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Sustainable and/or ESG investing can generally be characterized as investing that takes into account a more holistic view of a company's performance, incorporating not only traditional financial metrics but, importantly, non-financial metrics and characteristics that may be indicators or drivers of risks and opportunities associated with a particular company or investment.
Taking into account non-financial metrics has become increasingly relevant as economies and companies have moved towards being knowledge-based, such that a firm's value is increasingly comprised of intangible assets that are not traditionally accounted for in financial statements (such as intellectual property, brand, a skilled workforce, etc.). ESG or sustainable investing therefore looks to identify and quantify these intangible, non-financial features as drivers of risk and/or return for a particular company or investment.
ESG can also include investing that is based on values. In this case, investors are seeking to align their investments with their personal or organizational values. Value-based investing can take two forms: investing in companies, asset classes or sectors that provide outcomes aligned with one's values (ranging from renewable energy and positive social impacts to environmental protection or restoration); or divesting from certain companies or asset classes or sectors. Typical examples include tobacco, arms manufacturing, alcohol, coal mining, etc.
"ESG" stands for Environmental, Social and Governance. These factors are used to evaluate companies and countries, based on how they comply with sustainability principles.
Environmental factors include the contribution a company makes to climate change through greenhouse gas emissions, along with waste management and energy efficiency.
Social factors include human rights, labour standards in the supply chain, any exposure to illegal child labour, and more routine issues such as adherence to workplace health and safety rules.
Governance factors refer to a set of rules defining rights, responsibilities and expectations among the various stakeholders in corporations. A well-defined corporate governance system can be used to support a company's long-term strategy.
Proper and transparent corporate governance can help avoid conflicts of interest between the company's stakeholders as well as potential litigation.
The following items detail some of the benefits from sustainable investing:
Financial performance: There is growing evidence that sustainable investing can lead to outperformance, particularly over the longer term, versus investments that do not specifically look at ESG factors. This is most evident when ESG indices are compared with non-ESG benchmark indices.
Improve risk management: Because financial statements do not traditionally capture intangible risk/reward factors, incorporating analyses of non-financial risk/reward considerations can help improve risk management.
Alignment with investing values: The ability to align investment objectives with values is another key feature of sustainable investing. While traditionally seen as important to millennial investors, this ability to create value and values alignment is now gaining traction with Generation X and Baby Boomer investors.
An investor reads about ABC Inc. increasing R&D expenditures to help protect the environment and create a greener future. The company's actions align with the investor's beliefs, and he or she wishes to invest in ABC Inc. using call options.
The investor buys calls as a way to profit from a positive outlook on the underlying stock's price, without the risk and upfront capital outlay of outright stock ownership.
The smaller initial outlay also gives the buyer a chance to achieve larger percentage gains (i.e., greater leverage).
Maximum gain: The profit potential is theoretically unlimited. If the stock price rises as expected, the investor could either sell the option at a profit, or exercise it and purchase stock at the strike price.
Maximum loss: The maximum loss is limited and will be incurred if the investor is still holding the call at expiration and the stock is trading below the strike price. In this case the option will expire worthless, and the investor's loss will be the price paid for the call option.
If an investor is holding a stock that is exposed to ESG risk, put options can be used to help offset that risk. To establish the hedge, one will need to calculate the magnitude of the impact of the ESG risk on the share price.
A put option added to a long stock position insures the stock's value. This strategy is called a "protective put." It establishes a "floor" price under which the value of the investor's stock cannot fall. If the stock price keeps rising, the investor benefits from the upside gains. Yet no matter how low the stock might fall, the investor can exercise the put to liquidate the stock at the strike price. If the stock falls below the strike, as originally feared, the investor has several choices:
Maximum loss: The maximum loss is limited. The worst that can happen is for the stock to drop below the strike price. It does not matter how far it goes below; the put caps the loss at the strike price.
Maximum gain: In theory, the potential gains on this strategy are unlimited. The best that can happen to this position is for the stock price to rise to infinity. If the stock price rises sharply, it does not matter that the put expires worthless.
The put option can provide protection against a downturn during the term of the option. The drawback of this strategy is its cost, which raises the stock's cost basis.
This can be achieved by aligning your values with your investment decisions and improving your risk management.
The use of options can provide investors with a customizable and sustainable investment solution that aligns their financial goals with their environmental, social and governance values.
Company-specific ESG factors can be used in option pricing models.
By leveraging the benefits found in options, investors can now easily obtain or modify their exposure to a particular security or ETF that resonates with their ESG values. Or they can even purchase specific stocks or ETF insurance on the ESG factors that the investor believes the particular security is exposed to.
Regardless of whether an investor has a bullish or bearish outlook, there will be an option strategy that will allow them to integrate sustainable metrics into their investment objectives. To see all the options available and listed by the Exchange, click here.
The Montreal Exchange offers a wide range of educational content and trading tools on options. To learn more about options, visit: m-x.ca/education.
Amid growing concerns of climate change, demographic shifts and regulatory changes, sustainability is rapidly reshaping the investment landscape. The assets under management of ESG funds have risen exponentially and the need for sophisticated and aligned financial benchmarks, products and services is increasing.
Alignment with ESG Strategies and Commitments
ESG version of established benchmark indices enabling investors to align with ESG strategies or UN PRI objectives.
Capital Efficiency
Efficient way to manage fund inflows and outflows while remaining fully invested in ESG strategies.
Risk Management
Liquid and cost-efficient way to gain or manage exposure to ESG risks and opportunities.
Seamless and Simple Integration
Efficient transition to ESG is facilitated through the Basis Trade on Close (BTC) functionality and low tracking error to SXF.
S&P/TSX 60 ESG Index Futures Specifications | |
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Underlying Index | S&P/TSX 60 ESG Index |
Multiplier | C$50 times the S&P/TSX 60 ESG Index Futures contract size |
Expiry cycle | March, June, September, December |
Price quotation | Quoted in index points, expressed to two decimals |
Minimum price fluctuation |
|
Contract type | Cash settlement. The final settlement price is the official opening level of the underlying index on the final settlement day. |
Last trading day | Trading ceases on the trading day prior to the final settlement day. |
Position reporting threshold | 1,000 contracts gross long and short in all contract months combined. |
Position limit | No limit |
Final settlement day | The third Friday of the contract month, provided it is a business day. If it is not a business day, final settlement will occur on the preceding business day. |
Trading hours |
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Symbols |
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S&P/TSX Composite ESG Index Futures | |
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Underlying Index | S&P/TSX Composite ESG Index |
Multiplier | C$5 times the S&P/TSX Composite ESG Index Futures contract value |
Expiry cycle | March, June, September, December |
Price quotation | Quoted in index points, expressed to two decimals |
Minimum price fluctuation |
|
Contract type | Cash settlement. The final settlement price is the official opening level of the underlying index on the final settlement day. |
Last trading day | Trading ceases on the trading day prior to the final settlement day. |
Position reporting threshold | 1,000 contracts gross long and short in all contract months combined. |
Position limit | No limit |
Final settlement day | The third Friday of the contract month, provided it is a business day. If it is not a business day, final settlement will occur on the preceding business day. |
Trading hours |
*A trading range of -5% to +5% (based on previous day's settlement price) has been established only for this session |
Symbols |
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Through our partnership with Standard & Poor's Index Services we administer, calculate or publish eight sustainable finance indices. The index may have more names, but the tables below display the top 10 constituents that have options and futures available. Click on each block for more details.
Data is based on end-of-day values
Constituent Name | Symbol | Options Symbol | Futures Symbol |
---|---|---|---|
5N Plus Inc. | VNP | ||
Algonquin Power & Utilities Corp. | AQN | AQN | FQN |
Ballard Power Systems Inc. | BLDP | BLDP | |
Boralex Inc. Class A Shares | BLX | BLX | |
Brookfield Renewable Partners L.P. | BEP.UN | BEP | |
Cascades Inc. | CAS | CAS | |
Clearwater Seafoods Incorporated | CLR | ||
DIRTT Environmental Solutions Ltd. | DRT | DRT | |
EcoSynthetix Inc. | ECO | ||
Innergex Renewable Energy Inc. | INE | INE | |
NFI Group Inc. | NFI | NFI | |
Northland Power Inc. | NPI | NPI | |
Pinnacle Renewable Energy Inc. | PL | ||
Polaris Infrastructure Inc. | PIF | ||
SunOpta Inc. | SOY | SOY | |
TransAlta Renewables Inc. | RNW | RNW | |
Village Farms International Inc. | VFF | VFF | FFQ |
Westport Fuel Systems Inc. | WPRT | WPRT |
Data is based on end-of-day values.
Constituent Name | Symbol | Options Symbol | Futures Symbol |
---|---|---|---|
Bank of Montreal | BMO | BMO | FBO |
Bank of Nova Scotia (The) | BNS | BNS | FNS |
Barrick Gold Corporation | ABX | ABX | FBA |
Canadian National Railway Company | CNR | CNR | FCN |
Enbridge Inc. | ENB | ENB | FEB |
Royal Bank of Canada | RY | RY | FRY |
Shopify Inc. Class A Subordinate Voting Shares | SHOP | SHOP | FSH |
TC Energy Corporation | TRP | TRP | FRP |
TELUS Corporation | T | T | FTC |
Toronto-Dominion Bank (The) | TD | TD | FTD |
Constituent Name | Symbol | Options Symbol | Futures Symbol |
---|---|---|---|
Bank of Montreal | BMO | BMO | FBO |
Bank of Nova Scotia (The) | BNS | BNS | FNS |
BCE Inc. | BCE | BCE | FBC |
Brookfield Asset Management Inc. Class A Limited Voting Shares | BAM.A | BAM | FBM |
Canadian National Railway Company | CNR | CNR | FCN |
Canadian Pacific Railway Limited | CP | CP | FCP |
Enbridge Inc. | ENB | ENB | FEB |
Royal Bank of Canada | RY | RY | FRY |
Shopify Inc. Class A Subordinate Voting Shares | SHOP | SHOP | FSH |
Toronto-Dominion Bank (The) | TD | TD | FTD |
Data is based on end-of-day values.
Constituent Name | Symbol | Options Symbol | Futures Symbol |
---|---|---|---|
Bank of Nova Scotia (The) | BNS | BNS | FNS |
Barrick Gold Corporation | ABX | ABX | FBA |
Brookfield Asset Management Inc. Class A Limited Voting Shares | BAM.A | BAM | FBM |
Canadian National Railway Company | CNR | CNR | FCN |
Canadian Pacific Railway Limited | CP | CP | FCP |
Enbridge Inc. | ENB | ENB | FEB |
Royal Bank of Canada | RY | RY | FRY |
Shopify Inc. Class A Subordinate Voting Shares | SHOP | SHOP | FSH |
TC Energy Corporation | TRP | TRP | FRP |
Toronto-Dominion Bank | TD | TD | FTD |
Data is based on end-of-day values.
Constituent Name | Symbol | Options Symbol | Futures Symbol |
---|---|---|---|
Bank of Nova Scotia (The) | BNS | BNS | FNS |
Barrick Gold Corporation | ABX | ABX | FBA |
Canadian National Railway Company | CNR | CNR | FCN |
Canadian Pacific Railway Limited | CP | CP | FCP |
Enbridge Inc. | ENB | ENB | FEB |
Franco-Nevada Corporation | FNV | FNV | FFV |
Royal Bank of Canada | RY | RY | FRY |
Shopify Inc. Class A Subordinate Voting Shares | SHOP | SHOP | FSH |
Toronto-Dominion Bank (The) | TD | TD | FTD |
Wheaton Precious Metals Corp. | WPM | WPM | FPM |
Data is based on end-of-day values.
Constituent Name | Symbol | Options Symbol | Futures Symbol |
---|---|---|---|
Bank of Nova Scotia (The) | BNS | BNS | FNS |
Barrick Gold Corporation | ABX | ABX | FBA |
BCE Inc. | BCE | BCE | FBC |
Brookfield Asset Management Inc. | BAM.A | BAM | FBM |
Canadian National Railway Company | CNR | CNR | FCN |
Enbridge Inc. | ENB | ENB | FEB |
Royal Bank of Canada | RY | RY | FRY |
Shopify Inc. | SHOP | SHOP | FSH |
TC Energy Corporation | TRP | TRP | FRP |
Toronto-Dominion Bank | TD | TD | FTD |
Data is based on end-of-day values.
Constituent Name | Symbol | Options Symbol | Futures Symbol |
---|---|---|---|
Bank of Montreal | BMO | BMO | FBO |
Bank of Nova Scotia (The) | BNS | BNS | FNS |
BCE Inc. | BCE | BCE | FBC |
Brookfield Asset Management Inc. | BAM.A | BAM | FBM |
Canadian National Railway Company | CNR | CNR | FCN |
Canadian Pacific Railway Limited | CP | CP | FCP |
Enbridge Inc. | ENB | ENB | FEB |
Royal Bank of Canada | RY | RY | FRY |
Shopify Inc. Class A Subordinate Voting Shares | SHOP | SHOP | FSH |
Toronto-Dominion Bank (The) | TD | TD | FTD |
Data is based on end-of-day values.
Constituent Name | Symbol | Options Symbol | Futures Symbol |
---|---|---|---|
Bank of Nova Scotia (The) | BNS | BNS | FNS |
Barrick Gold Corp. | ABX | ABX | FBA |
BCE Inc. | BCE | BCE | FBC |
Canadian National Railway Company | CNR | CNR | FCN |
Enbridge Inc. | ENB | ENB | FEB |
Franco-Nevada Corporation | FNV | FNV | FFV |
Royal Bank of Canada | RY | RY | FRY |
Shopify Inc. Class A Subordinate Voting Shares | SHOP | SHOP | FSH |
Toronto-Dominion Bank (The) | TD | TD | FTD |
Wheaton Precious Metals Corp. | WPM | WPM | FPM |
* The above list of index constituents are the top 10 by index weight that have derivatives available on the Montréal Exchange.
There are over 30 Sustainable ETFs listed on the TSX representing over $1 billion of assets under management.
Sustainable Bonds are similar to traditional bonds in that they are issued for a fixed period of time, pay an interest rate coupon to the owner and are backed by the issuing entity's credit rating. Sustainable bonds differ from traditional bonds in that the proceeds of the bond issuance, the management of the proceeds and the reporting on the usage of proceeds are made transparent. Additionally, sustainable bonds, such as those made available for trading by the TSX, are all required to have a second opinion performed by a recognized 3rd party firm.
Transition finance is a rapidly emerging theme in Canada and globally. Transition finance broadly refers to investments and/or investing in companies, projects and activities that enable energy intensive companies/industries to lower their GHG emissions profile. Companies and/or projects that are seeking transition financing would typically not qualify for traditional forms of green finance, such as green bonds, as the underlying activity would still produce emissions, albeit a lower amount.
Some companies have already made public commitments to embark on a transition pathway by announcing their intent to achieve net-carbon neutrality. The following is a list of companies that have made such a commitment, and a list of their associated derivative instruments that are available to trade on the Montréal Exchange.
Net-Carbon Neutral Committed Companies | Options | Futures |
---|---|---|
Maple Leaf Foods Inc. | MFI | |
Cenovus Energy Inc. | CVE | FVE |
MEG Energy Corp. | MEG | |
Teck Resources Limited | TECK | FTK |
Wheaton PM Corp. | WPM | FPM |
Enbridge Inc. | ENB | FEB |
Aritzia Inc. | ATZ |
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