Report on responsible investing identifies key drivers as well as developments to watch
Interest in responsible investing has followed a positive trajectory over recent years, and it’s set to continue thanks to crucial drivers and developments, according to a new report from the Investment Funds Institute of Canada (IFIC).
Based on industry reporting and survey data, IFIC said there are three main drivers and motivations underpinning the rise of ESG in the mainstream:
- Financial performance, from both a risk-management and long-term returns standpoint;
- Client demand, partly spurred by a shift in wealth toward women and millennials; and
- Focus on positive societal outcomes
By the end of 2019, IFIC said that RI mutual funds held $12 billion in assets, accounting for 0.7% of total mutual-fund assets. Meanwhile, RI ETFs represented $654 million in assets, equivalent to 0.3% of ETF assets.
“Despite RI’s small share of mutual fund and ETF assets, there are 16 firms offering 69 RI mutual funds and 10 firms offering 23 RI ETFs,” the report said.
There’s also potential for further growth in Canada’s retail RIA space, IFIC said. It cited an investor opinion survey conducted by the Responsible Investing Association (RIA) in 2019, wherein 72% of respondents expressed interest in RI, 79% said they would like their financial-services provider to inform them about RI options, and 26% said they currently own responsible investments.
“If considering all retail and institutional assets that fit a broad definition of responsible investment, RI assets in Canada stand at $2.1 trillion,” IFIC said, again citing the RIA. The vast majority of RI assets are owned and managed by large institutional investors, IFIC added.
And based on academic research studies and industry reports – including work by Deutsche Bank, Calvert Investments, the RIA, and Fundata – IFIC said there’s strong evidence to indicate that ESG factors correlate with companies’ financial outperformance, as well as higher risk-adjusted returns for the funds and portfolios that include them.
But at present, RI fund managers are hamstrung by a lack of high-quality, comparable, and material data regarding companies’ ESG practices. While regulators require publicly traded companies to report data relating to environmental performance, health and safety, governance, and other factors, IFIC observed that “these data do not fully satisfy the needs of investment managers that incorporate ESG data into their investment processes.”
It concluded by citing four RI developments that investors should watch in the short term:
- A continuing rise in regulation pertaining to ESG factors;
- The development of a standard for sustainability and ESG integration by the International Standards Organization’s Technical Committee ISO/TC 322 on Sustainable Finance;
- A regulation establishing a sustainable-finance taxonomy in the EU; and
- The findings of the Canadian Expert Panel on Sustainable Finance , which prescribed a range of policies and regulations to ease the transition to a lower-carbon activity, with the asset-management industry expected to play a crucial role.