The evidence is irrefutable: the Earth’s climate is changing, and the global economy is providing proof as severe weather disrupts markets and supply chains.
The Bank of Canada has singled out climate change as one of five major risks facing the resource-reliant Canadian economy and financial system.
“It’s not the tree-huggers anymore. These risks are recognized by the Bank of Canada,” says Tim Nash, a financial planner at Toronto-based Good Investing.
The growing awareness of the risks of climate change has spurred numerous finance-industry initiatives focused on socially and environmentally responsible investing. While that’s positive, some investments may not meet investors’ criteria when it comes to protecting the planet.
“There has been a lot of ‘greenwashing,’ where funds will claim to be socially responsible and low-carbon, and when you look under the hood, all of a sudden there are companies in there that investors are shocked to find,” Mr. Nash says.
To avoid that, he recommends investors shift their portfolios away from industries that contribute to climate change and toward opportunities in the so-called green sector.
“It would be prudent to underweight the fossil-fuel sectors and hedge those risks by investing part of your portfolio in companies that are going to actually benefit from this transition,” Mr. Nash says.
Some climate-branded funds have come to market recently to meet the demand for green investments, but he believes only exchange-traded funds (ETFs) offer a complete disclosure of holdings.
“What I love about ETFs is how transparent they are. With mutual funds, it’s really hard to get a full list of holdings, and it will be a snapshot from six months ago,” Mr. Nash says.
For instance, Desjardins Global Asset Management offers a series of climate-themed ETFs that range from low-carbon emitters to fossil-fuel-free funds for investors who want to go further.
Horizons ETFs also offers the fossil-fuel-free Global Sustainability Leaders Index. Like most new climate-themed ETFs, it has yet to register a long-term performance, but so far this year has posted a return of about 23 per cent, compared with about a 14.5-per-cent advance from the benchmark iShares MSCI World Index ETF.
Mr. Nash attributes the difference to slumping fossil-fuel holdings in the benchmark index, but he also says his model green portfolios confirm investors don’t need to sacrifice performance for ethics.
“Those [green] portfolios do just as well, if not a little bit better, than traditional investment portfolios,” he says.
As more green-branded products come to market, Mr. Nash advises investors to do their homework and better understand their screening process.
Britain-based environmental-investment watchdog InfluenceMap recently analyzed 118 ETFs and mutual funds around the world marketed under a climate theme and found an aggregate exposure to fossil-fuel producers in line with the benchmark MSCI World ETF.
InfluenceMap research policy analyst Adrienne Buller says the term for funds that don’t reflect their environmentally friendly or low-carbon claims is “impact washing.”
“It’s slapping labels on things without making any effort to substantiate impact,” she says, adding that government and regulators need to force ETF providers to come clean on their holdings and make good on promises to promote positive change.
“Greater clarity on the contents of the funds is just one step toward actually substantiating that you are driving any sort of concrete change by investing in a fund,” Ms. Buller says.
Of the funds studied, 22 were found to have exposure to thermal coal, or oil and natural gas reserves. Funds offered by Asia-based Fullgoal Asset Management and Lion Asset Management were found to have thermal-coal levels 50 times greater than the benchmark.
BlackRock’s iShares MSCI ACWI Low Carbon Target ETF was also found to hold shares in Chevron and Shell, which were identified by InfluenceMap as big polluters.
“All the major miners and oil extractors you can name can probably be found in the full set of funds we identified,” Ms. Buller says.
Demand for responsible-investment products has surged to US$31-trillion under management worldwide. Of those, US$2-trillion is estimated to be managed in Canadian responsible-investment strategies.
Ms. Buller says Canadian regulators and legislators fall behind the European Union when it comes to enforcing transparency and compliance with environmental claims.
“The European Union is really breaking ground in this area, and there’s a lot of opportunity for Canada to learn from what they’re doing,” she says, adding that the primary objective of clean funds should be to build a renewable-energy industry.
“We see the solution [as] being less than just having people dump all these companies and more about developing [an] interest that could actually drive change in the companies’ business models,” Ms. Buller says.
Forcing Canadian equity funds to comply with environmental claims, however, is easier said than done, according to Luke Raftis, manager of extractives and utilities research at Sustainalytics B.V., an independent research firm. Roughly one-third of publicly listed Canadian stocks are related to natural resources, which limits choice.
“In Canada, a lot of funds are based on the TSX benchmark. The TSX is very energy-heavy, so there are difficulties in creating products that are completely fossil-fuel free. It’s a limited pool to draw from,” Mr. Raftis says.
Sustainalytics applies up to 70 ethical standards to more than 14,000 public companies on behalf of clients, which often includes climate-themed funds. Mr. Raftis says that, as demand grows, determining what is ethical and what is not ethical becomes more complicated.
“We’re adding indicators and refining them; in some cases removing indicators that don’t provide a fair comparison across the universe,” he says.
In many cases, the results are open to interpretation. “There are some things that are marketed as green in a very broad sense that have some things that certain investors would disagree with,” Mr. Raftis says.
Even if a company ranks low on the Sustainalytics ethical scale, Mr. Raftis says it’s up to the client to determine if the findings will be applied to a fund. In some cases, other ethical research firms are consulted and findings are cross-referenced.
“Our clients ultimately decide how to construct these products or whether to include certain companies in their portfolio,” he says. “Even if they’re buying our research, they can choose to cast a very broad net in terms of what they define as green.”