This article is the fourth in a series on the challenges and opportunities in environmental, social, and governance investing, and the great divisions in the investment industry on the attitudes to, and acceptance of, this rising trend.
Investment fund companies are increasing their efforts and focus on sustainable investing to meet surging demand from investors who are increasingly concerned about climate change and social justice as well as to stay ahead of evolving regulations.
Specifically, these firms are making sustainability a pillar of their future growth by adding products and expertise around environmental, social, and governance (ESG) and revamping investment policies and procedures.
The numbers prove it. The value of sustainable funds in Canada hit $18-billion at the end of the first quarter, a 160-per-cent increase over a year earlier, according to data from Morningstar Canada. There were 156 sustainable funds at the end of March, up from 105 at the same time last year.
“It’s a huge boost in assets and it will continue to grow,” says Ian Tam, director of investment research at Morningstar Canada in Toronto.
NEI Investments Inc. and RBC Global Asset Management (GAM) continue to dominate this space, but Mr. Tam says firms like BMO Global Asset Management and Mackenzie Investments have moved up quickly in terms of assets under management.
As firms increase their market share in this area, they’re investing in ESG tools to help advisors analyze and devote more time and energy to these funds.
“The topic seems to be hitting the agenda of boardrooms and executive committees in most firms,” says Katie Walmsley, president of the Portfolio Management Association of Canada in Toronto, which represents 290 asset management firms in the country.
She says the focus has also evolved from mostly environmental to include the social and governance areas of ESG.
Specifically, Ms. Walmsley notes that firms are largely focused on three areas: developing ESG policies, using data to make ESG decisions, and finding the expertise to support broader sustainable investing initiatives.
“In the early days of ESG, it tended to be more on the public relations and marketing side of the business,” Ms. Walmsley says. “There’s still a role for that there in terms of effectively communicating the company’s policy, but it’s moved much more into the investment team and how do they incorporate that ESG thinking into their processes.”
Compliance and legal teams are also paying closer attention to ESG funds being launched and new strategies to ensure they meet the sustainability promise, she says.
Jennie Baek, partner and corporate securities lawyer at McMillan LLP in Toronto, who specializes in the investment fund and asset management space, says firms delving deeper into ESG need to be strategic and authentic as well as avoid any perception of “greenwashing,” especially in light of increased regulatory scrutiny in this area.
“A lot of firms are feeling this pressure to incorporate ESG or have an ESG response,” Ms. Baek says. “It’s not just about changing the name of your fund or marketing your ESG strategies – it’s about figuring out what you want to do in the space and then ensuring that you are actually doing it.”
How firms are devoting more resources to ESG
An example of how firms are boosting their ESG proposition can be found at Mackenzie Investments, which hired Andrew Simpson in April as senior vice-president portfolio manager from Vancity Investment Management. He will lead the firm’s newest sustainability-focused investment boutique.
The announcement came about four months after Mackenzie Investments acquired Greenchip Financial Corp., which specializes in environmental thematic investing.
Fate Saghir, head of sustainable, responsible and impact investing at Mackenzie Investments, says the firm is hiring more ESG analysts and other experts and plans to add to its current roster of seven ESG funds later this year – moves driven by increased interest from investors.
The firm is also boosting communication and education for the 30,000-plus advisors who sell its funds on how to talk to clients about ESG in a way that aligns with their goals and values.
“We’re still early in our journey,” she says. “We are 14 months in and we have a lot more work to do.”
Meanwhile, Vancity, considered a pioneer in the ESG space after having launched Canada’s first socially responsible investment mutual fund in 1986, is using its history and smaller size to make the transition to a responsible investment (RI)-only shop by early 2022.
Joe Reid, the credit union’s vice-president of wealth management and impact investing, says the organization is mostly there with its mutual funds and individual securities and is working on finalizing the move for its separately managed accounts.
As there are no national standards for ESG investments at this time, Mr. Reid says Vancity is basing its decisions on the framework from Canada’s Responsible Investment Association (RIA).
He adds that Vancity, which has about 121 advisors, doesn’t expect pushback from its members on the move to RI-only products given that many come to the credit union for its long history of sustainability measures.
“We don’t see it as limiting, we see it as … good business for our members,” Mr. Reid says, citing the growing research showing that sustainable investments often perform better than the benchmarks.
Dixon Mitchell Investment Counsel, a small Vancouver-based firm with 10 advisors, has opted to conduct all its own investment research as it has for all of its portfolio mandates over the past 20 years.
“We were not early adopters of ESG, mostly because we do all of our own work in-house. The idea of just taking ESG ratings for our companies, and relying on a third party to say they’re good or bad was not natural for us,” says Don Stuart, executive vice-president at Dixon Mitchell.
“Our firm realized how much of the industry was seeing [ESG investing] as a profit centre,” he says. “Current and prospective clients were also asking us more questions about how their investments could make a positive difference in the world.”
Mr. Stuart says the capital and desire for ESG are moving faster than the tools that are available and found that rating firms were giving different scores to the same companies.
“It occurred to us that if we wanted to, we could shop around and find a positive rating for virtually any of the names in our portfolios,” he says.
“We’ve always seen ourselves as a buyer of businesses, so we want to know the people running the ones we have a stake in. Right now, we feel like we know all of our companies and management teams better than we did before – some for better, some for worse.”
Meanwhile, BMO GAM has been adding to its ESG fund lineup aggressively; it has 11 exchange-traded funds and nine mutual funds in the space, says Ross Kappele, the firm’s head of distribution and client management.
The firm is also continuously educating its approximately 1,000 BMO Private Wealth investment advisors and investment counsellors on ESG issues and how to discuss them with clients, he says. (BMO GAM also sells ESG products to approximately 33,000 third-party advisors.)
Mr. Kappele says BMO advisors have been open to ESG education and many are requesting more tools and information to better educate themselves and their clients.
BMO also created its own MyESG self-assessment tool, which recently won an RIA award for market education. Through a series of questions, MyESG helps advisors determine a client’s ESG objectives and produces a unique investor persona that serves as a base for the decisions made for their portfolios.
“It can gauge how important ESG is to their clients,” he says. “It also challenges misperceptions and helps both advisors and clients understand their journey in terms of ESG education and knowledge.”
Adapting to evolving ESG trends
To be successful with ESG, Ms. Baek of McMillan says investment firms need to have the proper people, policies, and procedures in place to support their products and strategies – and stay on top of the constant changes in the sector.
She notes there’s a growing number of ESG-related frameworks, standards, regulations, and other initiatives being developed in Canada and internationally. They range from voluntary disclosure and rating systems to mandatory regulatory requirements that focus on topics such as disclosure, measurement, reporting, best practices, and guiding principles.
As this landscape develops, Ms. Baek says advisors need to consider how their ESG mandates will adapt.
“Firms need to look internally, but also look externally to ensure that they’re remaining competitive,” she says.