Rapid growth in responsible investment will continue

Interest in responsible investment (RI) has grown rapidly in the last two years in Canada, and that’s expected to continue, says a new report from the Responsible Investment Association (RIA).

RI assets in Canada totalled $2.13 trillion as of Dec. 31, 2017, compared to $1.5 trillion in 2015, according to the 2018 Canadian Responsible Investment Trends Report. Institutional investors held  $1.69 trillion of those assets and individuals had $435 billion invested.

The RIA collected data from 106 asset managers and asset owners, and defines RI assets as those using at least one RI strategy.

Out of all professionally managed assets across the country—estimated at $4.2 trillion in the report and based on data from the Canadian Institutional Investment Network, IFIC and the OECD—RI assets now account for 50.6%, up from 37.8% two years ago.

This marks “a major milestone,” says RIA CEO Dustyn Lanz in a release. “Investors in Canada and around the world increasingly recognize that a company is more than just the numbers,” and that well-managed businesses can be found through analyzing environmental, social and governance (ESG) factors.

Though RI growth is already strong, the report suggests it will gain momentum by 2020. Survey respondents were bullish, it says, “with 87% […] reporting that they expect to see moderate to high levels of growth over the next two years, up from 80% two years ago. Zero respondents reported expectations of negative growth.”

As for investment options investors would like to see in the next two years, 11 of the 18 respondents who answered this question want to see products that are aligned with the United Nations’ 17 Sustainable Development Goals. Set in 2015, the goals focus on addressing challenges such as poverty, gender inequality and climate-related issues.

Read: Review UN development goals with investors

A detailed breakdown shows ESG integration, or the use of ESG factors in portfolio analysis, remains the favoured RI strategy, accounting for $1.9 trillion in assets. That’s followed by shareholder engagement ($1.5 trillion), norms-based screening ($981 billion) and negative screening ($878 billion). Since assets invested can follow more than one strategy, this combined total exceeds $2.13 trillion, the report notes.

Impact investing, led mainly by large foundations, and thematic investing haven’t been adopted as readily as the other strategies, but still account for $41 billion and nearly $15 billion in managed assets, respectively. For the latter approach, the most prominent ESG theme is low carbon, which can include choosing businesses that focus on energy efficiency, sustainable agriculture and clean fuels, for instance.

Reasons for investing

Asset managers’ top reason for choosing RI was to minimize risk over time (88 out of 106 chose this). The second reason was to improve returns over time (76 chose this) and third was to meet client or beneficiary demand (53 chose this).

Yet, those polled also have doubts about RI as a strategy, with nearly 70% saying that “performance concerns are the main barrier to the adoption of RI,” the report says. “This suggests that some investors still believe there is a tradeoff between corporate responsibility and financial performance, despite mounting evidence to the contrary.”

Other hurdles included a lack of qualified advice or expertise, concerns about greenwashing—where green marketing is deceptively used by companies—and a lack of viable products on the market, the report says.

Still, more asset managers and owners are implementing formal ESG integration programs: 71% of respondents said they have one, compared to 57% in 2015. For shareholder engagement, more than half (55%) have a policy, up from 35% two years earlier.

Portfolio allocation

In 2015, public equities accounted for 40% of total RI assets, while fixed income accounted for 27%, the report says. The latest data collected for this report indicates growth in the fixed income space, given the two asset classes are now almost equal in size: RI fixed income now accounts for 34% of assets while RI public equities account for 36%.

Pension funds still make up the lion’s share of total RI assets across the country, at $1.38 trillion or 65%, up from $1.1 trillion in 2015.

Retail assets are growing, though. “Labeled retail RI mutual fund assets have grown from $8.26 billion to $11.07 billion AUM, reflecting a significant growth rate of 34%,” the report says, attributing that growth to rising client demand and a growing landscape of products.

Over the same period, assets in RI ETFs have “more than doubled,” the report adds. At $240.6 million, up from $97.6 million in 2015, this segment has also seen more products come to market. The report notes that while institutional investors can also use ETFs, the vehicles are one of the most accessible ways for retail investors to take part.

Read the full RIA report.

Also read:

Why climate change disclosures must be improved Evaluating nuclear energy through an ESG lens Why and how to address clients’ ESG values