What advisors should know when asked about ESG: tackling a topical issue with Addenda Capital

Addenda's Delaney Greig puts ESG in the spotlight

What advisors should know when asked about ESG: tackling a topical issue with Addenda Capital

“Could you tell me more about ESG investing?”

When advisors sit down with an investor to go over their needs and goals, that question shouldn’t necessarily come as a surprise.

The pandemic, for many, has shifted priorities and altered expectations. And in the wake of calls for more social justice and a grim report published by the United Nations’ Intergovernmental Panel on Climate Change (IPCC), one can only bet that interest will keep on growing.

“More than ever, Canadians want to know how their invested assets are being used,” says Delaney Greig, Director, Sustainable Investing at Addenda Capital. “Just as they want to have confidence in the financial management of their funds, they want to have confidence in the social and environmental implications of their investments, as well.”

The appetite for knowledge about environmental, social and governance issues (ESG), also known as responsible investing (RI), is real. According to a poll conducted in September 2020 for the Responsible Investment Association (RIA), only 28 percent of Canadian investors have been asked about “responsible investing options”, whereas an overwhelming 75 percent of them would like their services provider to give more information about ways to align money with values. The RIA poll also showed that almost half, or 45 percent, of respondents “said they are more likely to choose RI than they were a year ago.”

So how do we start the conversation? Advisors should begin by trying to determine what the investor’s goals are, says Greig, because there can be many ways and motives for investors to engage in responsible investment.

First, some investors might turn to responsible investing because they want to know that companies have taken steps to deal with material issues such as climate change, business ethics, cybersecurity and labor practices. From this perspective, ESG investing can serve as a tool to manage long term risks while seeking compelling returns.

Second, investors might want to see their assets used as a lever to encourage change in the corporate world. Responsible investing has given rise to investor advocacy, including countless shareholders proposals designed to drive shifts in the way companies operate. According to another survey conducted by the RIA, climate change, diversity/inclusion and ESG disclosure are the most common themes for engagement by asset managers and owners with companies, followed by executive compensation and board independence.

Finally, other investors might want to simply avoid certain sectors altogether. This approach, known as negative screening, can take many forms, such as fossil fuel-free funds or funds that specifically exclude weapons manufacturers or tobacco companies. Positive screening is another possibility, an approach based on how companies perform on ESG issues relative to their peers.

Whatever the motive, the interest among investors is growing. So much so, that the RIA recently proposed that the “know-your-client” guidance -- which sets the table on how to determine a client’s needs and objectives --, should be amended to cover environmental, social and governance (ESG) factors. The RIA wrote in its submission to the Investment Industry Regulatory Organization of Canada that “Canadian investors need their financial services providers to guide them through the process of articulating their preferences or values in terms of investment objectives, and this cannot be done unless providers ask the right questions.”