Catching the RI wave

Institutional investors have long considered environmental, social and governance (ESG) factors when investing and are leaders in the RI market. But the RIA report states that more retail assets are flowing into RI-branded funds, with the size of that market tripling since 2015 to more than $400 billion from $118.5 billion. Client interest plays a part, but more large-scale asset owners also are implementing ESG integration and shifting assets as a result, the reports states.

“Individuals are beginning to realize that their investments have an impact,” says Brian Minns, vice president of sustainable investing at Addenda Capital Inc. in Toronto.

“People are not totally satisfied with how society is growing,” Minns says, particularly when they consider issues such as social inequality and resource scarcity.

Eighty per cent of the 800 participants in the RIA’s 2018 investor opinion survey said they’re concerned about climate change and the environment, with 70% adding that ESG risks will affect some industries negatively within the next five years.

Furthermore, 86% and 81% said financial advisors and institutions, respectively, should be aware of ESG risks and inform investors about them.

“A part of that [awareness] is having better information,” Minns says, referring to news, market analysis and enhanced financial disclosure from companies. “We’re going to continue to see a lot of movement toward both institutional and retail investors embracing responsible investing.”

Another driver of RI growth is government policy initiatives, both in Canada and around the world, Minns says. A recent example is the 2018 appointment and work of the Canadian Expert Panel on Sustainable Finance, which will release federal recommendations in 2019, with partial focus on how to boost RI and combat issues such as climate change.

Nalini Feuilloley, head of Canada’s network with the UN Principles for Responsible Investment (UNPRI) in Toronto, anticipates institutional and large-scale investors will continue to drive RI asset growth – in part because they have more resources.

However, the increasing number of RI-branded products will be a boon to retail clients, advisors and the RI industry, Feuilloley says.

The UNPRI focuses mainly on figuring out if there are ways to help the financial services industry better support RI and ESG analysis from a macro perspective, Feuilloley says: “Retail customers generally buy into ESG-branded products, whereas institutional investors are taking a more bottom-up, fundamental approach. There is a place and a need for [RI] products [in investment portfolios].”

In 2019, RI retail growth will continue to be driven partly by interest among millennials, Feuilloley adds. This echoes the findings of a joint research report from Europe-based Kepler Cheuvreux and Australia-based First State Investments released in November.

That report – based on a study that polled 540 global investors – called millennials “the world’s most powerful consumers” and highlighted their strong interest in RI. The report added that 81% of survey participants of all ages want more education about RI.

Some resistance against RI may continue, Minns says, but consider that “there are even people who [have been] willing to give up returns to express their [RI] views.”

As misconceptions dissipate about RI returns, for example, Minns says, “it’s reasonable to expect more growth in [RI] assets.”

As this growth occurs, RI discussions should be a core offering, says Patti Dolan, portfolio manager at Mission Wealth Advisors, which operates under the Raymond James Ltd. banner, in Calgary. Dolan expects new fund development from larger mutual fund providers. She adds that U.S. firms are looking at standardizing RI reporting to improve ESG analysis.

With all of these factors in mind, the outlook is bright for the mainstream financial market’s adoption of RI.

“That’s the future,” says Dermot Foley, portfolio manager, ESG analysis, with Vancity Investment Management Ltd. in Vancouver. “We’re going to see a much bigger push in 2019.”

Adding responsible investing (RI) to your suite of services requires a few changes in the way you approach your business and deal with your clients.

Here are some tips to get you started:

– Do your homework. Research the market and prepare for clients’ questions. Brian Minns, vice president, sustainable investing, at Addenda Capital Inc. in Toronto, suggests reviewing the Responsible Investment Association’s (RIA) website (riacanada.ca) and research reports.

Patti Dolan, portfolio manager with Mission Wealth Advisors in Calgary, suggests you take an RI course, such as those provided by the RIA.

– Be proactive. Listen to your clients, discuss their values and bring up RI. Scott Boassaly, principal and advisor at Balance Investments in Ottawa, typically mentions RI early in client discussions. He also tailors discussions about ESG issues and strategies based on the client’s values.

Dolan adds that clients must be aware that RI strategies only mitigate risk over the long term vs erasing it altogether.

“I’m proactive in promoting RI,” Boassaly says. “It’s aligned with my values, and I want to have a practice that [reflects that]. And the investments do well. Clients may not be strong advocates, but [RI can] still resonate with them on a financial level.”

– Watch your language. Discuss responsible strategies clearly and consistently. Acronyms may confuse clients, so Boassaly prefers to use terms such as “sustainable” and “conscientious” and define them.

– Conduct product due diligence. If a client is open to RI, says Dermot Foley, portfolio manager, ESG analysis, with Vancity Investment Management Ltd. in Vancouver, make sure the funds you choose are truly responsible. “If they don’t live up, that hurts the whole industry,” he warns.

Nalini Feuilloley, head of Canada’s network with the UN Principles for Responsible Investment, advises you don’t ignore non-ESG branded products if the portfolio managers behind them are using RI approaches. “It’s not just about the product,” she says, but about the manager’s overall focus on ESG and RI analysis.

– Offer a mixed portfolio approach. More than 60% of Boassaly’s clients have adopted RI in their portfolios, while 10%-15% are fully RI-focused. As an advisor with a mutual funds licence, he offers mutual funds and segregated funds. “I’ve had clients come to me because they’ve found I’m [RIA] certified. I don’t try to make a client’s entire list of holdings RI. I use whatever is best for the client.”