Few would argue that sustainable, responsible, and impact investing (SRI) doesn’t deserve attention, so it’s hard to take signs of increasing interest in the space as anything but positive. Aside from financial firms’ increased commitment to adopt RI-oriented designations, a new online survey commissioned by Mackenzie Investments shows growing support for the space.
From a sample of over 1,500 adult Canadians, 70% expressed a belief in the importance of investing in companies that focus on environmental, social, and corporate governance (ESG) issues. Thirty-one per cent currently engage in Sustainable, Responsible, and Impact investing (SRI), of which two thirds are planning to increase their holdings within the next two years; of those who do not currently engage in SRI, one third have plans to start making such investments.
The growth story is also evident based on fund flow figures. “In terms of gross sales, SRI investment funds have been growing at roughly double the compound annual growth rate of regular investment funds over the last five years,” said Michael Schnitman, senior vice president and head of Products at Mackenzie Investments.
That growth in SRI, Schnitman clarified, is off a small base of $10 billion, compared to the hundreds of billions in traditional mutual funds. But considering that SRI funds posted net positive inflows in 2018, as opposed to traditional funds that suffered net outflows, it’s clear that the fledgling space is an exciting area to get into for socially aware Canadians.
The interest in SRI is so strong that 53% of investors in the survey said they are prepared to give up some percentage of potential return to support companies whose values and actions align with their own. That’s in line with a belief shared by 67% of those engaging in SRI, which is that it results in lower returns compared to investing in regular/non-SRI funds.
But academic studies conducted over the years have shown that doesn’t hold true. That includes one conducted by Harvard Business School faculty in 2016, which showed that integrating ESG into investment management does not result in sacrificed performance.
“Our three SRI-oriented funds have certainly shown strong returns,” Schnitman said. “Over the past year, our Global Leadership Impact Fund is in the top quartile of its peer group, and our Global Sustainability and Impact Balanced Fund is in the top half of its peer group. And since inception, our Global Environmental Equity Fund is in the top quartile of its peer group.”
Engaging in SRI without sacrificing returns is no sure thing; it requires many considerations from the retail investor. One thing Schnitman stressed is finding the right investment manager. As ESG becomes the subject of increasing hype, many firms will launch an SRI fund or repurpose an existing fund into an SRI product. Firms with genuine deep experience, therefore, should be of real value.
“The SRI managers we look for do not stop at excluding so-called ‘sin stocks,’” he said. “What we look for are managers with intentionality: they would buy securities in companies and slowly build ownership leverage until they can act to make those companies improve their ESG standards.”
Toward that end, Mackenzie Investments has engaged Pax World, Rockefeller and Company, and Green Chip Financial to sub-advise their three ESG funds. As world-class sub-advisors, the three firms possess the resources, platforms, and leverage to engage in shareholder advocacy with the companies within the portfolios. And while many data providers evaluate companies and give them ESG scores, Mackenzie’s sub-advisors have teams that conduct fundamental analysis and perform quantitative screens on the top-scoring names in order to produce true ESG portfolios.
“ESG is an exciting area of opportunity, and investing in it doesn’t have to detract from portfolio performance,” Schnitman said. “The desire to make a difference in the world is gaining prominence, particularly among millennials, and what better way to do that than to applying capital in the areas where you can make the most impact?”
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