Just how much money is dedicated to responsible investment (RI) in Canada? Every two years, the Responsible Investment Association (RIA) surveys pension funds, asset managers, retail mutual funds and others connected with Canada’s RI industry to answer that very question. The latest number reported was impressive: $1 trillion as of Dec. 31, 2013. That’s a 68% increase compared with the same survey two years earlier.
That $1-trillion figure reported in the 2014 Canadian Responsible Investment Trends Report has already generated many headlines in the mainstream media — and so it should. Many people have worked hard to boost the generation of RI assets in Canada and they deserve the attention. However, the survey is more than just one number. Here are a few of the many interesting details in the 43-page study:
Retail mutual funds
This has traditionally been a challenging category for responsible investors, with retail RI mutual funds making up just a few percentage points of the overall retail mutual fund market in Canada. However, this latest survey shows a 52% increase, to $6.64 billion from $4.36 billion. It’s not where the RIA wants it to be, but at least RI funds are increasing at a much faster pace. Now, we just need more of them.
Qualitative factors are starting to make a difference, the report notes, and perhaps have increased mainstream investor interest and awareness of RI funds, including their personal values, increased knowledge of environmental, social and governance (ESG) risks and the generational transfer of wealth. These are all playing an important role in the growth of RI in Canada. A list of all RI mutual funds and retail funds is available on the RIA’s website.
Impact Investment (II)
Described in the report as a small, yet dynamic, category of RI, II refers to investments that provide solutions to social or environmental challenges by generating measurable positive ESG impacts along with a financial return.
This was the first year the RIA conducted an in-depth study of II in Canada, and it has now reached more than $4 billion, almost a 10% increase since others involved with II conducted a similar survey in 2012.
It’s worth noting that 94% of those assets are invested directly into companies or organizations with a social or environmental purpose as opposed to being invested indirectly through a fund.
Fossil-fuel divestment
This is another growing trend that has emerged since the RIA’s last report. In 2012, Oakland, Calif.-based international environmental organization 350.org launched a campaign to promote fossil-fuel divestment. The campaign has attracted a lot of attention in the U.S. and it has now made its way to Canada. So, will a Canadian RI mutual fund company develop a fossil fuel-free product? Perhaps. The challenge for mutual fund companies and others is that fossil-fuel companies account for roughly 25% of the value of Toronto Stock Exchange, representing significant challenges to the development of fossil fuel-free investing in Canada.
Still, there is demand for low-carbon or fossil fuel-free products with a Canadian focus. In fact, one asset manager has launched an institutional product and several others in the survey say they are considering launching this type of product, perhaps later this year.
Green bonds
Although green bonds are experiencing explosive growth around the world, respondents to the RIA’s biannual survey who disclosed bond allocations did not report any allocation to green bonds in 2013.
Green bonds are fixed-income securities that raise capital for projects with specific environmental benefits, such as renewable energy, clean transportation and clean water.
According to the RIA report, there have been four Canadian issuers of green bonds: Export Development Canada, Toronto-Dominion Bank, the Ontario government and Tandem Health Partners in partnership with the B.C. government.
These four issuances total $1.53 billion; all four were issued in 2014 and all were oversubscribed.
“Although Canada was a latecomer to the green bond boom, there is proof of demand coming from Canadian investors,” the RIA report says. “We can expect to see more Canadian-issued green bonds in 2015.”
Industry perspective
Finally, we asked the investment industry for its perspective on the growth of RI and the results were largely positive. Almost 60% of respondents said they expect either moderate or high levels of growth over the next two years.
The RIA also asked survey respondents to identify their main reasons for considering ESG criteria in their investment process. The top three reasons were minimizing risk, client demand and improving returns over time.
Although minimizing risk is an important consideration, the strength of client demand caught the RIA’s attention. The more investors ask about RI, the greater the investment industry will pay attention — hopefully with the addition of new RI products. This is something the market sorely needs, particularly on the retail side.