Author: Peter Kenter Canadian Family Offices

Following a surge of adoption and acceptance over the past two decades, ESG—the investment and corporate policy trend that evaluates companies on environmental, social and governance factors—has been taking a beating recently. Among the examples of anti-ESG blowback making headlines: 

• A slate of Fortune 500 companies has dialed back on ESG and diversity commitments, several in response to pressure by U.S. conservative activist Robby Starbuck, who has targeted Meta, McDonald’s, Walmart, Boeing, Molson Coors and others.
• Texas Attorney General Ken Paxton and the attorneys general of nine other states have targeted BlackRock, Goldman Sachs, JPMorgan Chase, Bank of America, Citigroup and Morgan Stanley over investment policies that they claim give short shrift to traditional energy investing. 
• BlackRock chief executive officer Larry Fink has minimized exposure to ESG strategies, calling for “energy pragmatism” and a more nuanced path to decarbonization.
• In January, JPMorgan was the last large U.S.-based bank to leave the Net Zero Banking Alliance, following the exits of Citi, BofA, Goldman Sachs, Morgan Stanley and Wells Fargo. That month, the Net Zero Asset Managers Initiative also suspended its activities, following major defections that included BlackRock.

So, is ESG dead? If it is, it looks like nobody told a lot of family offices. At the same time as some big U.S. financial players have been leaving the ESG fold, North American family offices appear to have been increasing their overall exposure to responsible investing. The North America Family Office Report 2024 by Campden Wealth and RBC notes that 28 per cent of family offices are engaged in responsible investing—somewhat below the global average of 40 per cent—but among those, responsible investments comprise an average of 41 per cent of their portfolios, up from 36 per cent the year before. Those family offices also said that this number will increase to around 50 per cent over the next five years. 

Compared with their American peers, Canadian investors in general also seem to have a continuing appetite for ESG investing. In 2023, Ortec Finance, a provider of technology and advisory services for risk and return management, surveyed 50 Canadian wealth managers and financial advisors. The survey reported that 96 per cent of their clients are increasing their focus on ESG credentials in their investment portfolios.

If investors are increasingly interested in incorporating responsible investments into their portfolios, why is ESG under assault?

Dragged into the “culture war”

ESG has become divisive because it means different things to different people, depending on their views of business, politics and society. ESG supporters, for example, may envision a universal set of positive business practices; detractors may see an unwieldy basket of politicized initiatives in which management seeks to appease external stakeholders while ignoring its fiduciary duty to investors. 

Part of the answer, too, is a political shift in the U.S., reflected in the policies of Donald Trump and a slate of state governors who have targeted ESG investing as a “woke” folly. 

“American politicians dragged ESG into the so-called culture war, making it a wedge issue,” says Dustyn Lanz, chief executive officer of proxy voting analytics firm OxProx, past CEO of Canada’s Responsible Investment Association and a former senior advisor with ESG Global Advisors Inc. “At first, we in the industry dismissed a lot of these attacks as bogus, because they are, but then red states started to target asset managers involved with ESG and climate-related initiatives. So, asset managers had no choice but to start taking these attacks seriously, like a form of political risk. As a result, we see some asset managers talking about ESG and sustainability much less, and leaving collaborative initiatives as a way to remove the target from their backs.” 

A February report by Canadian ESG advisory service Millani concurs, noting that Canadian institutional investors are embedding their commitments to ESG and refining their approach. “The focus has shifted from public-facing commitments to internal strategy refinement, risk management, and outcomes-oriented engagement,” the report says.

Has the industry outgrown ESG?

A consistent definition of ESG has long been an elusive goal, further muddying the waters for supporters and detractors alike. While a few ESG rating providers such as Bloomberg and Sustainalytics dominate the industry, companies can choose from dozens of agencies that offer similar services. A research letter published by the CPA Ontario Centre for Sustainability Reporting and Performance Management at the University of Waterloo by researcher Amar Mahmoud suggests that “research documents a low level of correlation between ESG ratings from different providers.”

A recent article in Harvard Business Review, “It’s Time to Unbundle ESG,” by professors Aaron Chatterji (Duke University) and Michael W. Toffel (Harvard Business School), suggests that responsible investing may have outgrown ESG. The authors trace the modern ESG movement to an influential 2004 United Nations initiative, Who Cares Wins, which promised that “ESG integration currently represents an important source of competitive differentiation and value creation for financial institutions that make it part of their strategy.”

While the Harvard authors are all for corporate responsibility, they question whether current ESG ratings systems are good enough going forward. “It was never clear exactly why E, S, and G were the right concepts to bring together with (apparently) equal weighting or how they were connected to each other,” Chatterji and Toffel write. “This awkward bundle would later prove to be a liability to the ESG movement as it went mainstream in the subsequent two decades.”

Lanz agrees that the definition of ESG is sometimes too restrictive, arguing that practical ESG should be less aspirational and philosophical and more comprehensive. 

“For most major institutional investors, ESG integration has little to do with ethics or values,” he says. “It’s about considering all the material information that might impact a company’s performance. Management quality has always been a key consideration among investors. A leadership team’s management of ESG risks and opportunities is simply part of that evaluation.”

Does ESG really make for better investments?

Steven Globerman, a senior fellow at the Fraser Institute, highlights a conundrum for investors who want to increase their exposure to ESG investments in the hopes of reaping the financial benefits of exposure to better-managed companies. His recently published study, “ESG Investing and Financial Returns in Canada,” suggests that there’s no statistically significant relationship between ESG ratings and Canadian stock performance.

Examining data from MSCI, a leading ESG ratings provider, the study looked at statistical relationships between changes in ESG rankings of companies and changes in equity returns, using a sample of 310 companies listed on the Toronto Stock Exchange between 2013 and 2022. The study found that neither upgrades nor downgrades in ESG ratings significantly affected stock market returns. 

“Part of the motivation for the research was to determine whether complying with all those regulations is costly in terms of real resources, management time, etc., that has to be diverted into the compliance reporting exercise—resources that could be used in other ways,” Globerman says. “It’s not appearing in superior performance, at least as measured by stock market returns.”

He’s also skeptical of regulations that would force companies to disclose their fealty to a basket of ESG standards.

“If ESG did improve corporate performance, either by making a company more efficient or reducing risk, companies would not need to be regulated to disclose ESG standards,” he says. “They would do so voluntarily, because changes in corporate behaviour would reward them with a higher stock price.”

Brad Cornell, emeritus professor of finance at UCLA and senior advisor at Cornell Capital Group, also questions whether a company with stellar ESG ratings is necessarily a good investment.

“Suppose I pick a company which is well managed, has great products, behaves ethically and manages risks well,” he says. “Does that alone make Apple a good investment? It depends on how the company stock is priced. Even if you think ESG indicates a lot of favourable things about a company that would lead to superior returns, it would lead to superior returns for investors only if those benefits were not properly priced in right off the bat.”

Likewise, if investors tend to prefer high-profile firms with favourable ESG ratings, then the stock in those firms would be priced higher.

Cornell also points to litmus tests for ESG investing as problematic, citing exclusion screening of companies that produce carbon-based fuels as a prime example. “If you use carbon-based fuels, there are emissions, and there’s a social cost that goes along with that,” he says. “But you shouldn’t ignore the social benefits, such as the ability to heat your home affordably through cold Canadian winters. If you’re going to divest yourself of companies that produce hydrocarbons, why not go all the way and divest yourself of the companies that burn them—airlines, home heating companies or manufacturing companies?”

Some investors are also prioritizing their commitments to broader goals over absolute returns. They’re not investing to lose money, but they’re less concerned about whether a company that receives a high ESG rating delivers comparable returns to a company that doesn’t. They’re not necessarily married to the strict criteria of ESG ratings—but they do want to know the impact their investment will have on the world. 

Kind Capital is a wealth management practice that takes a pragmatic approach to responsible investing. The firm helps match clients to a range of investing strategies that may include ESG, but might also include socially responsible investing or impact investing—which aims to generate positive social or environmental impact alongside a financial return.

“Our clients generally believe that money is a conduit to creating a meaningful and rewarding life, and our job is to help them figure out what that is,” says Kind Capital CEO and founder David O’Leary. “Once they’ve taken care of themselves and their families, they look to something bigger than themselves. We help them understand which levers they have to pull to make an impact on those things.”

Kind Capital clients may want to invest in large, publicly traded companies who are doing the best job of managing ESG risks. Or they may want to make investments that would improve the lives of children in developing countries. They may want to invest in oil and gas companies that do a good job of managing risks in their sector, or they may want to avoid investments in traditional energy companies altogether.

“It’s our job to help them understand what types of activities their investments are supporting, and to help them align those investments with their values,” O’Leary says. “We can then explain whether achieving those goals would require them to sacrifice any financial returns. We want them to be intentional about the impact of their investments.”

While ESG may be in public retreat, companies aren’t abandoning a thorough assessment of business risks—and investors who care about ESG and the impact of their investments remain committed.

“Institutional investors largely have not changed course on ESG,” Lanz says. “Managers will meet demand wherever it exists, and big asset owners continue to consider all issues they deem to be material, including climate change and other ESG issues. While the ESG marketing party may be over, the consideration of ESG issues among investors isn’t going anywhere.”

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U.S. President Donald Trump says he’s following through on his promise to levy punishing tariffs of 25 per cent on imports from Canada and Mexico. The move leaves Canadians asking whether these sanctions represent the highest tariff levels the U.S. will impose, how long they will be in force, and how these sanctions will affect investors and the broader economy. 

The situation might be described as Kafkaesque, given that it’s unclear exactly which transgressions have earned the punishing tariffs. The list of accusations from Trump and U.S. officials has been updated and amended several times. Is the problem undocumented migrants and fentanyl slipping across the Canadian border? Unfair trade practices under the U.S-Mexico-Canada Agreement (USMCA) involving access to Canadian markets for U.S. dairy products? The division of employment opportunities across the auto sector? Canada’s failure to live up to military spending commitments? All of the above?

Part of the confusion stems from the Trump team’s inconsistent messaging. For example, Howard Lutnick, Trump’s nominee for commerce secretary, recently stated that the Feb. 1 tariffs were related entirely to the issue of border security and could be sidestepped by “swift” action. The Canadian federal government had already cobbled together and announced a $1.3-billion border security plan, but that was apparently insufficient to stave off the tariffs.

Such inconsistencies may be a deliberate tactic on Trump’s part, says Vivek Astvansh, associate professor, Desautels Faculty of Management at McGill University, and a researcher on the use of language and rhetoric in trade negotiations. He sees Trump preparing for a longer game.

“I believe we should care less about the reasons Trump is threatening tariffs, because the reason keeps shifting,” Astvansh says. “He’s creating shocks for Mexico and Canada, sowing confusion and uncertainty. In my opinion, this will last until next year when the U.S., Mexico, Canada trade agreement has to be renegotiated. When Canada comes to the negotiating table in 2026, he hopes to see the country weakened, shaken and annoyed, so that we’ll be more likely to agree to terms more favourable to the U.S.”

While many provincial leaders are calling for retaliatory tariffs, Astvansh says that such a show of bravado would be the wrong approach. Instead, he believes negotiators would be better off working quietly behind the scenes, with people in Trump’s inner circle and with state governors, to create a more friendly cross-border business environment, while taking the wind out of the sails of Trump’s public theatre.

“Mutual tariffs will be inflationary and hurt businesses and people in both countries,” Astvansh says.

The question is, how badly will Canadians be hurt?

Jessica Brandon-Jepp, senior director, fiscal and financial services policy, with the Canadian Chamber of Commerce, notes that mutual tariffs between Canada and the U.S. would cut deeply across the North American economy, but would almost certainly cut Canada deeper.

The organization’s model supposes a 25 per cent across-the-board tariff on all imports to the U.S., matched by retaliatory tariffs from exporting countries. Under that scenario, the Canadian economy would enter into recession by mid-2025 and Canada’s GDP would shrink by 2.6 per cent, costing Canadians approximately $1,900 per person annually. U.S. GDP, meanwhile, would likewise take a beating, shrinking by 1.6 per cent and costing Americans about $1,300 per person annually.

In part, the Chamber’s modeling is based on a 10 per cent tariff imposed across the board by President Richard Nixon in August 1971. Although the tariff lasted only four months, it’s estimated that the measure reduced Canadian exports to the U.S by 2.6 per cent. Analysts also projected that the tariff would have resulted in the loss of as many as 90,000 Canadian jobs if they had been imposed for a year.

“Resource-based sectors would be heavily affected,” Brandon-Jepp says of the most recent Trump tariffs. “And in a highly integrated economy, where goods pass back and forth across the border multiple times—for example in manufacturing—you could see an outsized risk of tariffs also being imposed multiple times.”

Clearly, the impact on the real economy could be severe. But in the financial markets, Canadian investors may have an easier time weathering the tariffs.

Angelo Kourkafas, senior investment strategist with Edward Jones, notes that approximately one third of the revenue generated by companies in the S&P/TSX composite index comes from the U.S., and that some sectors exporting large amounts of goods to the U.S are not well represented in the Canadian equity market.

“The auto sector is a good example,” he says. “Automotive components account for 10 per cent of Canada’s exports to the U.S.—the second largest category of exports after oil, gas and minerals. But the auto sector’s representation on the TSX is just 0.5 per cent.”

In addition, many heavily weighted sectors on Canada’s stock exchange export no physical goods to the U.S.—for example, the financial sector, which comprises about one third of the TSX.

That leaves energy and materials as the sectors most likely to bear the brunt of tariffs. Trump’s Jan. 30 tariff announcement contains a faint hope clause—he was, apparently, still considering whether to spare Canada’s oil exports from tariffs. However, as significant as a 25 per cent tariff on oil might be, Kourkafas says he believes that commodity prices will be a more important driver of financial performance for the sector. As a result, U.S. energy policy may play a greater role in energy sector earnings than tariffs.

While Trump’s tariffs on Canadian imports in 2018 resulted in somewhat greater volatility in Canadian equity markets, Kourkafas notes that this was exacerbated by rising interest rates. He cautions investors this time around to play the long game and to avoid short-term, reactionary portfolio shifts, especially in an environment where central banks are trending dovish.

“Many of the issues President Trump cites could potentially see a solution through incremental measures that won’t be too costly for Canada,” he says. “Long-term tariffs and retaliatory tariffs would be like sand in the gears of the economy, making it less efficient, but we don’t expect them to be in effect indefinitely.” 

Investors can shed some trade risk, he says, by maintaining a well-diversified and balanced portfolio across geographic regions. For most Canadian investors, U.S. equity allocations are already a big part of their portfolios, and those holdings will likely be less affected by tariffs.

“We continue to recommend a slight underweight to Canadian large-cap, developed overseas large-cap, and developed overseas small- and mid-cap stocks, offset with an overweight to U.S. large-cap and U.S. small- and mid-cap stocks,” Kourkafas says. “If we do see trade-related volatility show up, it could be a buying opportunity for investors, given that Canada has a favourable backdrop supporting the markets.”

As much as the reality of a 25 per cent U.S. tariff has highlighted the potential for damage to the Canadian economy, Brandon-Jepp says that it also underscores a very real problem that Canadians have placed on the backburner for decades. “Existing internal trade barriers between the provinces are already having an impact on the Canadian economy greater that the potential impact of U.S. tariffs,” she says. “The removal of those barriers would be a huge benefit to our economy and help insulate us against future trade challenges.”

The Canadian Family Offices newsletter comes out on Sundays and Wednesdays. If you are interested in stories about Canadian enterprising families, family offices and the professionals who work with them, but like your content aggregated, you can sign up for our free newsletter here.

Please visit here to see information about our standards of journalistic excellence.

U.S. President Donald Trump says he’s following through on his promise to levy punishing tariffs of 25 per cent on imports from Canada and Mexico, sticking to a recently announced “will-he-or-won’t-he” deadline of Feb. 1. The move leaves Canadians asking whether these sanctions represent the highest tariff levels the U.S. will impose, how long they will be in force, and how these sanctions will affect investors and the broader economy. 

The situation might be described as Kafkaesque, given that it’s unclear exactly which transgressions have earned the punishing tariffs. The list of accusations from Trump and U.S. officials has been updated and amended several times. Is the problem undocumented migrants and fentanyl slipping across the Canadian border? Unfair trade practices under the U.S-Mexico-Canada Agreement (USMCA) involving access to Canadian markets for U.S. dairy products? The division of employment opportunities across the auto sector? Canada’s failure to live up to military spending commitments? All of the above?

Part of the confusion stems from the Trump team’s inconsistent messaging. For example, Howard Lutnick, Trump’s nominee for commerce secretary, recently stated that the Feb. 1 tariffs were related entirely to the issue of border security and could be sidestepped by “swift” action. The Canadian federal government had already cobbled together and announced a $1.3-billion border security plan, but that was apparently insufficient to stave off the tariffs.

Such inconsistencies may be a deliberate tactic on Trump’s part, says Vivek Astvansh, associate professor, Desautels Faculty of Management at McGill University, and a researcher on the use of language and rhetoric in trade negotiations. He sees Trump preparing for a longer game.

“I believe we should care less about the reasons Trump is threatening tariffs, because the reason keeps shifting,” Astvansh says. “He’s creating shocks for Mexico and Canada, sowing confusion and uncertainty. In my opinion, this will last until next year when the U.S., Mexico, Canada trade agreement has to be renegotiated. When Canada comes to the negotiating table in 2026, he hopes to see the country weakened, shaken and annoyed, so that we’ll be more likely to agree to terms more favourable to the U.S.”

While many provincial leaders are calling for retaliatory tariffs, Astvansh says that such a show of bravado would be the wrong approach. Instead, he believes negotiators would be better off working quietly behind the scenes, with people in Trump’s inner circle and with state governors, to create a more friendly cross-border business environment, while taking the wind out of the sails of Trump’s public theatre.

“Mutual tariffs will be inflationary and hurt businesses and people in both countries,” Astvansh says.

The question is, how badly will Canadians be hurt?

Jessica Brandon-Jepp, senior director, fiscal and financial services policy, with the Canadian Chamber of Commerce, notes that mutual tariffs between Canada and the U.S. would cut deeply across the North American economy, but would almost certainly cut Canada deeper.

The organization’s model supposes a 25 per cent across-the-board tariff on all imports to the U.S., matched by retaliatory tariffs from exporting countries. Under that scenario, the Canadian economy would enter into recession by mid-2025 and Canada’s GDP would shrink by 2.6 per cent, costing Canadians approximately $1,900 per person annually. U.S. GDP, meanwhile, would likewise take a beating, shrinking by 1.6 per cent and costing Americans about $1,300 per person annually.

In part, the Chamber’s modeling is based on a 10 per cent tariff imposed across the board by President Richard Nixon in August 1971. Although the tariff lasted only four months, it’s estimated that the measure reduced Canadian exports to the U.S by 2.6 per cent. Analysts also projected that the tariff would have resulted in the loss of as many as 90,000 Canadian jobs if they had been imposed for a year.

“Resource-based sectors would be heavily affected,” Brandon-Jepp says of the most recent Trump tariffs. “And in a highly integrated economy, where goods pass back and forth across the border multiple times—for example in manufacturing—you could see an outsized risk of tariffs also being imposed multiple times.”

Clearly, the impact on the real economy could be severe. But in the financial markets, Canadian investors may have an easier time weathering the tariffs.

Angelo Kourkafas, senior investment strategist with Edward Jones, notes that approximately one third of the revenue generated by companies in the S&P/TSX composite index comes from the U.S., and that some sectors exporting large amounts of goods to the U.S are not well represented in the Canadian equity market.

“The auto sector is a good example,” he says. “Automotive components account for 10 per cent of Canada’s exports to the U.S.—the second largest category of exports after oil, gas and minerals. But the auto sector’s representation on the TSX is just 0.5 per cent.”

In addition, many heavily weighted sectors on Canada’s stock exchange export no physical goods to the U.S.—for example, the financial sector, which comprises about one third of the TSX.

That leaves energy and materials as the sectors most likely to bear the brunt of tariffs. Trump’s Jan. 30 tariff announcement contains a faint hope clause—he was, apparently, still considering whether to spare Canada’s oil exports from tariffs. However, as significant as a 25 per cent tariff on oil might be, Kourkafas says he believes that commodity prices will be a more important driver of financial performance for the sector. As a result, U.S. energy policy may play a greater role in energy sector earnings than tariffs.

While Trump’s tariffs on Canadian imports in 2018 resulted in somewhat greater volatility in Canadian equity markets, Kourkafas notes that this was exacerbated by rising interest rates. He cautions investors this time around to play the long game and to avoid short-term, reactionary portfolio shifts, especially in an environment where central banks are trending dovish.

“Many of the issues President Trump cites could potentially see a solution through incremental measures that won’t be too costly for Canada,” he says. “Long-term tariffs and retaliatory tariffs would be like sand in the gears of the economy, making it less efficient, but we don’t expect them to be in effect indefinitely.” 

Investors can shed some trade risk, he says, by maintaining a well-diversified and balanced portfolio across geographic regions. For most Canadian investors, U.S. equity allocations are already a big part of their portfolios, and those holdings will likely be less affected by tariffs.

“We continue to recommend a slight underweight to Canadian large-cap, developed overseas large-cap, and developed overseas small- and mid-cap stocks, offset with an overweight to U.S. large-cap and U.S. small- and mid-cap stocks,” Kourkafas says. “If we do see trade-related volatility show up, it could be a buying opportunity for investors, given that Canada has a favourable backdrop supporting the markets.”

As much as the reality of a 25 per cent U.S. tariff has highlighted the potential for damage to the Canadian economy, Brandon-Jepp says that it also underscores a very real problem that Canadians have placed on the backburner for decades. “Existing internal trade barriers between the provinces are already having an impact on the Canadian economy greater that the potential impact of U.S. tariffs,” she says. “The removal of those barriers would be a huge benefit to our economy and help insulate us against future trade challenges.”

The Canadian Family Offices newsletter comes out on Sundays and Wednesdays. If you are interested in stories about Canadian enterprising families, family offices and the professionals who work with them, but like your content aggregated, you can sign up for our free newsletter here.

Please visit here to see information about our standards of journalistic excellence.