Priti Shokeen is Vice President and Director, Social, and Governance (ESG) Research and Engagement at TD Asset Management Inc. She completed her PhD at Kingston University London, where her thesis was on the institutionalization of ESG factors in Canadian pension funds. Priti shares her insight on the evolution and future of ESG investing. 

How has the ESG space evolved over the years? 

When I started in the industry, only a few major institutional players were serious about responsible investing and ESG issues related to their portfolios. The general industry was limited to socially responsible and values-based investing, as well as exclusions based on religious values, international norms, and corporate governance practices. I explored the responsible investing practices of UK and Canadian pension plans, which were interesting from a regulatory standpoint, as in the UK, regulations had come out requiring pension plans to disclose whether they were considering ESG factors when making investment decisions. 

Since then, ESG and its role in creating value for a company have been evolving. When it comes to mainstreaming ESG in investment management, I think what has changed over time—and I hope I played a little bit of a part in that—is that the narrative has shifted from values-based investing to how ESG factors can contribute to companies’ risk mitigation and opportunity creation. Companies that are paying greater attention to the environmental impacts of their operations and mitigating environmental risk exposures are likely to face fewer regulatory fines, fewer penalties, and less reputational risk. Similarly, on the social side, companies with good community relationships are less likely to experience protests and project delays or closures. 

The most significant change over the past twenty years is from values-based investing to value creation. Shareholders recognize that, when choosing companies, they want to pick the best-in-class companies: those managing not only their financial risks but also their ESG risks well. In the long term, these companies are likely to be winners, and as such, it makes ESG another dimension of fiduciary responsibility. This view of ESG integration is also now more formalized in investment training such as in the CFA curriculum. 

What will be the most significant ESG trend in the coming five to ten years? 

The biggest one is climate change, and we already see a lot of commitments to climate change, specifically to net-zero carbon emissions by 2050. Finance has a pivotal role to play in these commitments. For example, with the Glasgow Financial Alliance on Net Zero, companies from the financial sector have rallied, and many other sectors have committed to net-zero emissions by 2050. In addition, regulators and governments are looking to create enabling environments for the transition to low-carbon economies—for example, the Inflation Reduction Act that is north of US$370 billion in funding, the first of its kind in climate spending in the US. For investors, these developments have second-order effects on the investment universe and really shape investment opportunities. 

From a risk perspective, companies need to adapt and become more resilient to economic and physical risks related to climate change. We are seeing more frequent extreme weather events, resulting in economic loss—take Hurricanes Fiona and Ian in recent months, for example. 

How will finance drive change in ESG? 

Financial organizations must be proactive in identifying immediate and future risks to prepare themselves and to protect their revenues and lines of business. When there are more frequent weather events, insurance costs increase, and insurance companies feel the impact of climate change. With major institutional investors, asset managers and banks reflecting the financial risks related to ESG in their practice and adopting a longer-term view on cost benefits, there is a cascading effect in making capital markets stronger and more resilient. 

This article reflects the views of Priti Shokeen, Vice President and Director, for informational purposes only and is subject to change. The contents of this document are not endorsed by TD Asset Management Inc. 

This article has been edited for length and clarity.