The latest United Nations report on climate change is urging immediate action to avert a global catastrophe in the decades to come.
For government, business and the general public, to ignore this warning is, well, irresponsible. The same can be said for investors, their portfolios and, even more so, their advisors.
The traditional metrics guiding investment – business fundamentals, macroeconomics and financial statements – remain important. But advisors who ignore the impact of environmental and related concerns on their practice will likely struggle to grow their client base, particularly with younger generations, says a board member of Canada’s leading organization for responsible investing, or RI for short.
What’s more, they may even lose clients as more investors seek to align their portfolios with environmental and social justice concerns, says Patti Dolan, a Calgary portfolio manager on the board of the Responsible Investment Association (RIA), a national body providing RI certification for advisors.
Put simply, responsible investment is quickly becoming a must-have skill for advisors.
“It’s almost a fiduciary duty to understand responsible investing issues and the impact of these concerns on clients’ portfolios,” says Ms. Dolan, an investment advisor with SAGE Connected Investing with Raymond James. “It’s like the perfect storm because there are a lot of things happening at once.”
RIA statistics show a growing number of investment managers now take ESG (environmental, social and governance) issues, such as climate-change mitigation and respecting Indigenous rights, into account when making investment decisions. This is reflected by the rapid growth of assets managed using RI strategies, now more than $1.5-trillion in Canada alone, as of the end of 2015, an increase of almost 50 per cent since 2013.
The lion’s share involves institutional money, whose managers are guided by ESG mandates. But individual investors are also seeking more RI options. Over the same span, individual investors’ RI assets reached $118-billion in Canada – a 91-per-cent increase from 2013. Millennials are driving this growth, according to an EY report from 2016, being twice as likely as other demographics to invest according to social and environmental outcomes.
Yet interest is widespread. Among those seeing demand from clients is Winnipeg wealth manager Uri Kraut with CIBC Wood Gundy. “I have personally found more clients are asking about this in principle,” says Mr. Kraut whose clients, like most other advisors, tend to skew older.
Part of the challenge for advisors is understanding what RI means in the eyes of their clients because so many variations and options exist.
“An exploratory conversation” is essential “where we identify key issues that they either want to support or [investments they do not want] to have in their portfolio,” says Mr. Kraut, who recently got his responsible investment advisor certification.
Investors, for example, might want to avoid investing in, or want to divest of, companies involved in oil and gas.
This is often referred to as “negative screening,” says J.P. Harrison, president of Genus Capital Management, which provides responsible investment management services for high-net-worth and institutional clients.
Still, Ms. Dolan says advisors can help clients understand the value of different strategies. That includes ESG-driven approaches, which often allow for a more diversified portfolio that could include oil and gas companies. Central to ESG-focused investing is engagement, in which advisors work with other money managers to change corporations’ policies.
“So you’re buying really good companies, and if they’re going off the tracks, you actually engage the executive” through shareholder activism, including proxy voting for resolutions at annual general meetings.
Mr. Harrison says advisors may find clients are not content to have a portfolio of firms meeting ESG principles while avoiding others operating in industries that don’t align with their values.
Rather they want to invest in companies doing good with the products and services they make. “These might include green bonds where, for example, a province might issue debt to finance a new transit project.”
Often referred to as impact investing, advisors have had few options in the past, especially in public markets. “But there are more coming, and that’s an area of growth,” he says.
Already, a number of exchange-traded funds (ETFs) listed in the United States offer access to impact investing strategies. These include iShares MSCI KLD 400 Social ETF, which tracks 400 firms making positive contributions to environmental and social challenges.
More broadly, considerations for RI have become not unlike discussions with clients around asset allocation. Only rather than ensuring the portfolio is diversified by investing in stocks, bonds and cash, “you classify product in three buckets – ESG integrated solutions, negative screened solutions and positive impact solutions,” Mr. Harrison says.
This speaks to the notion of having that “conversation with clients … about to what extent they want sustainability built into their investment approach.”
What shouldn’t be a concern is performance – at least from an ESG perspective. Ms. Dolan points to the performance of the Jantzi Social Index, which tracks Canadian large-cap companies that meet ESG criteria.
“It’s been around since 2000, and if you look at the performance for the last 18 years, it’s actually outperformed the TSX Composite by about a half of a per cent year over year.”
Keeping abreast of the changing landscape “takes a bit of work, but you don’t have to do it all yourself,” Mr. Harrison says. Research providers such as MSCI and Sustainalytics can “help advisors connect the dots.”
Additionally, they can upgrade their skills through organizations like the RIA, which offers the responsible investment advisor certification that Mr. Kraut and Ms. Dolan have.
At the very least, advisors must be able to carry on informed conversations with clients, particularly when it comes to the next generation of wealth.
“When they’re dealing with Generation X and others who are going to inherit older clients’ assets,” these discussions inevitably arise, Ms. Dolan says.