This family story is the third of a series in which we discuss some of the common investment challenges families face and what ultimately led them to HighView. Here, we explore what can happen when one member of an affluent family assumes responsibility for money and investments, particularly surrounding the concerns that can emerge as that person ages.

How long will they be able to maintain that level of guardianship? What will happen if they pre-decease their spouse?

In this story, the father had been managing the family’s wealth of approximately $10 million for more than 20 years. Although he had done this well, there were investment options he could not access as an individual investor, and both he and his family were becoming concerned about who would manage the wealth as he aged or if something happened to him.

These apprehensions prompted the father to search for a wealth management firm able to provide the same fiduciary responsibility and level of care that he would for his family over the long term:

• Searching for a Trusted Investment Partner: HighView’s founding principles, processes, and transparency—from building goals-based portfolios to selecting the right third-party managers for each portfolio mandate and conducting quarterly and annual reviews—gave the father the confidence he needed to entrust his family’s wealth to us.

• Carrying out a Careful and Comfortable Transition: Transitioning the family’s assets was a three-year process that occurred in stages for reasons of both comfort and tax mitigation.

• Preserving the Wealth and Achieving Peace of Mind: Today, the family feels at ease that their wealth is being sustainably managed not only because they transitioned to HighView, but also as a result of the ongoing oversight and governance provided through their stewardship council.

Read the full family story here.

HighView is an independent fiduciary portfolio management firm whose sole purpose is to provide our clients with peace of mind by making their wealth sustainable. We would be happy to discuss our goals-based investment approach with you and your professional advisors.

You may also be interested in:

• HighView Family Story: Transition from Self-Managing the Family’s Wealth to Ensure Financial Peace of Mind
• HighView Family Story: Former Entrepreneur with Multiple Advisors in Need of Integrated Family Wealth and Succession Plan
• Mitigating Volatility to Create Sustainable Family Wealth

In 2017, HighView proudly became a member of the Responsible Investment Association (RIA). HighView believes there is a fiduciary duty to invest prudently without taking undue risk. Incorporating Environmental, Social and Governance (ESG) standards into investment decisions to better manage risk and generate sustainable long-term returns makes sense. We believe ESG due diligence should be designed to measure how a company does business, to identify potential social and ethical issues, and to quantify the impact on corporate performance for disclosure purposes (i.e. better disclosure by companies should include climate-related financial disclosure).

Large public companies can have a social and environmental impact at every level by way of their networks, supply and distribution chains, labour force, and in the communities where they operate. As investors, we can make an impact by being intentional through our allocation of capital and through shareholder engagement with management. There has been a growing interest in assessing how asset managers are thinking about ESG criteria within their research evaluation. In this regard, ESG metrics are not uniform across investment managers. While the “G” has been a significant part of manager due diligence given the ability to measure corporate governance, “S” is also now becoming better understood as it relates to such things as diversity, pay equality, zero tolerance, and the work environment. “E” still has a ways to go. Corporate disclosure on ESG factors will continue to improve as demand for the information continues to increase. Many public companies are taking initiatives in regards to their carbon footprints and committing to clean energy projects suggesting a shift in mindset towards sustainable business decisions.

Given the fast growing movement towards sustainable investing, statistics tell us that 80% of investment managers now practice some form of ESG metrics within their investment research and corporate actions. The integration of ESG considerations within investment processes and across asset classes continues to gain traction among investors and concerned citizens, both from the perspective of social impact, but also in the form of positive financial performance. While we had long known that our chosen managers integrated ESG criteria—particularly governance—into their investment process to varying degrees, we did not focus specifically on such practices.

So in January of this year, we sent out an ESG due diligence questionnaire to our investment managers to determine their current level of ESG integration. We were pleased to confirm that our investment managers have been integrating ESG into their investment research for some time with most having a specific ESG or Responsible Investment Policy in place. Our investment managers seek to invest in quality companies, and an assessment of that quality will include a company’s practices in each of the “E”, “S”, and “G”. A strongly held belief across our platform of managers is that companies that ignore sustainable practices, disregard the effects of their operations on the communities in which they operate, or have improper practices around protecting rights of all stakeholders, will likely be poor long-term investments. As part of our ongoing monitoring and due diligence of our investment managers, ESG integration and discussion is now a part of our formal review.

Next Steps in Impact Investing for HighView

A recent paper by SVX and MaRS suggests that many Canadian high net worth households are interested in the idea of impact investing, particularly younger, wealthier, and female investors. As Amit Bouri, chief executive of The Global Impact Investing Network (GIIN) says, “Investors have been thinking for decades on how to get harmful things out of their portfolios. Impact investing is about proactively investing in solutions. It is a much more intentional step about investing in things like climate change directly.” Impact investments are made with the intention of generating financial return plus positive social and/or environmental consequences. Examples of impact investment might include clean technology investments in agri-tech, energy, smart cities and water, or food in natural and organic foods, and ethical and sustainable foods, or in affordable housing, or helping people in poverty. There are a number of themes, sectors, geographies, and asset classes available to social impact investments.

Many global family offices are engaged in impact investing, and many more plan on increasing their allocations going forward as more ethically minded clients move in this direction and as advisors educate their clients on the opportunities. At HighView, we are exploring the opportunity of a Social Impact Fund that would be available to our clients as part of our portfolio allocation strategy. Our review will include an examination of asset classes, themes, sectors, geographies, and liquidity, in both public and private investments.

Bill Gates predicted that philanthropy would remain the primary way the wealthy help tackle social and environmental issues. Transitioning from philanthropy to impact investing has the ability to create sustainability over the long term.

HighView is an experienced portfolio management firm for affluent Canadian families and foundations. We would be happy to discuss our goals-based investment approach with you and your professional advisors.

You may also be interested in:

• Designing Investment Policy for ESG and Impact Investing
• Making an Impact: Aligning Values with Investment
• Mitigating Volatility to Create Sustainable Family Wealth

HighView recently had two educational seminars, one in Oakville and one in Toronto, on the fascinating subject of Artificial Intelligence (AI).

A Primer on Artificial Intelligence

Human progress moves ever more quickly as time marches on. More advanced societies have the ability to progress at a faster rate, so it’s no surprise that 19^th century humanity made far more advances than 15^th century humanity. This is referred to as the “Law of Accelerating Returns”.

And now, we are entering a new age of rapid AI advancement.

AI investment is growing fast. Tech giants such as Google are spending billions of dollars on R&D. Adoption patterns illustrate growing gaps between digitized early AI adopters and others. AI can deliver real value to serious adopters and can be a powerful force for disruption; it has the potential to improve forecasting and sourcing, optimize and automate operations, develop targeted marketing and pricing, and enhance the user experience. There are no shortcuts for business today. Companies cannot delay their digital journey if they wish to remain competitive. Adaptation will be crucial to survival.

Despite it’s upsides, artificial intelligence is scary for many. The idea of AI as a threat stems from the academic theory known as “the singularity” which argues that researchers will eventually develop a machine smarter than its creators. In doing so, this machine would be able to program itself in more advanced ways than humans can understand.

Welcome to the World of AI: Embracing Disruptive Change

Our first speaker, Gayemarie Brown, embraces AI and sees abundant opportunity.

Gayemarie has more than 25 years of digital transformation experience. A seasoned, bold leader and entrepreneur, Gayemarie, through her work as National Innovation Leader for Deloitte Canada, and now as founder and CEO of her own consulting firm, Wintam Place Consulting, is a strategic visionary, helping companies translate their ambitions into practical plans. She is a sought-after speaker, world renowned female futurist, and a self-described lover of humanoids and artificial intelligence.

Highlights from Gayemarie’s presentation “Welcome to the World of AI: Embracing Disruptive Change”:

• We are living in an exponential world. Humans understand linear progress, but exponential progress requires new models and new ways of thinking.
• The rate of change continues to accelerate:
  • Digitalization of everything
  • Disruption of the old guard
  • Costs of technology continue to decline (3D printing, industrial robots, drones, solar energy are just a few examples of how costs have decreased in a short period of time)
  • Accessibility to knowledge and the internet on a global basis
• Computational power, discoveries, and breakthroughs in AI advancement, the Cloud, the internet, the proliferation of data, and the rise of Quant computing is changing the landscape.
• Changing business models – many businesses are being disrupted. It’s important for management to stay abreast of change, apply AI, and adapt.
• AI today is excellent at understanding patterns, learning tasks, and is ok with logical reasoning but still weak at abstract learning.
• AI is here to make lives better. Advanced machine learning will augment human capability or replace mundane tasks.
• AI is learning fast. Amazon’s virtual assistant Alexa now has over 15,000 third party skills in just over one year of learning.
• The 2015 DARPA Robotics Challenge required robots to climb a set of stairs, turn valves on and off, open a door, get in and out of a car, and master an obstacle course.
• Today robots are being used for many things.

A Machine Learning Revolution

Sri Iyer, Managing Director and Head of Systematic Strategies at Guardian Capital, and portfolio manager for the Guardian Global Dividend Strategy is one of HighView’s investment managers. Sri began his career in the financial services industry in 1995, firstly with Global Value Investors based in Princeton, New Jersey, and since 2001, with Guardian Capital.

Sri spoke about how AI, machine learning, and Big Data are changing the investment industry and how Guardian has applied AI and Big Data into their research and forecasting abilities.

Highlights from Sri’s presentation “A Machine Learning Revolution”:

• Exponential increase in amount of data available – 90% of world data has been created in past two years alone.
• Data flood expected to increase digital universe of data from 4.4 zettabytes (or trillion Giga Bytes) in 2015 to 44 zettabytes by 2020.
• Open source frameworks for splitting complex tasks across multiple machines and aggregating results has dramatically diminished barriers to entry allowing for large scale data processing and opening up big/alternative data based strategies to a wide group of quantitative investors.
• Significant developments in machine learning methods – big strides in pattern recognition, increased focus on investment applications of Deep Learning.
• Adoption of Amazon Echo, Google Home, and Apple Siri rely heavily on Deep Learning Algorithms.
• Goal of machine learning is to enable computers to learn from their experience in certain tasks. Machine learning methods attempt to uncover relationships between variables: when given historical patterns, the machine forecasts outcomes out of the sample.
• Guardian applies machine learning to help predict outcomes for dividend securities.
• Collective intelligence of a diverse and independent group typically yields better estimates than any one superior individual.

Artificial Intelligence: Impact and Benefits to Competitive Strength

Another of HighView’s investment managers, Chris Page is President, CIO, and founder of Laurus Capital. Laurus relies on deep fundamental research and maintains concentrated portfolios of financially strong and well-managed companies with long term growth potential. For more than 30 years, Chris has held a number of senior positions within the investment and insurance business and founded Laurus with a vision of a firm focussed on client wealth creation through prudent risk averse investing and a culture that fosters independent thought.

Chris spoke about some of the Laurus Small Cap investments in companies with regards to how AI impacts and benefits competitive strength.

Highlights form Chris’s presentation “Artificial Intelligence: Impact and Benefits to Competitive Strength”:

• Businesses can use AI to their competitive advantage.
• AI can add value to knowledge and data, enriching the client experience and enhancing human judgement.
• Advantages of AI include:
  • Limiting competition (first to market, specialist knowledge, quality differential)
  • Increasing margins
  • Greenfield capability
  • Having a continuous client (locking in client with technology platform)
• We all know big names like Google and Amazon, but there are numerous investment opportunities in the small cap market where companies are utilizing AI to their advantage.
• Examples Chris spoke about include Kinaxis, Wabco, and Intuit among others.

For Chris’s presentation, please click here.

In Closing

The capabilities of artificial intelligence are rapidly increasing, which will have a significant impact on business and the economy, as well as the investment industry in particular.

It’s important for savvy investors and forward-thinking investment firms to stay engaged in the ongoing discussion and developments as this exciting technology progresses.

HighView is an experienced fiduciary investment counselling firm committed to investor transparency. We would be happy to discuss our goals-based investment approach with you and your professional advisors.

Watch our videos about a variety of asset management topics.

You may also be interested in:

• Designing Investment Policy for ESG and Impact Investing
• Why Do I Need an Investment “Fiduciary”?
• Firing Your Underperforming Money Manager

“We believe that considering material ESG factors as part of our investment decision-making process, with respect to both direct and indirect investments, along with other material investment factors is consistent with our fiduciary duty”.

– UTAM

There is a mind shift underway in the evolution of fiduciary duty in the world of investing: a move away from the old school thinking of “maximizing returns” without regard to impact and exercising due care, to one of skill and diligence by way of Environmental, Social and Governance (ESG) factor analysis that our fiduciary obligations requires us to consider. Ultimately, using our capital to shape a better society.

At the same time and on the other side of the table, companies are facing an increased pressure for better disclosure of what they are actually doing to address ESG factors in their business to enhance sustainability. As Elisse Walter of the Sustainability Accounting Standards Board (SASB) so eloquently states in her speech at a March 2017 CPA Canada Event, markets are being reshaped by resource constraints, climate change, population growth, technological innovation, and globalization. Sustainability is poised to be the next competitive frontier. In fact, research has already shown that companies can achieve superior results—including return on sales, sales growth, return on assets, and return on equity, in addition to improved risk-adjusted shareholder returns—by focusing on the limited number of materiality-based, industry-specific sustainability topics as identified by SASB. The question is no longer whether companies should disclose information on material sustainability risks and opportunities; it is how they can improve the effectiveness of the disclosures they are already making.

In short, it is not about more disclosure; it is about better disclosure. Many are promoting and supporting corporate environmental disclosures with a focus on climate. Most recently, over management’s objections, shareholder resolutions to disclose climate risks passed at the annual meetings of ExxonMobil and Occidental Petroleum this past May.

So how should we as investors, think about making our world a better place and align ourselves with the United Nations sustainable goals to end poverty, protect the planet and ensure prosperity for all? How can we design our Investment Policy to align with what we believe in?

Responsible Investing

Responsible Investing is an approach that integrates consideration of ESG matters into investment activities with the objective of enhancing long term investment performance.

The integration of ESG considerations within investment processes and across asset classes continues to gain interest among investors and concerned citizens. Evaluation of ESG factors can provide insights into investment risk and management of ESG risks can add to long term sustainable returns. Studies have shown that companies with robust sustainability practices demonstrate better operational performance. Strong corporate environmental performance also links to financial outperformance. Strong ESG standards correlate with good stock price performance, and of course, brand awareness. We all know that poor governance, or poor health and safety measures, or exploitive labour practices directly impacts shareholder value (think emissions scandals, or non-compliance with building codes resulting in collapse).

Investment policies surrounding Responsible Investing are being considered and developed by investors, families and foundation investment committees. There is no “right” way, but the best way is to incorporate policies into an Investment Policy Statement (IPS) that communicates the investor’s wishes and beliefs. Some choose to develop a Responsible Investment Policy to be housed within a section of the IPS or as an addendum to an IPS. Either way, a policy formalizes the practice of integrating ESG issues into investment decision making. An addendum to the IPS may be a simple way to start as to how to include ESG factors. As we move forward, Responsible Investing may become incorporated throughout the IPS.

ESG Issues to Consider:

Examples of Responsible Investment Policies

As per the PRI guide on writing a Responsible Investment Policy, policies can take many different shapes. You might start by identifying high level core beliefs that are central to you, and you might read other IPS’s that have been designed for ESG and Social Impact Investing.

For example, the Western University IPS states a belief that ESG factors may have an impact on corporate performance over the long term. Section 4 of its IPS, titled Responsible Investing, outlines how the university will engage external investment managers and that this engagement will involve increasing the level of scrutiny on ESG factors. The university will keep a registry, updated annually as to ESG related information on its external managers. This may include incorporation of ESG factors into the firm’s investment process, the firm’s target allocation for climate change related investments, the presence of a committee on sustainable investment, the portfolio’s exposure to fossil fuels, sustainable industries, and high impact sectors, and details about the firm’s proxy voting policy.

Another great example is the University of Toronto’s (U of T) annual report on Responsible Investing. U of T has a major commitment to Responsible Investing and in particular, points to a comprehensive approach to the challenges posed by climate change. The University president, Meric Gertler, called on the University Pension committee to incorporate ESG factors into its Statement of Policies and Procedures, a change that was implemented in June 2016. He also called on UTAM (the University of Toronto Asset Management Group) to build a rigorous and systematic approach to integrating ESG factors into investment decisions. UTAM, along with many other universities and investment managers, is now a signatory to the United Nations supported 6 Principles for Responsible Investment (PRI):

1. We will incorporate ESG issues into investment analysis and decision-making processes.
2. We will be active owners and incorporate ESG issues into our ownership policies and practices.
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
4. We will promote acceptance and implementation of the Principles within the investment industry.
5. We will work together to enhance our effectiveness in implementing the Principles.
6. We will each report on our activities and progress towards implementing the Principles.

Putting It in Perspective: Sustainable Investment Taxonomy

An excellent model on describing the matrix of Responsible Investing can be found in the TASK FORCE Report on Sustainable Investment Taxonomy: September 2016. This report describes Responsible Investing or Socially Responsible Investing as being synonymous with sustainability and it provides for a simple model on the taxonomy of sustainable investing, dividing it into three distinct orders:

• Screening Strategies:

Screening Strategies can be negative or positive. Negative screening would simply exclude companies based on what they sell such as tobacco, alcohol, weapons, gambling, pornography, or fossil fuel. Positive screening involves identifying companies that have a positive impact, and often use ESG measurement systems and scores to guide decisions. MSCI and Morningstar/Sustainalytics are providers of measurement and scoring systems used by many investment managers today.

• Thematic Strategies:

Thematic Strategies are built on focussed and constrained investment universes. Thematic strategies will have very specific allocations and can typically be overexposed to some sectors such as clean technology, renewable energy, industrial and technology, and underexposed to sectors such as energy, financials, or consumer.

• ESG Practices:

ESG Practices are not an investment strategy per se, but a group of investment practices. They are not the primary driver of an investment thesis but rather practices of making investment decisions. ESG integration is currently being employed by many traditional investment managers as a way to identify new business risks, and improve corporate behaviour through direct engagement and shareholder activism. According to the Responsible Investment Association (RIA), 80% of investment managers now pay attention to ESG issues.

ESG factors include climate change, biodiversity, air and water pollution, corruption, executive remuneration, and board diversity among others. These are all material issues that should be integrated into the investment making decision processes. Voting can affect governance, and provide a management team with valuable feedback. Important voting issues should be reviewed and voting rights used in a responsible way so as to add value to change.

ESG Practices and Designing Your Own Investment Policy Statement

There are three primary ESG Practices:

1. Identifying emerging ESG risks.
2. Actively influencing the operating behaviour of management teams through engagement strategies, proxy voting, corporate engagement and shareholder activism.
3. The measurement and monitoring of environmental and social impact.

In designing your own Investment Policy Statement, and incorporating Responsible Investment guidelines you may want to think about:

• Incorporating ESG standards for investments. These could be high level, or specific based on certain issues and minimum standards.
• Your core beliefs such as companies need quality management, strong, diverse and effective boards, transparent shareholder reporting, recognition of environmental and social risks, and executive compensation that aligns well.
• Setting guidelines for ESG practices across all asset classes. Research has shown that governance scores are most important when determining bond credit worthiness. Bonds with high governance scores suffer credit downgrades less often.
• Setting guidelines for working with external investment managers; what issues are important, what requirements and measurements are expected.
• Social or environmental themes that may be important to you such as community housing, clean technology, climate, food, agriculture and forestry, green investing, renewable resources, social impact bonds, waste management and/or water infrastructure and technology. You may wish to review the UN Sustainable Development Goals for further background and understanding.

As described in the Taxonomy model, potential approaches for responsible investing can include negative and/or positive screening, theme investing or ESG integration. You may wish to invest through the traditional public markets or through private markets. You might combine some of the approaches or all of the approaches.

As mentioned earlier, there is no “right” way but rather the way that suits your individual, family or foundation goals and objectives.

Moving Towards a 100% Impact Portfolio

Certain organizations are moving proactively and intentionally toward a 100% impact portfolio where all of their assets are used to generate positive impact. Inspirit Foundation is one such organization. The mission of the Inspirit Foundation is to promote inclusion and pluralism through media and arts, provide support for young change leaders and impact investing—specifically addressing discrimination based on ethnicity, race and religion. The Inspirit Foundation believes it can create positive change through their capital allocation and is on the road towards a 100% Impact Portfolio. They are not the first foundation to think this way and they acknowledge the work that has been done before them by foundations such as the F.B. Heron Foundation, The Hamilton Community Foundation and the Edmonton Community Foundation.

The Inspirit Foundation believes in using financial capital to support companies that behave responsibly and they will engage and respectfully challenge companies that have room for improvement. For Inspirit, the definition of 100% Impact includes:

• Applying impact investing tools to the public portfolio (90% of the portfolio) by incorporating positive screening and ESG factors into mainstream traditional investments, ensuring shareholder engagement, having some specific product choices (i.e. shift capital to renewable energy sources through a fossil fuel free equity fund), and by not knowingly investing in alcohol, gambling, pornography and adult entertainment, tobacco and related products and weapons.
• An allocation of 10% to private investments that contribute to inclusive society through mission and program related investment. This is invested by way of private real estate, private debt and private equity.

While Impact investing is not new, it continues to grow in interest and capture attention across the investment community. At HighView, we began our journey through research and meeting with many people and firms that focus their time and energy on sustainable investing. HighView joined the Responsible Investment Association (RIA) this past spring, and more recently, our Portfolio Strategy Committee has enhanced our investment manager selection and ongoing monitoring processes by implementing an ESG due diligence component to understand how our managers integrate ESG factors into their investment research. While only a start, we will continue to look for ways to bolster our expertise and capabilities in this burgeoning sector.

To that end, HighView works strategically and collaboratively with firms that have specific expertise beyond our own. In this regard, we are pleased to align with Purpose Capital. Formed in 2010, Purpose Capital is an impact advisory firm that designs and deploys customized impact investment strategies by mobilizing all forms of capital to accelerate social progress. Purpose Capital has worked extensively with Inspirit Foundation on their impact investment journey. We are excited to continue our focus in exploring new ideas for sustainable investing, and stepping beyond ESG integration to meet our clients’ evolving requirements.

Sources

• TASK FORCE on Sustainable Investment Taxonomy, September 2016: http://greenchipfinancial.com/wp-content/uploads/sites/5/2016/09/Sustainable-Investment-Taxonomy-Report.pdf
• University IPS’s: http://www.intentionalendowments.org/investment_policy_statements
• SUSTAINABILITY MATTERS: FOCUSING ON YOUR FUTURE TODAY, By Elisse B. Walter
  SASB Board Member and Former Chair of the SEC
  CPA Canada Event, March 30, 2017
  https://www.sasb.org/blog-elisse-walters-keynote-at-cpa-canada-conference/

Special thanks to Hyewon Kong and Nadi Naderi of AGF Investments, to Julie Desjardins of RIA, and to Upkar Arora, CEO of Purpose Capital for their knowledge and guidance on Sustainable Investing.

HighView is an experienced portfolio management firm for affluent Canadian families and foundations. We would be happy to discuss our goals-based investment approach with you and your professional advisors.

You may also be interested in:

• Making an Impact: Aligning Values with Investment
• Thinking Client-First: Goals-based Investing
• Why Do I Need an Investment “Fiduciary”?