Desjardins survey exposes gap between Canadian investors' attitudes and reality in RI fund performance
Earth Week is in full swing, and there’s greater excitement than ever in the ESG investment space.
Over the past year, the world has seen a record level of inflows pouring into sustainable investment products and strategies. Asset managers are expanding their shelves to accommodate more ESG solutions. At the same time, there’s been a proliferation of ESG data and scoring services to help people ensure they’re not investing in questionable firms or sectors.
The surge in interest is hardly surprising. During the steep pandemic-driven downturn in the financial markets last year, responsible investment (RI) funds famously held up better than their vanilla peers as they were less exposed to some of the broader risks that hammered many companies and economic sectors.
“2020 was a great year for responsible investment,” said Marie-Justine Labelle, Responsible Investment Practice Lead at Desjardins. “It really showed that RI strategies behave well in a context of market crisis.”
While 2020 showed arguably breakout performance among RI funds, the category has been a quiet outperformer over longer time periods. Recent data from the Responsible Investment Association (RIA) showed that over 3-, 5-, and 10-year periods, the average returns of RI funds either matched or exceeded those of all funds in each of four main asset classes: Canadian fixed income, Canadian equity, global equity, and U.S. equity.
The RIA data echoes findings from many previous studies conducted across the world, both by academics and companies within the financial industry. One notable meta-analysis from Morgan Stanley, Labelle said, concluded with the same insight: responsible investment leads to better risk-adjusted returns, as RI funds tend to be less volatile because of the better risk management they use.
“We often see a correlation between better ESG performance and better general management and governance of companies,” she said.
Many investors in Canada aren’t awake to that fact. In a survey of more than 2,800 Canadians commissioned by Desjardins late last year, 28% shared a belief that RI products provide lower returns than traditional investments, up from 24% in 2018 and 16% in 2016. What’s more, over 40% of the respondents said it was the first time they had heard about responsible investment.
But in the same survey, 75% of respondents said that they would like to hear more about responsible investing. And among participants who said they weren’t likely to invest in RI products, 61% said they’d be motivated to do so by good return potential; 29% said they’d be convinced by evidence of concrete benefits from their investments, and 28% cited positive impact on society and the planet generated by the investment as a motivator.
“I feel that we have a duty to educate investors more, and we’ve been working hard at that,” Labelle said. “Desjardins has trained over 2,500 employees and advisors that we work with on the topic of responsible investment. We really see responsible investment as a way for investors to align their finances with their values.”
When asked about their ESG priorities, around half of respondents said they were very concerned about climate change (51%), which is an issue that Desjardins has been very active to address through its lineup of investment products. Labelle said it follows a three-pronged approach, with the first pillar centred around excluding companies that derive a major portion of their revenues from petroleum, coal, and natural gas.
“The second pillar is engagement with the companies we invest in,” she said. “In 2019, we engaged with over 150 companies across our line of responsible investment mutual funds, and over a third of those activities involved climate change and the environment. We really try to influence the way that they address and plan for climate change.”
The third pillar is to invest proactively in companies that propose solutions to environmental challenges, and grasp the commercial opportunities associated with finding answers. That approach shines through particularly in the firm’s thematic funds, such as its SocieTerra Cleantech Fund.
Another major concern among Canadian investors was human rights, with 50% of the respondents in the survey saying they were very concerned. Labelle said Desjardins is able to address that by complying with the UN Global Compact, particularly by not investing in companies involved in major controversies related to the breach of human rights.
“We had a specific instance of this last year,” she said. “We were invested in a digital surveillance company in China through our SocieTerra Emerging Markets Fund, and found out one of its contracts was with a Chinese detention centre that had been implicated in breaches of human rights and racial discrimination.”
From there, Labelle said Desjardins engaged in very active and constructive dialogue with the company around the issue. But because it did not go as fast as they would have liked to address the situation, they decided to divest from the company.
Another 51% of participants in the survey said they were very concerned about cybersecurity. On that front, Labelle said Desjardins engages with the companies they invest in, making sure that cybersecurity is a mainstream priority across the organization in terms of governance, culture, and processes. Aside from recommendations to have external audits, Desjardins has given recommendations to align on regulations involving data privacy. And given the breathless pace of evolution in technology, she said it’s also important to ensure that companies constantly calibrate and improve their understanding of cybersecurity risks.
The Desjardins survey also turned up other areas of emphasis among Canadians such as biodiversity (45%), air quality (43%), water management (41%), child labour in developing countries (41%), integrity of corporate governance practices (39%), and workers’ rights (38%). And those concerns are translating into real conviction: in its annual report for 2020, the Investment Funds Institute of Canada (IFIC) noted a 55% increase in assets placed in RI products – including both mutual funds and ETFs – which ended the year with $20.1 billion in assets.
“We really see in the data more and more, and this has been confirmed time and again, that investors can do well and do good at the same time,” Labelle said. “They don't have to sacrifice long-term returns when they invest with the planet and people in mind.”