Canadians seeking to infuse their portfolios with their values—be it mitigating climate change or promoting diversity and inclusion—have a smorgasbord of investments to choose from, and the universe is expanding. Call it sustainable investing’s big bang.
A study from the Responsible Investing Association of Canada (RIA) showed that 28 new responsible investing (RI) mutual funds and exchange-traded funds (ETFs) launched in the first quarter of this year alone. Another 14 were introduced in the second quarter, making 42 for the first half of 2022. That’s on top of the 77 new RI funds launched in 2021. And no shortage of money is being allocated to them, with about $4.1-billion in net inflows in sustainable funds in the first half of this year.
“The product availability is significantly more than it was 10 or 15 years ago,” says Catherine Philogene, vice-president and responsible investment specialist with RBC Global Asset Management in Toronto.
Today’s sustainable investment universe consists of a wide range of strategies. There are funds that include companies with strong environmental, social and governance (ESG) performance, regardless of sector. Other “ethical” mutual funds exclude sin stocks such as tobacco, and divest from oil and gas. Still others take thematic approaches, such as ETFs focused on clean energy.
More recent additions to the market include impact investment funds that target specific goals like supporting affordable, green housing, Ms. Philogene says.
More choice means more careful sorting
While responsible investors have more choice than ever, the trick is sorting through the options to find the right products for a portfolio, says Naveed Mohammed, vice-president and head of investment manager research at BMO Private Wealth.
A benefit of the expanding options is the ability to combine broad-based funds with more targeted thematic and impact funds, to build more well-rounded, sustainable portfolios.
It’s a spin on the “core-and-explore” approach. The majority of investors’ portfolios remain diversified, while adding the best-in-class of ESG, and capitalizing on fast-growing trends in RI, such as solar ETFs.
Most investors will see some measure of sustainability in their portfolios regardless of their values because ESG strategies are increasingly part of an asset manager’s risk assessments of securities, Ms. Philogene says.
She says investors seeking more exposure to sustainable trends with long-term growth arcs—such as electric vehicles or green infrastructure—will continue to have more choice of funds in this space, particularly as these sectors garner more public and private capital.
With the array of choices, cutting through the noise is another challenge. “It’s just difficult for investors to understand what all the different terminology means,” Mr. Mohammed says. “There is an education process involved before making those choices.”
One issue is ensuring that the funds investors choose are indeed as advertised. Ms. Philogene says investors should still have some worries about greenwashing, where funds are misleadingly promoted as “ESG” or “sustainable.”
Even over-hyped marketing is now less of a concern with regulators issuing guidelines on proper ESG disclosure, she adds. In July, the Canadian Investment Funds Standards Committee also released its framework for identifying responsible investments.
“That’s another way to compare and identify products across the responsible investment spectrum, which should be helpful for investors and advisers,” Ms. Philogene says.
There are also organizations, such as Corporate Knights Canada, that research, rate and rank publicly traded companies and investment funds on their sustainability.
“Five years ago, you could maybe find just a few options that were bonafide sustainable investments,” says Toby Heaps, chief executive officer of Corporate Knights Canada. “The product is getting better because the bar is rising.”