aaron Yoon. “Corporate Sustainability: First Evidence on Materiality”, Digital Access to Scholarship at Harvard, Working Paper 15-073, Retrieved from https://dash.harvard.edu/bitstream/handle/1/14369106/15-073.pdf?sequence=1
[ii] “In the financial sector, half of the 63 companies surveyed by SASB’s Industry Working Group said they currently provide no disclosure on ESG issues in their 10-K filings, with another 14 percent offering only boilerplate statements and 30 percent reporting on industry-specific issues. Just 6.0 percent of the companies disclose ESG metrics. Reporting on performance and goals is virtually unheard of.” David Bogoslaw. “SASB previews sustainability standards for financials”, Corporate Secretary, 18 April, 2013. Retrieved from  https://www.corporatesecretary.com/articles/compliance-ethics-csr/12425/sasb-previews-sustainability-standards-financials/
[iii] IBID, 2, Table 6, 32.
[iv] “An economically targeted investment broadly refers to any investment that is selected, in part, for its collateral benefits, apart from the investment return to the employee benefit plan investor.” Department of Labor. 29 CFR Part 2509 RIN 1210-AB73. “Interpretive Bulletin Relating to the Fiduciary Standard under ERISA in Considering Economically Targeted Investments.” Retrieved from https://s3.amazonaws.com/public-inspection.federalregister.gov/2015-27146.pdf
[v] 134 S.Ct. 2459 (2014). “Fifth Third Bancorp et al., Petitioners, v. John Dudenhoeffer et al.”No. 12-751. Supreme Court of United States Retrieved from https://scholar.google.ca/scholar_case?case=17046701813240930601&hl=en&as_sdt=6&as_vis=1&oi=scholarr&sa=X&ved=0ahUKEwjN1fzKnujSAhWn34MKHcAqC3gQgAMIGygAMAA

[vi] Edward A. Zelinsky, Morris and Annie Trachman. “The Continuing Battle Over Economically Targeted Investments: An Analysis of DOL Interpretive Bulletin 2015-01”, 2015. Retrieved from: link here

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