Despite growing pains and near-term challenges, experts highlight continuing opportunity to close the RI service gap
While Canada’s responsible investment space saw its fair share of challenges in 2022, the Responsible Investment Association of Canada's (RIA) latest Investor Opinion survey shows that it’s still fertile ground for advisors looking to forge deeper client relationships, according to experts.
“Individual investors continue to show really high interest in RI,” said Meaghan Kelly, SVP for Strategic Communications, Research & Product Innovation at AGF Investments, during a virtual session unveiling the survey results yesterday. “We did continue to see very strong flows coming into [responsible investment funds] last year.”
While inflows were strong, Kelly noted that the percentage of investors allocating to RI has remained steady over the past few years of the survey – in 2022, about one third of investors said they currently own responsible investments – signalling a possible maturation of the industry.
The RI fund space also encountered speed bumps last year from market volatility, as well as sector trends that caused some sustainable investing strategies to underperform the broader market. But according to Deborah Debas, senior responsible investment specialist at Desjardins Wealth Management, inflows into RI strategies remained positive in contrast to conventionally managed strategies that saw close to zero or negative net flows.
“It just shows that [RI funds] seem to be stickier as an investment, and people [invested in them] tend to be more patient,” she said.
Similar to previous years, 73% of investors that the RIA surveyed in 2022 said they want their financial services provider to inform them of ESG and RI options that align with their values; 40% of investors said they were more likely to choose RI compared to a year ago. But only 31% said their financial services provider ever brought the subject up.
“Positive flows have been overwhelmingly on the responsible investment side. In 2021, RI assets doubled in Canada,” Debas said. “The advisors who are mentioning it are capturing their piece of that ever-growing pie.”
Both Kelly and Debas acknowledged growing pains in the RI space, as pressures from increased regulation and market volatility led to a slowdown in RI product launches last year. It’s also still early days in terms of solutions to address biodiversity loss – a concern for three quarters (74%) of investors – as asset managers are still working on risk mitigation rather than the loftier future goal of positive impact.
Advisors may also be concerned about other lingering questions surrounding responsible investing. Amid continued conflict in ESG ratings from different rating agencies – a natural consequence of their diverse scoring methodologies – 75% of respondents in the RIA’s survey said they were very concerned or somewhat concerned about greenwashing.
To help curb the risks and protect investors, investment industry regulators around the world are stepping in with ESG frameworks and classification systems, as well as clearer guidance or stricter enforcement of existing applicable rules. In the U.S., the Securities and Exchange commission has imposed tens of millions of dollars in fines against firms it said were falsely marketing certain funds under the umbrella of ESG.
“The [Canadian Securities Administrators] has really tackled this in the right way,” said Kelly, referring to anti-greenwashing guidance that it released for ESG funds last year. “That has helped us to ensure that our current disclosures are really being very clear in terms of what our intended objectives and outcomes are for the products.”
In line with the CSA’s push for client-focused reforms (CFRs) in 2021, the Investment Industry Regulatory Organization of Canada (IIROC) – which has now been subsumed into Canada’s new single SRO – also encouraged firms to consider clients’ desire to “[invest] in accordance with environmental, social, and governance criteria” as part of their broader KYC oblications.
“While the guidance from IIROC allows for these questions, it probably hasn't been hard-coded into all of the dealers’ KYC conversations yet,” she said. “I think it's going to take time for those conversations to become normalized.”
Kelly expects a new fund classification system from the Canadian Investment Fund Standards Committee (CIFSC) that’s coming this year will help investors better understand the nuances of ESG products. Beyond that, it could also provide a valuable tool for advisors to navigate the challenge of making RI recommendations.
For advisors looking to start RI conversations with their clients, Debas said it’s important to demand information from fund managers or wholesalers about the strategies and portfolios underlying their RI products. She also emphasized the importance of understanding what ESG concerns and issues their clients care about, and explain how a particular product addresses those concerns.
“[Make] sure not to oversell a responsible investment product,” she said. “If you're able to really understand your clients’ objectives and identify what they want, then you can really manage expectations and show them what the investment can and cannot do.”