There has been steady growth in ESG strategies over the last decade. In just the last year, Canadian AUM in ESG strategies have skyrocketed 153% to US$21 billion, according to Invesco data.
Advisors can no longer ignore this area, as investor demand is also increasing.
“Canadians are supporting businesses that are focused on improving in areas that are aligned to their own beliefs,” says Glen Yelton, Head of ESG Client Strategies, Invesco Ltd. “And that’s where some of our products could benefit them. For instance, Invesco’s S&P Core and Tilt ESG indexes remove or underweight holdings in common indices based on ESG scores. So there’s a level of comfort knowing that they’re not investing in companies that go against their beliefs.”
To incorporate ESG strategies into portfolios, you must first ask asset managers about their approach to ESG.
“Ask them what they don’t buy, and why,” says Yelton. “ESG is an additive and has a sustainable objective. So understanding how an investment manager thinks about elimination is important.”
And ask asset managers about their ESG thesis. “Most investment managers could quickly tell you their investment thesis about performance, like which factors lead to out- or under-performance, and how they would allocate in a bull or bear market,” he says. “They should have that same level of confidence in their approach to ESG.”
They should also be able to answer questions, including What are the impacts of my ESG allocation in those markets? If they use an exclusionary approach, resulting in a growth-heavy equity portfolio, says Yelton, can they articulate what that will mean for performance in different market scenarios?
Many advisors don’t discuss ESG because they don’t understand it, says Yelton. His advice? “Find something that resonates with you as an individual. It’s not about performance or fees. It should be something that reflects your values. Start with that fund. If you care about something and discuss that with clients, you’ll be better able to explain it.”
And, use neutral language. Yelton suggests using terms like “sustainable future, clean water, health, or well-being.”
Doing so allows for two things. “One, you’re avoiding traditional language that could cause confusion. Two, those broad themes allow for a broader strategy.”
Busting ESG myths
Even as ESG grows, there continues to be the myth that there’s a conflated definition.
“While there is some validity to that comment on the surface, when you actually peel back the layers, there is a consistency,” says Yelton. “If you use plain language, like health and well-being, you get to a commonality of what ESG actually does mean across multiple types of investors.”
For instance, many clients want to own individual securities they can be proud of. “They want to understand why they own them, and the context of the strategy itself, which is very simple. It removes the confusion of more politically loaded terms like net zero, climate transition, or carbon mitigation.”
Another common myth is about performance. “The performance-drag myth comes from very early ESG—actually, SRI funds. That’s over 20 years ago. In the modern state, the performance you get is dependent on the asset class, investment thesis, and allocation model. ESG doesn’t drive it. It’s the way the investment manager or index is actually constructing the portfolio.”
In the end, the key is to evaluate the asset manager when you execute your due diligence. “When you look at their materials, do you believe that they believe in what they’re doing on ESG?”