The number of sustainable investment products and assets under management (AUM) have continued to grow during the COVID-19 pandemic, providing more options for financial advisors looking to add responsible investments to their clients’ portfolios.
Sustainable investments – which include investment funds focused on environmental, social and governance (ESG) factors or companies making an impact in specific areas such as diversity and inclusion or climate change – have reached about $8.8-billion in AUM in Canada in 92 funds (excluding fund of funds) as of June 30, according to data from Morningstar Canada. That’s up 13 per cent from $7.8-billion, or 72 funds, as of Dec. 31, 2019.
The majority of sustainable investment funds in Canada, or 63 of the 88 that Morningstar Canada tracks, have also outperformed their peers for the first half of the year, “providing an acute observation that investing sustainably does not necessarily come at the expense of returns,” says Ian Tam, director of investment research at the Toronto-based firm.
Morningstar Canada’s research conducted over the past decade shows that sustainable investing “is not detrimental to investor outcomes,” Mr. Tam says, despite concern among some investors that responsible investing means sacrificing returns.
For advisors, the challenge is determining which type of sustainable investments are best suited to their clients, such as a fossil-fuel-free fund or something with a broader ESG mandate. Then, advisors need to ensure that the investments they choose are in areas they believe will perform well in the long term and aren’t a short-term fad that may fade quickly.
“We spend a lot of time thinking about themes versus trends,” says Martin Grosskopf, vice-president and portfolio manager, sustainable investing, at AGF Investments Inc. in Toronto, who manages AGF Global Sustainable Growth Equity Fund. “Trends you want to be careful about, themes you want to invest in … [because] themes won’t dissipate over time.”
Examples of longer-term sustainability themes include clean energy, carbon reduction and waste management, Mr. Grosskopf says.
Specifically, he points to well-known renewable energy companies such as Brookfield Renewable Partners LP (BEP-UN-T), which he holds in the AGF fund, as well as Innergex Renewable Energy Inc. (INE-T), Northland Power Inc. (NPI-T) and Algonquin Power and Utilities Corp. (AQN-T).
“These [companies] are solid, long-term opportunities,” Mr. Grosskopf says. “For some [investors], they were considered too boring to own. [But] these companies generate very good yield on long-term contracts and their opportunities are growing because their cost of capital is coming down.”
There’s also more investments in renewable projects, he says, “driven by government objectives and corporate decarbonization efforts.”
The AGF fund also holds other environmentally friendly companies that are part of the trend toward carbon and waste reduction, including Ecolab Inc. (ECL-N), which provides water and energy technologies and services, as well as Trex Co. Inc. (TREX-N), which recycles plastics bags and turns them into composite decking products.
“I would encourage [advisors] to look at these areas as long-term opportunities,” Mr. Grosskopf says of sustainable investing themes, in general.
Tim Nash, an independent investment coach at Good Investing in Toronto, says diversity and inclusion – which fall under the “S” and “G” part of ESG investing – are also expected to be important sustainable investing themes in the years to come.
He says more companies are making commitments to do better in this area, particularly in the wake of the social unrest following the police killing of George Floyd in the U.S.
The COVID-19 crisis has also highlighted income and health inequalities that exist in many countries around the world.
“[These events] have put a magnifying glass on the inequities that exist in our society,” Mr. Nash says. “People are saying, ‘Enough.’ It’s a bit of a breaking point.”
Companies are being forced to respond to calls for social justice, and Mr. Nash says investors are watching. And those that take action are more likely to outperform their peers who do little or nothing, over the long term.
Still, he cautions advisors and investors to do their homework on investments that claim to be ESG friendly. Some investment funds may not live up to their claims, while others may turn out to not fit investors’ values in other areas. For example, an ESG fund might hold gun, tobacco or gambling stocks, which an investor may be opposed to.
“It’s not always transparent,” Mr. Nash says. “It’s up to investors and advisors to do their due diligence and look under the hood of these products because they are different and use different methodologies. Also, look at the companies that are inside.”