Advisors may have thought it was a fad, but demand for a much-hyped investment class is finally stepping up to the plate, with growing indication it will dictate future client growth.
Advisors typically stay in their own lanes, go for what they know, but socially responsible investing (SRI) can be just as profitable as regular non-sustainable investments, said one advisor from Ontario.
“It’s a common misconception among advisors to say that mutual funds for socially responsible investments (SRI) are not parallel to non-sustainable investments,” said Ryan Colwell, an investment advisor with IPC Investment Corporation/
“The returns are pretty much the same, despite contrary belief. I hear that a lot but it’s not true.”
The news comes at a time when investors are looking to invest more in environmentally and socially conscious mutual funds in Canada and divest in oil, advisors are capitalizing on rising demand, according to a new report from the Morgan Stanley Institute, while battling their own reservations to try new methods.
“The trajectory for sustainable investing continues to point upward,” said Audrey Choi, managing director and CEO of the Morgan Stanley institute for Sustainable Investing, in the report.
“What used to be a bifurcated decision – one between investing to make money and giving to do good – is increasingly becoming a blended conversation as investors look to harness the power of the capital markets as a force for positive impact," she said.
According to the report, 71 per cent of individual investors are interested in socially responsible investing but more importantly, 65 per cent of respondents believe that socially responsible investing will become more prevalent over the next five years.
It’s become big business for some advisors but despite it becoming a rising trend, not everyone is sold on SRIs being a big money-maker for advisors, especially amongst millennials.
“A lot of millennials don’t have a lot of money to invest but the ones coming out of college are more socially conscious than ever before. They come out with that, ‘I want to change the world’ attitude,” said Colwell.
Kathleen Peace, a senior financial consultant with the IPC Securities Corporation, said as much in an interview with WP.
“That returns are the same if not better when comparing apples to apples,” Peace told WP, whose SRI accounts amount to almost five per cent for her business. “I have a few young families invested responsibly and these types of investments are also very popular with social-justice oriented non-millennials.
“For example, a balanced, well diversified portfolio - one that is SRI one that is not. This is even the case when taking higher fees associated with socially responsible investing into account. Advisors should be aware of the higher MERs - these are a result of an extra layer of risk management/research that goes into screening the portfolios.”
Despite the positive signs, there are still some roadblocks and the most important one is advisors.
“The tough part in selling deals is that most people assume returns will be lower and their portfolios significantly less diversified if SRI,” said Peace.
“There are no SRI mutual funds out there using the tax-efficient corporate class structure, so that makes them less attractive for non-registered accounts. In most cases, those invested in the SRI philosophy don't care about that, however the advisor may feel that it's not in their best interest to "show" a less tax efficient investment to their client.”
By 2050, the business opportunities for sustainability-focused companies are expected to be between $3 trillion and $10 trillion annually, or up to 4.5 per cent of global GDP.
"As sustainable business practices and investment options become more important to investors, the Morgan Stanley Institute for Sustainable Investing is working to drive scalable investment solutions that seek to achieve market-rate returns and help address global challenges," Choi said.