Ignore ESG at your peril

Since 2013, responsible investment (RI) mutual funds and ETFs have more than doubled their assets under management (AUM) to $12.7 billion in 2019, according to data from the Investment Funds Institute of Canada (IFIC).

Daniel Straus, vice president, ETFs and financial products research, with Montreal-based National Bank Financial Inc., says the rise in ESG investing has been led largely by institutional investors. But, judging by increasing AUM of ETFs such as iShares Jantzi Social Index ETF — which, after languishing following its launch in 2007, quintupled its AUM to $178 million over the past two years — retail investors are showing more interest in RI.

“We are at the beginning of what may be a very large sea change of investor behaviour across the board, both retail and institutional,” says Straus, who notes that a growing cohort of younger investors is helping to lead the charge into RI.

Nicolas Piquard, vice president, portfolio manager and options strategist with Horizons ETFs Management (Canada) Inc. in Toronto, says millennial investors are likely to play a large role in driving ESG growth. “A big part of why we haven’t seen the inflows from retail investors could be because the ones who are the most interested in ESG don’t have as [many investible] assets yet,” Piquard says.

A 2019 study by the Morgan Stanley Institute for Sustainable Investing found that 95% of millennials are interested in sustainable investing, and 67% take part in at least one sustainable investment activity — compared with 52% of the general population.

Consequently, as millennials grow their investible assets and/or inherit their parents’ wealth, being well versed in RI will become increasingly important for advisors.

“The millennials are only going to acquire more wealth, and when they do, that alone will lead to more interest and more assets [invested in RI],” says Piquard. He adds that ESG investing still is more of a philosophy than an asset class, which can make it difficult to fully adopt and understand, thus presenting another possible reason for the slow uptake in RI.

“There are a lot of products doing a lot of different things, and I think [RI] still is a bit confusing,” says Piquard.

Pat Dunwoody, executive director of the Canadian ETF Association, agrees. “The larger institutional investors can have detailed conversations with product providers to get the information that they want for their portfolio,” she says. “But for the average retail investor, [that is] quite difficult right now.”

RI products have proliferated in recent years as fund manufacturers expand their ESG offerings to keep pace with investors’ concerns about the economic impact of extreme weather events, plastics piling up in the oceans and gender equality in workplaces. According to IFIC’s latest Investment Funds Report, at the end of 2019 there were 16 firms in Canada offering a total of 69 RI mutual funds and 10 firms offering a total of 23 RI ETFs.

“I do think ESG will become more popular, but what that means in terms of numbers, I still don’t know,” Dunwoody says. “But clients are asking [about RI] now, and, from an advisor’s standpoint, it may pay to be somewhat knowledgeable in preparation for those questions.”