For many Canadians, it’s important that their investments reflect their personal values. A first step may be to avoid investing in companies whose business they see as unethical, such as weapons manufacturers, tobacco and fossil-fuel companies. But an increasing number of people are looking to go further. They want to invest in firms that are working actively to make the world a better place.
That’s where “impact investing” comes in. A subset of responsible investing (RI), impact investing goes beyond excluding companies that may have questionable business practices. Instead, it seeks out companies with a stated intention to generate positive, measurable social and environmental impact alongside a financial return. It’s a trend that is on track to play a much larger role in the years ahead.
“Many of my clients are shopping carefully, looking at where and under what conditions their clothes are made, buying organic produce and fair-trade coffee,” says Sucheta Rajagopal, investment advisor and portfolio manager at Mackie Research Capital Corp. in Toronto. “They want their investment portfolios to reflect those concerns.”
Ms. Rajagopal became an advisor more than 20 years ago and offered RI as an option to her clients because she says she’s someone who’s very interested in social and environmental issues.
“I found there was a huge take up,” she says. “So, after a few years I focused exclusively on RI. All my clients are socially responsible investors and they seek me out because that’s what they are looking for.”
As part of her socially responsible approach, Ms. Rajagopal offers clients a variety of impact investing options. It’s part of a growing trend. The Responsible Investment Association’s (RIA) 2018 Canadian Impact Investment Trends Report, published this past February, reveals that assets under management in impact investing in Canada grew to $14.75-billion as of year-end 2017 – up by 81 per cent from $8.15-billion two years earlier.
Dustyn Lanz, the RIA’s chief executive, says most large asset-management firms are now incorporating environmental, social and governance (ESG) factors into their investment decisions.
“The business case for doing it is quite clear,” he says. “A company is more than just the numbers, so investors need to look beyond the financials to see how well a company is managed. Looking at a company’s performance on environmental, social and governance issues can help to identify risks and opportunities that may not be visible in conventional financial metrics. As a result, integrating these factors into investment analysis can shine a light on companies that are going to generate sustainable profits over the long term.”
There are several ways advisors can introduce socially responsible investing, in general, and impact investing in particular, into their business. One thing to bear in mind is that it doesn’t have to be an “all or nothing” proposition.
“Many clients are happy to have a portion of their portfolio invested responsibly,” says Ms. Rajagopal.
She recommends sounding out clients on the topic, then seeing what might work for them. One possible way to start is to look at a “best of sector” approach. That involves finding companies even in sectors such as oil and gas that are actively trying to have a positive impact on ESG issues.
As far as impact investing options currently available to retail investors, advisors can look to some specific exchange-traded funds. Ms. Rajagopal says Horizons ETFs Management (Canada) Inc.’s Horizons Global Sustainability Leaders Index ETF (ETHI-T) and Evolve Funds Group Inc.’s Evolve North American Gender Diversity Index Fund (HERS-T) have a strong representation of companies with a focus on impact investing.
Mr. Lanz says more asset-management firms are looking to differentiate themselves by moving into impact investing. He cites Britain-based Schroders PLC’s recent acquisition of a majority stake in Switzerland-based impact investment fund manager BlueOrchard Finance Ltd. as an example.
“I believe we are going to see more managers either developing the expertise internally or buying it externally like Schroders did,” he says.
The other trend Mr. Lanz sees developing is a growing appetite for impact investing in public markets. He predicts more assets will flow into thematic funds that focus on specific environmental themes such as clean technology and gender diversity.
“This trend underlines the value of shareholder engagement because, as an investor, you can’t change a company you don’t own,” he says.
One trend Ms. Rajagopal is hoping to see in the coming years is more products tailored to retail investors. She notes that the primary investment vehicles currently available in the impact investing space are either community bonds that can’t be held in most retail accounts or investments that are only available to accredited investors.
Ms. Rajagopal points to the green bonds issued by Toronto-based renewable energy co-op SolarShare and exempt-market dealer CoPower Inc., which she says are like utilities, with income streams that are guaranteed – often by the government – for 15 to 20 years.
“If they were available through brokerage firms, the take up would be huge,” she says.
Ms. Rajagopal says her “dream” is to have a product that aggregates community investments into a fund that people could buy for as low as $1,000 and hold in their registered retirement savings plans or other registered accounts. She would also like to see a “green real estate investment trust” that would hold building projects with a positive environmental and social impact.