According to CIBC World Markets, fund flows into these ESG funds have been doubling each year since 2018.Dan Riedlhuber/Reuters
Enbridge Inc. appealed to environmentally conscious investors this week when it hosted a forum to showcase its commitment to environmental, social and governance principles – underscoring just how important ESG is becoming to companies in their pursuit of long-term investors.
Money is certainly pouring into mutual funds and exchange-traded funds that incorporate ESG into their mandates.
According to CIBC World Markets, fund flows into these ESG funds have been doubling each year since 2018. In the first half of 2021, global fund flows nearly reached the record levels for the full year in 2020, bringing total assets under management to an estimated US$1.5-trillion.
“Looking specifically at equities, ESG inflows are becoming an increasingly dominant factor in determining overall equity flows,” Shaz Merwat, a CIBC analyst, said in a note.
The interest goes well beyond retail investors, who typically turn to funds for one-stop diversification and professional stock-picking. Giant institutional investors, too, are growing increasingly vocal about ESG, and they are aligning their hefty portfolios with their ideals.
The Caisse de dépôt et placement du Québec, the giant pension fund with $390-billion in net assets, this week expanded its climate strategy. It will sell its remaining oil-producing assets, valued at nearly $4-billion, by the end of next year. The Caisse is also increasing its exposure to low-carbon assets, to $54-billion by 2025 from $36-billion currently.
Companies that hold no appeal during this sort of shift in strategy could find themselves struggling to attract long-term investors, and their stock valuations could suffer.
Enbridge’s ESG forum, then, may be far more important than an outline of its own environmental strategy – though that’s clearly part of it.
The company is an energy infrastructure firm best known for its North American network of oil and gas pipelines, which can raise the ire of environmentalists in some jurisdictions. Enbridge is currently engaged in a particularly fraught battle over its Line 5 pipeline, which crosses the Straits of Mackinac, which the State of Michigan wants to shutter. It also has about $8-billion of renewable energy infrastructure, including wind farms and solar energy, and plans to be net zero in terms of carbon emissions by 2050.
During the forum, Enbridge executives highlighted these green aspects, and announced a dedicated team, called New Energies, that will focus on areas such as low-carbon energy infrastructure and carbon capture, utilization and sequestration – a process that prevents carbon from entering the atmosphere. ESG performance, Enbridge pointed out, is even tied to executive compensation.
However, Enbridge also stands by its traditional pipeline infrastructure, arguing that conventional energy is essential to meet rising demand while greener energy expands, making its pipelines a kind of bridge to the future.
Is that good enough for ESG investors?
Some of the big ones may be on board. While the Caisse is ditching oil producers, it also said in its climate strategy update it is holding onto its investments in pipelines (it owns shares in U.S.-based Colonial Pipeline Co.). This would support the view that the infrastructure is necessary to keep the lights on as countries increase their exposure to renewable energy.
Analysts also remain upbeat about Enbridge’s prospects.
“The ESG Forum presentation keeps us constructive on the company’s energy transition strategy and commitment to being an ESG leader. The new energy strategy strikes the right balance for us in terms of risk and reward,” Robert Catellier, an analyst at CIBC World Markets.
Robert Kwan, an analyst at RBC Dominion Securities, noted that the overall negative view on hydrocarbon infrastructure is weighing on sentiment. Yet, he believes the company’s business model is low-risk, supported by a strategy of slowly shifting toward low-carbon assets.
But investors may need more convincing. The dividend yield is curiously high, at 6.6 per cent, suggesting little faith in the company’s growth prospects. As well, the share price is about 10 per cent below its early 2020 levels. An ESG boost could go a long way.
Full disclosure: The author personally owns shares in Enbridge.
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