The Forces at Play – The Quest for the Theory of Everything in ESG An Evaluation of the Acceleration Toward Stakeholder Capitalism and Integrated Reporting Patrick Bryden, CFA | Analyst 403-213-7750 Scotia Capital Inc. – Canada [email protected] Klazina van den Berg | Senior Associate Nick Koch, MSc, P.Geo | Associate 416-862-3721 403-213-7754 Scotia Capital Inc. – Canada Scotia Capital Inc. – Canada April 2021 All currencies in Canadian dollars unless otherwise stated. For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S. unless otherwise indicated in this report. Our Third Annual ESG Report Source: Scotiabank GBM. 1 ESG Forces Integrated Business & Government Market & Reporting Accounting & Policy Stakeholder Source: Scotiabank GBM. 2 PRI Global Signatories – The Trend in AUM Continues to Defy Gravity $110 14-Yr CAGR = 22% $100 $90 2020 $80 $70 R² = 0.96 $60 $50 $40 14-Yr CAGR = 32% AUM Trillion) AUM (USD $30 2006 $20 $10 $0 0 500 1,000 1,500 2,000 2,500 3,000 Number of Signatories Source: UN PRI; Scotiabank GBM. 3 Sustainable Investing Assets by Strategy and Region (2018) Source: 2018 Global Sustainable Investment Review (GSIA). 4 EV/EBITDA Multiples of the S&P/TSX Composite Index 50x 45x Comm. Services. Financials 40x Info. Tech. Cons. Disc. 35x Industrials 30x Health Care Real Estate Cons. Staples Materials 25x Utilities 20x 15x Energy 10x Year Average EV/EBITDA Multiple Average EV/EBITDA Year - 5 5x 0x TSX Composite Companies Segmented by GICS Sectors and Ranked by EV/EBITDA Multiples Source: Refinitiv; Scotiabank GBM. 5 Interest Levels in ESG over Time – Web Searches Worldwide 120 100 80 60 Interest Level Interest 40 Lockdowns in March 2020 20 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Google Trends; Scotiabank GBM. 6 ESG Chaos “We are in a state of ESG acceptance but also ESG chaos, because every firm is saying they do ESG, too.” – Buyside Investor 7 Aggregate Confusion: The Divergence of ESG Ratings A paper by the MIT Sloan School of Management and University of Zurich showed how ratings from six different ratings agencies – KLD (MSCI Stats), Sustainalytics, Vigeo Eiris (Moody’s), RobecoSAM (S&P Global), Asset4 (Refinitiv), and MSCI Intangible Value Assessment – featured low correlations on aggregate ESG ratings and for each subset as follows: 8 ESG Forces CDP CDSB GRI IIRC SASB Integrated Reporting Forces WEF Big 4 IFAC IFRS IASB Business and Accounting Forces UN EU USA CAN Others Government and Policy Forces Capital Corporates Raters Stakeholders Public Market and Stakeholder Forces Market Source: Scotiabank GBM. 9 The Quest for a Theory of Everything in ESG Business and Accounting Forces WEF + Big 4 Five ESG Leaders IFRS September 2020 September 2020 September 2020 White Paper Statement of Intent Consultation Paper Aims for unified global Commitment to work Commitment to work reporting system for ESG together and align together and align Source: Far left – World Economic Forum; middle – Impact Management Project, WEF, and Deloitte; far right – Copyright © 2020 IFRS® Foundation. Used with permission of the IFRS Foundation. All rights reserved. 11 How Standards and Frameworks Fit into Reporting Domains Source: Impact Management Project; WEF; Deloitte. 12 Government and Policy Forces EU Canada Other European Green Deal Expert Panel on Australian Sustainable Sustainable Finance Finance Roadmap Non-financial Reporting Directive Leading Eight Pensions U.S. SEC CSA Group CHN, GBR, JPN, NZL, etc. Source: Far left – European Union; middle – Government of Canada; far right – Australian Sustainable Finance Initiative. 13 Case Studies in E, S, and G: Market and Stakeholder Forces at Work We continue to take steps toward ESG integration in our Global Equity Research department. Our third annual ESG report offers targeted case studies that touch on examples of themes that are of crucial importance to all stakeholders today. Perspectives from our colleagues’ sector coverage are as follows: Environmental • Insights on Financial Institutions and the “E” of ESG – Meny Grauman, MA, CFA • Energy Transition Strategies Among Global Integrated Oil Companies – Paul Cheng, CFA • Corporate Leadership Through Disclosure: IGM Financial and Climate Change – Phil Hardie, P.Eng., MBA, CFA Social • COVID-19 and Inequality in LatAm: Elevating the “S” in ESG – Francisco Suarez • People, Planet, and Products: The Empire (Sobeys) Approach – Patricia Baker, MBA, PhD • Consequences of Mishandling Social Licence: Rio Tinto – Scotiabank GBM Mining and ESG Teams Governance • ESG Integration at Work: FirstEnergy Corp. – Andrew Weisel, CFA • ESG Integration at Work: SNC-Lavalin Group Inc. – Mark Neville, CFA 14 Environmental: Canada’s Climate Aims and Carbon Pricing Corridor Strengthened Climate Plan – 2020: Components Strengthened Plan – 2020: Carbon Pricing Corridor 2015 - Base mtCO2e 815 Agriculture mtCO2e -2 1% Transportation mtCO2e -12 4% Land mtCO2e -27 9% Waste and Other mtCO2e -28 9% Buildings mtCO2e -44 14% Heavy Industry mtCO2e -46 15% Electricity mtCO2e -47 15% Oil & Gas mtCO2e -104 34% 2030 - Target (New) mtCO2e 503 -- 2030 - Target (Old) mtCO2e 511 -- 2030 - New vs. Old % -1.6% -- 2030 - New vs. Base % -38.3% -- 2030 - 15-yr CAGR (New) % -3.2% -- Source for both exhibits: Based on Environment and Climate Change Canada data; Scotiabank GBM. 15 Social: Correlations Between Diversity and Performance – Gender Source: McKinsey & Company. 16 Social: Diversity Wins – Ethnicity Source: McKinsey & Company. 17 Governance: S&P/TSX Composite – Gender Diversity, 2019 70 Comm. Services 60 Consumer Disc. Health Care Consumer Staples Industrials Real Estate Utilities 50 Financials Materials Energy Info Tech 40 30 20 % Gender % Gender Diversity (Female) 10 0 1 11 21 31 41 51 61 71 81 91 101 111 121 131 141 151 161 171 181 191 201 211 221 231 Number of Companies (Ranked High to Low by GICS Sector) Board Executive Source: Refinitiv; Scotiabank GBM. 18 Items Reported in Five-Year Data Set Binary Affirmatives Numeric 140 140 120 120 5-Year Avg CAGR:10% 100 100 80 80 60 60 40 40 5-Year Avg CAGR:14% Number of Items Reported Items of Number 20 20 Number of Items Reported Items of Number 0 0 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Comm Services Cons Disc Comm Services Cons Disc Cons Staples Energy Cons Staples Energy Financials Health Care Financials Health Care Industrials Info Tech Industrials Info Tech Materials Real Estate Materials Real Estate Utilities Utilities Source for both exhibits: Refinitiv; Scotiabank GBM. 19 Scotiabank GBM’s Leading and Trending ESG Equities Leading (Flag Adjusted) Unadjusted Flag-Adjusted Total Total Company Industry Score Flags Company Industry Score • Canadian Imperial Bank of L Consumer Staples 81 CM Financials 75 Commerce (Financials) YRI Materials 80 CHP.UN Real Estate 75 CM Financials 75 AGI Materials 74 • Choice Properties REIT CHP.UN Real Estate 75 OTEX Information Technology 71 AGI Materials 74 REI.UN Real Estate 71 (Real Estate) RCI.B Communication Services 74 CVE Energy 71 OTEX Information Technology 71 ELD Materials 70 • Alamos Gold Inc. (Materials) REI.UN Real Estate 71 CRT.UN Real Estate 70 CVE Energy 71 CSH.UN Health Care 68 ELD Materials 70 CRT.UN Real Estate 70 CSH.UN Health Care 68 Trending (Flag Adjusted) Unadjusted Flag-Adjusted 1-Yr Over 1-Yr Over 5-Yr Avg 5-Yr Avg • Centerra Gold Inc. (Materials) Company Industry Increase Flags Company Industry Increase CG Materials 15 CG Materials 15 • Fortuna Silver Mines Inc. FVI Materials 13 FVI Materials 13 (Materials) CWB Financials 12 CWB Financials 12 CP Industrials 12 AGI Materials 11 AGI Materials 11 CPG Energy 11 • Canadian Western Bank CPG Energy 11 RNW Utilities 11 (Financials) RNW Utilities 11 NFI Industrials 11 NFI Industrials 11 NPI Utilities 10 NPI Utilities 10 REI.UN Real Estate 10 REI.UN Real Estate 10 Source: Refinitiv; Scotiabank GBM. 20 Additional Detail Analytical Framework Examples, Observations and Conclusions, and Questions How the Scores Are Derived Mechanics • Numerical items are ranked within each GICS sector on the basis of percentiles. • Percentiles are sorted into quartiles. • Aggregate policies and targets are ranked into quartiles, with positive data points being additive to scores. • Quartiles are assigned points: • Numerical items: +2 for top quartile, +1 for second quartile, -1 for third quartile, and -2 for fourth quartile. • Policies and targets: within each dimension of E, S, and G, the number of selected items that a company has implemented is summed and ranked versus its peers. Points are assigned as follows: +2 for top quartile, +1 for second quartile, -1 for third quartile, and -2 for fourth quartile within each E, S, and G dimension. • Numerical scores plus policy and target scores are aggregated to arrive at “total scores” for companies that have met a minimum threshold of disclosure (one-third of the numerical fields under study are assigned neither numerical nor total scores). • Normalized scores, ranging from 0 to 100, scale the company scores for comparability across sectors, based on the number of metrics evaluated under the framework for each one. • Overall rankings are established, with the companies ranked by total scores (composite only). Note: The rankings and conclusions in this report are based on quantitative data. Scotiabank GBM’s covering fundamental analyst may issue a recommendation or publish opinions that differ