Responsible investing: an underserved market

By Susan Yellin | February 25 2016 06:00AM

Investment fund companies are jumping on the responsible investing bandwagon, but it may be taking longer to convince financial advisors of the benefits of environmental, social and governance (ESG) funds.

Companies like NEI Investments, RBC, OceanRock Investments Inc., IA Clarington, Desjardins Wealth Management and most recently, AGF Management Ltd., plus individual asset managers, offer ESG funds to clients.

In total, the ESG market has attracted $1 trillion in assets under management to about 31% of the Canadian population, mostly women and the younger generation looking past quarterly financial statements, says Deb Abbey, CEO of the Responsible Investment Association of Canada (RIA).

Abbey credits increased awareness of environmental, social and governance risks as the reason for the strong influx of investors and the growing participation by mutual fund companies.

This heightened activity with ESG funds – which evaluate companies based on their actions regarding issues such as climate change, water scarcity, executive pay, board diversity and inclusiveness of minorities – proves that they have now become part and parcel of mainstream investing, said Abbey.

“Every time we look in the newspaper, we see something about climate change or governance issues on the corporate level,” she said in a recent interview. “I think investors are becoming quite aware of those issues – much more aware than industry players think that they are. I think that’s starting to manifest itself in increased assets in the funds and investments that represent managing that risk to long-term manager and stakeholder value.”

Lack of advisor engagement

Unfortunately, said Abbey, the advisory community is not as engaged as many clients. A recent study by NEI Investments shows that 92% of retail investors would like to invest in ESG products, but only about 10% of advisors actually make ESG recommendations, she said.

 “So there is a huge gap – it’s an underserved part of the market. It’s a great opportunity for the firms that are starting to go down that path and really promote responsible investment within their advisory chains. I think it’s something that will be led by the bottom in terms of very engaged advisors and the top from senior management recognizing this is a huge opportunity on the institutional and retail side as well.”

There are some advisors, however, who are very keen on offering ESG funds as potential investments. Abbey said RIA provides training and certification for those advisors who want to specialize in responsible investing.

Roger Beauchemin, CEO of Montreal -based Addenda Capital, said there is a gradual sense of concern coming from investors and the industry in general about issues such as green-house gas emissions and their effect on climate change. Addenda Capital has signed the Montreal Carbon Pledge, a commitment to measure and disclose the carbon footprints of investment portfolios. It then uses this information in making investment decisions.

Many investors are asking how issues like climate change can impact the investment side, he said. The way to understand this is to understand how companies operate and whether they allocate their carbon efficiently and are sensitive to their impact on the environment.

About 15 years ago, Addenda Capital started removing some stocks in its portfolios because of their poor governance or environmental standards. “Where we go now is that we tend to favour companies in how we select our securities,” said Beauchemin. “We tend to favour companies that have the better behaviour around a low carbon footprint. This doesn’t mean that we won’t at some point invest in a company that has a higher footprint than another.” He added that Addenda Capital can take an interest in a company either through its performance potential or because it’s about to embark on a big change in its carbon footprint.

Beauchemin said his company measures the carbon footprint of each individual company in which it wants to invest by gathering data using its own research and third-party services. He said the information isn’t always easy to get and not always calculated the same way by each company so Addenda Capital tries to normalize the numbers.

In making its determination on a firm’s carbon footprint, Addenda Capital looks at three levels of emissions: those from the physical plant that is making the product; the energy required at the plant, and finally, what the end product emits. So, for example, a car manufacturing plant emits certain greenhouse gases, plus the company buys energy to fuel the plant, and then the end product, cars, also produce greenhouse gases.

Addenda Capital is majority owned by the Co-operators, which already understands the interplay between climate change and insurance. So Beauchemin said it wasn’t a great leap to move into ESG funds.

“[People] are starting to cause changes and those changes have an economic cost to them – either through the damage they cause, or the replacement or rebuilding. But the economic cost is hidden – no one is paying for that,” he said. “People now realize we have to put a cost to this. And as an economist, I’m a big believer that if you put a price mechanism on these things then you put a value on it. If you put a value on it, then you start realizing what you’re doing.”

More transparency needed

Abbey said the responsible investing industry would like regulators to require more transparency from companies about the ESG risks they may pose.

For example, most Canadian securities regulators have introduced regulations that require all issuers on the S&P/TSX Composite Index to disclose the level of representation of women on their boards and in senior management, said Abbey. Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Québec and Saskatchewan adopted the new rules on Dec. 31, 2014. She said this transparency is intended to assist investors in their investment and proxy voting decisions and should be extended to all areas of ESG risks.

Abbey said responsible investing is not just about values, but about managing risks that can eventually affect clients’ bottom lines. “I think if you’re concerned about the long-term performance of your portfolio, you should be concerned about these environmental, social and governance issues. There is a mountain of evidence to show that these investments have performed as well or better than traditional investments,” said Abbey. “It’s a no-brainer really.”

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