Investors are eager for information on RI, yet the topic rarely comes up in conversations with financial advisors.Drazen Zigic/Getty Images
Canadian investors are a curious lot when it comes to responsible investing (RI). Nearly three in four Canadians want more information about investing with environmental, social and governance (ESG) performance in mind, according to a survey from the Responsible Investment Association. Yet only about three in 10 said their financial advisor had broached the subject, and 70 per cent said they knew little RI.
If you’re hungry for RI know-how, here are four questions to ask an advisor.
1. What do RI strategies entail and what investments are there to choose from?
With so many approaches to RI, this form of investing can intimidate investors, says Agnes Balcerzak, a certified responsible investment specialist (RIS) with IG Wealth Management in Winnipeg. She says two basic concepts encompass most RI strategies: negative screening and positive screening.
Negative screening means excluding certain industries or companies from a portfolio, based on ethics. So that often knocks out the likes of fossil fuel companies, tobacco producers or weapons manufacturers. With positive screening, you include firms that are ESG leaders in their sector, or that are involved in industries like clean energy.
Another strategy is impact investing, which backs companies or funds whose goals is to address specific environmental or social problems, along with generating solid returns. Additionally, investors can choose from thousands of thematic exchange-traded funds (ETFs) focused on wind or solar power, and broad-based ESG funds.
“First and foremost, it’s important to define your values,” says Stephen Whipp, an RIS with Leede Jones Gable in Victoria. “Then think about what companies you want to own based on these values, like mitigating climate change, and look to build a portfolio that holds these companies.”
2. Is RI more risky than typical investment strategies?
That’s a common misconception, says Aimee Palmer, an RIS and vice-president of sales at Aviso Wealth in Winnipeg. If anything, she says broad-based, diversified RI strategies – ones that hold companies with the top ESG performance among their peers – can help asset managers make more informed decisions to mitigate risks.
She says companies with high governance scores are typically well managed and have transparent financial reporting. Equally important, RI generally addresses material risks ranging from climate change to supply chain disruptions.
3. Is RI more profitable than non-RI strategies?
Corporations that are strong ESG performers stand out at a time when governments are tightening emissions regulations, and consumers are demanding more sustainable products, services and operations.
“Net-zero strategies, employee satisfaction and executive compensation are just some ESG issues material to companies’ reputation and their ongoing ability to maximize profits,” says Tim Nash, a Toronto fee-only financial planner offering RI strategies at Good Investing.
That means RI can lead to greater long-term profitability, he says. What’s more, data show RI strategies can outperform.
Ms. Balcerzak points to 2022 findings from Morningstar that showed 42 per cent of RI funds outperformed the average return for their respective asset class over the last five years. That’s despite 2022 being a year of economic uncertainty, affecting RI’s appeal. Another recent study from UK-based global asset manager abrdn plc found companies with high ESG scores had lower volatility and better valuation long-term.
4. As an adviser, how do you approach RI?
Guidelines from the Investment Industry Regulatory Organization of Canada encourage financial advisors to collect information from clients about their investment goals relating to ESG criteria or their other personal values. So your advisors should be asking you about that and accounting for those preferences when building a plan for you.
“The process should always start with clients to understand what is most important to them,” says Ms. Balcerzak.
Then, you can discuss specific strategies that are aligned with your value and objectives. You can also ask if your advisor has specific experience in RI, says Mr. Whipp. Those who do might have professional designations, such as responsible investment advisor certification (RIAC) for investment advisors and portfolio managers, or RIS for licensed mutual fund advisors.
To learn more about RI on your own, Mr. Whipp suggests starting with the website of the Responsible Investment Association. They have resources for beginners and publish their own reports as well as independent studies from other organizations.