A growing number of investors want to generate income and returns while investing in products that align with their values. How can they achieve both?
Investing with a focus on environmental, social and governance (ESG) factors has become more mainstream. Brianne Gardner, wealth manager and investment advisor with Velocity Investment Partners at Raymond James Ltd. in Vancouver, calls it “less of a fad and more of an economic transformation strategy.”
A Deloitte study from April 2022 found that ESG-mandated assets, at their current growth rate, will represent half of all professionally-managed assets globally by 2024. “ESG incorporation may no longer be a differentiator for investors, but rather a standard input for consideration in the investment decision-making process,” the study stated.
However, there are many shades of green when it comes to ESG factors and investing. More investors now understand the risk of “greenwashing,” which refers to misleading or vague comments companies make about their ESG processes.
Paul MacDonald, chief investment officer and portfolio manager at Harvest Portfolios Group Inc., says it can be a challenge for investors to navigate the ESG landscape, avoid greenwashed products and find investments that suit their unique needs.
The firm’s new Harvest ESG Equity Income Index ETF HESG-T is designed to provide investors with monthly income and market growth prospects from an equity income portfolio constructed with a clear ESG screening process, he says.
“Harvest ESG Equity Income Index ETF follows an index that has strict exclusionary factors that are systematic, allowing investors to understand the ESG processes used in selecting the underlying securities easily,” Mr. MacDonald says.
In applying these screens, Harvest also recognizes that many investors are thinking about socially responsible investing (SRI). “There’s often a blurred green line between SRI and ESG,” Mr. MacDonald says.
This investment space has typically been dominated by equities aimed at generating capital growth. “We’re filling a void in the marketplace for an ESG screened equity income portfolio that offers high monthly cash flows,” Mr. MacDonald says.
Increasingly, investors are looking for income and returns from a variety of ESG-focused products. In July 2022, the Index Industry Association reported on a survey of investment management firms throughout the U.S. and Europe, which found that 76 per cent of asset managers implement ESG within fixed income (up from 42 per cent in 2021) and 74 per cent incorporate ESG in equities (up from 53 per cent in 2021).
Responsible investors are also calling for information and products they can trust. In August 2022, the World Economic Forum (WEF), in collaboration with EY, published an article that said “the ESG movement is at a make-or-break moment.” While investor interest has grown to historically high levels, the WEF said, there’s still varied perspectives on how to define ESG, and on the type of information that should inform capital allocation. “Market forces will increase demand for robust, independent external assurance over sustainability information in the coming years,” the article concluded.
HESG will seek to track the performance of the Solactive ESG US Equity Index TR. The index incorporates a stringent process that excludes certain areas of the market such as tobacco and fossil fuels, and incorporates norms-based criteria to screen for compliance around standards such as business ethics and diversity. It then eliminates select companies based on their aggregate ESG scores. The ETF will hold the 30 largest companies that meet these screening criteria.
Mr. MacDonald says the Harvest ETF will also apply SRI proxy voting policies, using external experts to monitor them.
HESG is a welcome addition to the sustainable income space, which in recent years has seen a proliferation of ESG-compliant debt instruments.
“An ESG equity income ETF like Harvest’s opens new corridors for investors who are seeking relatively high income,” says Prem Malik, an investment advisor with Queensbury Securities Inc. in Toronto.
The Harvest offering will write covered-call options on up to 33 per cent of the securities to enhance income, says Mike Dragosits, portfolio manager at Harvest ETFs. “The level of covered-call option writing may vary based on market volatility and other factors.”
The covered-call strategy is designed to generate additional cash flow and provide enhanced monthly distributions. It’s also a tax-efficient strategy as the income generated from using covered calls is taxed generally as capital gains.
“Many Canadians want to invest to reflect their values but also require a steady income,” Mr. MacDonald says. “Harvest ESG Equity Income Index ETF addresses both needs in a single ETF, while delivering the long-term equity income approach for which we are known.”
Advertising feature produced by Globe Content Studio with Harvest Portfolios Group. The Globe’s editorial department was not involved.