A move against greenwashing is one of the RI trends gaining steam.JM Image Factory
What forces will shape responsible investing (RI) in 2023?
A recent report by the Responsible Investment Association says “RI is entrenched in Canada,” with $3-trillion in assets under management. Factoring in environmental, social and governance (ESG) performance and goals has become a “fundamental tool” in the decision making of Canadian investors, the report says.
With ESG funds a key part of portfolios, investors can look to five RI trends that are likely to pick up in 2023.
1. Green bonds are poised for growth
Fixed-income instruments that support renewable energy or affordable housing have long appealed to responsible investors. But access and pricing have proved challenging for many, says Ryan Fontaine, RI specialist with Credential Securities at Assiniboine Credit Union in Winnipeg.
“A lot of companies have come out with funds offering diversified access. And with interest rates where they are, investors can seize on much better yields.”
Investors have plenty of choice here, too, from exchange-traded funds (ETFs) such as Horizons S&P Green Bond Index ETF (HGGB-T) to mutual funds like CI’s Global Green Bond Fund.
2. Embrace sustainable investing without the volatility
ESG and sustainable funds offering exposure to broad, diversified indices are abundant. These investments are prone to the same downside volatility that the market as a whole endured in 2022, says Matthew Soegtrop, director of RI at BMO Private Wealth in Toronto.
“Expect more offerings with not just a sustainability factor but also a value factor,” Mr. Soegtrop says.
These funds will hold lower-volatility stocks, which will be less negatively affected by high inflation, rising interest rates and declining economic conditions, he adds.
Investors already have many choices in this space, including the Invesco S&P 500 Low Volatility ETF (ULV-F-T) and the Sun Life MFS Low Volatility Global Equity Fund on the mutual fund side.
3. Fission is on a mission
Renewable energy sources such as wind and solar are likely to fall short of filling the energy vacuum to be created by phasing out fossil fuels, says Steen Rasmussen, publisher of Carboncredits.com in Vancouver. That could put the spotlight on nuclear.
“Uranium is likely going to fill some of that gap because it’s relatively clean from a climate change perspective,” Mr. Rasmussen says.
North American producers have seen renewed interest, particularly since the start of the Ukraine war. Kazakhstan is the largest producer of uranium in the world, and Russia is the sixth largest. In 2021, the United States bought nearly half its uranium supply from those nations. Institutional investors bought a lot of the commodity early in the conflict over concerns the supply could be disrupted. “The U.S. is looking for a safe supply of uranium,” Mr. Rasmussen says.
Saskatoon-based Cameco Corporation (CCO-T), which mines some of the largest, richest deposits in the world, is likely to see increasing demand from the western world.
4. More screening for fossil fuels
Although the energy industry has rebounded, the growth of funds that are free of fossil fuels is unlikely to abate in 2023. “More companies are issuing these funds as investors seek to have more climate-friendly portfolios,” Mr. Fontaine says.
Among newer entrants are CIBC’s Sustainable Funds series, which includes its Sustainable Canadian Equity Fund (CSCE-NE). It screens out oil and gas companies while limiting exposure to other holdings in the portfolio that still have revenues from servicing the industry.
5. Coming clean on greenwashing
Greenwashing came to the forefront in 2022 as leading investors labelled ESG as window dressing to attract capital. Regulators are also looking more closely at greenwashing, says Tim Nash, Toronto-based founder of Good Investing, a financial planning firm specializing in RI.
“The Canadian Securities Administrator has recently put issuers on notice for greenwashing,” he says. “In other countries we’ve seen companies fined for making misleading claims, and it looks like that’s coming to Canada, which is a good thing.”
Mr. Soegtrop agrees that growing concerns about greenwashing will be a positive for RI, showing its evolution from qualitative to quantitative metrics.
“It’s no longer good enough to make claims; you need to back them up,” Mr. Soegtrop says. “Increasingly, investors are going to demand to see that quantitative data to make sure asset managers are not engaging in greenwashing.”