Responsible investing (RI) is exploding in popularity. And for portfolio managers and financial advisors who offer RI to their clients, or are looking to do so, it’s more important than ever to be able to explain what measures and parameters are used to determine what makes an investment “responsible.”
“[RI] can be highly subjective,” says Robert Mark, portfolio manager at Raymond James Ltd. in Toronto. “For example, some may see nuclear power as ‘responsible’ if we want to be serious about a low-carbon world; others see [nuclear] as worse than fossil fuels. Is fast food cheap protein for the masses or bad nutrition? Are pipelines the safest possible way to transport hydrocarbons or looming environmental catastrophes?”
“A good RI fund manager tries to make decisions as objective as possible,” adds Paul Shelestowsky, senior wealth advisor with Meridian Credit Union in Niagara-on-the-Lake, Ont. “For example, in beef farming, the dialogue with the investor might cover issues such as supply-chain management, labour rights for farm workers, animal welfare and waste management. In energy, an RI fund manager might recognize that while society still depends on fossil fuels, the fund can work with energy firms that support environmental innovation and exclude the ones that don’t. This might not fit every individual’s personal ethics definition, but it objectively addresses and works to improve the sustainability and accountability of the companies in which a fund invests.”
Although there’s no one-size-fits-all definition of what makes an investment responsible, assets in Canada managed using one or more RI strategies increased by 41.6 per cent to $2.1-trillion at the end of 2017 from $1.5-trillion at the end of 2015, according to the Responsible Investment Association’s most recent “Canadian RI Trends Report.”
In fact, RI assets under management (AUM) in Canada made up more than half (50.6 per cent) of total Canadian AUM as of year-end 2017, up from 37.8 per cent two years earlier, the report says. Meanwhile global RI AUM rose by 25 per cent to US$22.9-trillion between 2014 and 2016.
The growing demand for RI both in Canada and around the world is being driven by millennials and members of Generation Z, who want their investments to reflect their personal values. Research conducted by Environics Research Group Ltd. on behalf of Mackenzie Investments late last year found that 31 per cent of millennial investors either usually or always consider environmental, social or governance (ESG) factors when investing, which was more than double the percentage of baby boomers in that study.
Women are also comparatively keen RI investors, Mr. Shelestowsky says. Case in point: A study by the Center for Talent Innovation, a U.S. not-for-profit research organization, entitled “Harnessing the Power of the Purse: Female Investors and Global Opportunities for Growth,” found that “90 per cent of women globally say making a positive impact on society is important” in their investment decisions.
Determining what belongs in an RI portfolio is more precise now than previously, says Lindsay Patrick, managing director and head of sustainable finance at RBC Capital Markets in Toronto.
“There are four key pillars. The first one, RI, is not even the highest component now,” Ms. Patrick explains.
The term “RI” refers broadly to products that align generally with an investor’s basic values – being a good corporate citizen, for example. But while “responsible” is still often used as an umbrella term, investors look more carefully now at the other pillars, Ms. Patrick says.
“They look at ESG and then then next pillar is often thematic – investors will look at particular technologies, such as clean energy or companies that promote gender diversity," she says. "The fourth pillar is impact investing: funds or companies that deliver a positive social return along with the financial return.”
RI portfolio managers typically follow six Principles for Responsible Investing developed by more than 50 global financial institution chief executives with the United Nations and launched in 2006.
RI is getting deeper and wider, though. RBC Global Asset Management published a survey this past October, which found that 84 per cent of institutional investors incorporate ESG factors into their selection process – and this is now moving beyond strictly equities.
The survey found that 60 per cent of institutional investors incorporate ESG factors into their fixed-income portfolios, 43 per cent in real estate, 36 per cent in infrastructure and 34 per cent in alternative assets.
Asset managers are also looking beyond “negative” screening – eliminating companies engaged in activities such as tobacco or firearms – to “positive” screening. The latter focuses on ways to engage companies to improve their ESG-related practices.
Furthermore, RI- or ESG-focused investment funds now benefit from experts who specialize in evaluating and screening potential investments, says Barry McInerney, president and chief executive officer at Mackenzie Investments.
“It’s important for advisors to understand the offering, and to know the manager’s experience and approach,” he says. “It takes time for managers to build up that expertise.”