How can advisors help clients who want more sustainable investing

Recent Earth Day study shows increased pressure for more ESG in portfolios

How can advisors help clients who want more sustainable investing

While advisors may still be cautious about investing part of their client portfolios in environmental, social, and governance (ESG) funds, a recent Earth Day study shows more Canadians want their money to make an impact on the world - and they want to make sure that it does.

“We’re trying to be responsible in everything that we do – walking the talk and ensuring that we’re investing in companies that are responsible. There are challenges everywhere, especially when you get into net zero and transition. But, some progress is better than no progress. That’s the approach that we’re taking,” Fate Saghir, head of sustainability for Mackenzie Investments, told Wealth Professional as she released its fourth annual Earth Day study.

The study, which surveyed 1,000 Canadian adults in a random online sample in early March, showed that 92% of those who hold sustainable investments plan to increase their sustainable holdings in the next few years. That’s up from the 71% last year.

The study also showed that Canadians are increasingly more conscious of their investment decisions, with 54% of those surveyed saying they’re likely to consider how they can have a positive impact on the world. That’s up from 50% last year.

Most (81%) surveyed felt it was important to use their investment dollars to create positive social change. Saghir said: “an overwhelming majority felt that when they invest their investment dollars, they should be aligned with making some positive societal change. But I don’t think Canadians – and especially advisors, who have been so focused on financial returns – know exactly what that means because we’re still building this out.”

But, the study, conducted with Pollara Strategic Insights, showed many surveyed were also concerned about the true impact of sustainable investments. It examined Canadians’ level of trust in companies’ sustainability claims and transparency in corporate governance, and showed some concerns, so Saghir recommended advisors increase their research to address those concerns.

The study discovered that 60% of the Canadians surveyed wondered whether their sustainable investments were truly “sustainable”, with 35% concerned about greenwashing and 31% concerned about being able to access information and hold businesses accountable for their social and climate impact. Half (51%) of the respondents also did not feel sustainability claims are credible. More than three-quarters (78%) said it is important to increase transparency and access to details about business practices and performance of sustainable investment impact claims.

Saghir said the industry is seeing a lot of regulations about disclosure to ensure companies are reporting in a consistent manner, so asset managers, like Mackenzie, can use more reliable data when building its funds and report the outcome data from those investments to investors. While that data is critical in providing more transparency for investors, she said getting consistent disclosure standards is still a work in progress, but is key to reporting on the outcomes of sustainability funds as well as their financial performance. She said that’s important as advisors and clients look at ESG from a risk management perspective versus a sustainable outcome perspective.

“As more and more asset managers start to put this out in the public realm, it’s going to make advisors and investors more comfortable in this space,” she said. “Then as the regulations on disclosure start to set in and come to life, I think we’re going to see a big acceleration in the adoption of not just sustainable investment funds, but also the understanding of ESG integration across the Canadian investment industry.”

While the ESG area is still being defined, Saghir encouraged advisors to talk to their clients and get to know how they’d like to invest to make a difference as well as get good returns.

She also noted that, last year, Canada’s sustainable investment fund space had less outflow than other funds as people moved non-ESG funds into cash.

“If you, as an advisor, have a conversation with your clients and they’re not just focused on performance, but asking about all of the other things that are important to them, they may be less likely to be purely focused on the performance aspect of their investing,” said Saghir. “The studies we see are confirming that these assets tend to be retained.

“So, it’s important to have these conversations with your clients and understand their holistic needs and priorities,” she said. “It’s part of an advisor’s fiduciary duty and its part of the KYC (know your client) process. So, it’s important to ask - What charities do you support? What causes do you care about? - before you jump into the investment process, so you can tease out how your clients might like to invest and that can evolve into more discussion about sustainable investment funds.

“It doesn’t go from zero allocation to 100%. Once you find the one or two topics that are important to your client, you can start with a 5% to 10% allocation because the studies we’ve done internally show that if clients are keen on sustainable investment funds, they may only have 20% of their portfolio in them and they plan to increase it to 30% over the next two to five years. It’s a gradual process. So, as an advisor, you should use it as an opportunity to get to know your client and use this as a learning journey that you can do together.”