A $90M ESG 'Dragon's Den' competition, as industry faces public reckoning

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Earlier this month, 11 ESG asset managers pitched at a live “Dragon’s Den” competition in Montreal, on the unceded lands of the Mohawk Nation, for the chance to invest up to $90 million of the competition sponsor’s capital — and to prove to funders and the public alike that they don’t “greenwash.”  

The Great Canadian ESG Championship is a first of its kind event in Canada. 

It invited financial asset managers — both big global investment banks and small Canadian investing firms alike — to submit proposals to the competition outlining why their approach to environmental, social and governance (ESG) investing is best. 

Event sponsors say the competition provides a chance to identify the “best in class” ESG investment firms and sends a powerful signal to all ESG asset managers to up their game. 

“As investors, we care deeply about ESG and responsible investing and we wanted to align our assets with our granting values,” said Eric St. Pierre, executive director of the Trottier Family Foundation, one of the event’s sponsors. “But we’re also seeing a rise in marketing and greenwashing – something that really disturbs us.” 

This spring, more than 60 asset managers applied to participate in the competition, including large asset managers like RBC Global Asset Management and Mackenzie Investments, and smaller, ESG and impact-focused firms, like AlphaFixe Capital and Rally Assets.  

The top 11 finalists pitched before a panel of industry judges and a live audience. Each had ten minutes to explain their approach and why investors should place their confidence in their firm. 

On the line were both bragging rights and investment management fees. 

In October, three firms will be crowned the winners of the competition. Around the same time, the boards of each of the nine sponsoring investors — six foundations, one university and two trusts — will select asset managers from amongst the group of competition finalists to manage a share of their funds. 

The Trottier Foundation has committed to invest up to $15 million with some combination of the winners — or about 9 percent of their $230 million endowment. The McConnell Foundation and Concordia University have also each committed to invest $15 million with participating firms. The six other competition sponsors have collectively committed up to $45 million, for a total competition purse of $90 million. 

Though the mood of the competition was friendly, the event comes as the ESG industry is facing a public reckoning. 

The CEO of a top German investment management firm recently resigned after government prosecutors raided the company’s offices over allegations of misleading investors through wide-spread “greenwashing.” 

In April, a Globe and Mail investigation found that competing ESG indices — which aim to help investors understand the difference between ESG leaders and laggards — rank the same company’s ESG scores as both best and worst-in class. 

The stakes have also never been higher for the field. 

In recent years, the ESG market has surged, as many foundations, pensions, and individual investors seek to align their investments with their values and reduce risk. From 2017 to 2019, ESG assets in Canada increased by 59 percent to a total of $3 trillion, according to data from the Responsible Investment Association. 

Investors have welcomed the new products to invest in, but they also want to ensure that the ESG brand stands for something real. 

“The government hasn’t established regulations or standards or even labels” for ESG investing, said St. Pierre, in an interview earlier this spring. “So it’s kind of like the Wild West.” 

Smaller firms impress competition judge

One of the pitch judges, Daniel Simard, former CEO of a large Quebec retirement fund, said at the end of the competition that he was particularly impressed with some of the smaller investment firms who participated. 

Rally Assets, a Toronto-based impact investment firm, pitched their “total impact fund,” whose holdings include a women’s and children’s health technology fund, an Indigenous investment fund, and a fund that helps farmers acquire ownership over their land. 

At day’s end, the firm was selected the “people’s choice” award winner. 

“I think they came across as very authentic,” said pitch judge Andrea Moffat, vice president of the Ivey Foundation, of Rally Assets’ presentation. “They also had some very strong examples, which some of the other groups were missing.” 

Rally Assets was also the only finalist that is purely an impact investment advisory firm — meaning that they set the bar higher for impact for the investments they make than their ESG counterparts. They were also the only finalist to highlight an investment in an investment they’ve made in an indigenous-owned company. Through their investment with the Raven Indigenous Capital Partners fund, Rally is supporting Cheekbone Beauty, an Indigenous-owned, sustainability-focused cosmetics company.  

In their pitches, finalists described their approach to selecting investments, the depth of ESG investing experience of their staff, their engagement with investee companies on ESG issues, the particular investments they’ve made and more — all things that could set them apart from peers who are accused of “greenwashing.”  

For instance, RBC Asset Management pitched a “global equity leaders fund,” which invests in bonds, private companies and real estate. Staff made the case for real estate as a high-impact ESG investment, describing that buildings are one of the largest greenhouse gas emitters and that environmental retrofits can make a big dent in emissions. 

PenderFund Capital Management, a smaller firm in the competition, pitched a fund that invests in private technology companies that focus on their three impact themes — better lives, better planet and better inclusiveness — such as investee companies, Claruis, a portable ultrasound company, and Swift, which offers mobile wound-identification and management.

The judges did not single out any firm by name, but pushed competition finalists to focus on improvements in several areas, including transparency. 

To participate in the Great Canadian ESG Championship, firms had to submit a detailed questionnaire about their ESG approach, including how they research prospective investments with an eye for ESG considerations and whether, for instance, they tie executive compensation to responsible investing success.

Simard said that in reviewing the firm’s proposals however, most said that they had “proprietary” approaches which they couldn’t disclose in full. This “black box,” made it tough, he said, to have a clear sense of what firms are up to and how each company’s practices differ from one another. 

Moffat, another judge, said she also wanted to see more from the presenters in terms of supporting Indigenous ownership through their funds. “I hoped to hear a little bit more on the First Nations or Indigenous ownership side,” she said. “But I think it was maybe hidden in some of the proposals — or I hope.”

She said she was pleased however, to see many firms mention linking ESG performance with staff compensation, but said that the details provided by competitors was still too “generic and high-level” for her to feel comfortable that it was really going to drive change. 

Audience members too had pointed questions for the finalists. 

ESG field ‘in danger of losing credibility’

Audience member Katie Wheatley, a manager with responsible investment organisation SHARE, said the quality of the shareholder engagement efforts touted by the finalists in their pitches “varied greatly.”

Shareholder engagement strategies are those that investors use to influence the behaviour of their investee companies. Investors can, for instance, submit a shareholder resolution calling their investee company to adopt science-based CO2 emissions reductions targets or to conduct an audit into company practices that contribute to racial inequity. Other companies can vote for these initiatives through “proxy votes.” Companies can also choose to hold meetings with investee companies to pressure them to take action on specific ESG-related issues.  

When asked for details about their shareholder engagement activities during their pitches, several firms described securing meetings with their investee companies to discuss ESG concerns, Wheatley said. “[But] I would have preferred to hear a lot more about the actual outcomes of those conversations rather than like, ‘We’re so pleased. We had a meeting with management about this issue.’”

Wheatley said she was happy, however, to see how passionate presenters were, and glad to see firms sharing their ESG best practices in public, believing that it could drive “innovation” across the field. 

Fellow audience member Jacques Bordeleau, former executive director of the Béati Foundation, a small Montreal-based foundation, said he was also encouraged by the number of firms who accepted the ESG competition challenge, but said there was lots of room for improvement in their approaches. 

“We are at a really pivotal moment,” he said, speaking in French. “Most of what we’re seeing is not is not off-the-charts…And the danger is of losing credibility, because if you don’t meet expectations you drive people and organizations away.”    

Experts say there are several reasons why greenwashing has grown into such a bear of a problem for the industry. 

Marketing departments go ‘hog wild’ with ESG: expert

Tim Nash, a longtime sustainable investing coach for retail investors said, during an interview in April, that he believes both lax regulations and overzealous company marketing departments are partly to blame for a decline in trust in ESG investing. 

Nash said voluntary ESG standards, such as the UN principles for responsible investment designation, have allowed asset managers to “tick the box” to say they use ESG screens, when really they might just use it for a portion of their assets or might use it as merely a “tilt” for their investing approach. 

“​​It’s challenging because the way we measure these things really matters,” he said. 

He also said the perception of industry greenwashing also results from a disconnect between firms’ marketing departments and their investment managers. “I think the communications departments have kind of been allowed to sort of go hog wild with this,” he said, of ESG marketing.  

Judges raised this issue during the competition too, saying they believed finalists’ marketing departments had helped produce their applications, making it more challenging to understand their ESG approaches. 

Liz Simmie, co-founder of a small ESG-focused investment firm, said during an interview in April, however, that she believes one of the biggest barriers to truly using ESG to achieve impact is “structural.” 

Simmie said asset managers are hamstrung by financial models that privilege “shareholder primacy” — the philosophy that underpins traditional finance which says that the role of a corporation is to deliver maximum profits to shareholders. “They’re trying,” Simmie said, “but the financial models get in the way.” 

Simmie, whose firm, Honeytree Investment Management, was not a finalist but was awarded a “best emerging manager” honourable mention by the competition, also said she believes greenwashing is more common in the industry because of the people making the financial decisions: “The investment industry is all dudes. They’re mostly old and they’re pretty conservative.” 

But experts say that an event like the Great Canadian ESG Championship can help the issues some, by giving investors and the public greater insight into the ESG field — and by shifting industry power dynamics.  

“Taking this approach totally changes the power dynamics in the asset owner [and] asset manager interactions…radically different from [standard] behind-the-scenes beauty parades and pitches,” said Colin Barnes, a staff member at a UK-based foundation, who spoke at Thursday’s event by Zoom. (In 2000, his organization co-sponsored a similar “ESG Olympics” event in the UK.)

Normally, foundations host meetings with financial firms one-by-one, assessing for fit. These meetings often include only foundation board members and select foundation financial staff. The ESG competition flips this on its head, Barnes suggested, by pooling the resources of nine institutions, asking firms to pitch side-by-side, and by giving the public a view into a normally opaque process. 

“Taking this approach also brings investment management out of the shadows for all to see.”  

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