Sustainable approaches are routinely part of the evaluation process whether or not a fund has an ESG mandate, experts say.Kerkez
Sustainability is a buzzword applicable to just about everything these days, from farm-to-fork to how we consume energy.
It’s also a big deal in the investment world.
A study from Deloitte notes that professionally managed assets with an environmental, social and governance (ESG) mandate – foundational aspects of sustainable investing – increased from US$19-trillion in 2014 to an estimated US$46-trillion last year.
That accounted for about one-third of all professionally managed investments globally. ESG-mandated funds could grow to about 60 per cent of all managed assets by 2025, the Deloitte study forecasts.
Ignoring this trend means potentially missing out on better returns, says David Rutherford, vice-president of corporate sustainability at Aviso Wealth in Toronto. “On balance, there are four key reasons for considering sustainable investing: risk mitigation, opportunities for growth, aligning your portfolio with your values, and creating an impact beyond returns.”
Evidence has been mounting for more than a decade regarding sustainable investing’s advantages, and these benefits are becoming increasingly clear. “There is a great math case that if you invested in companies with better ESG performance, over time you would outperform with lower risk,” says Graham Isenegger, a Victoria-based portfolio manager with Blue Heron Advisory Group at CIBC Wood Gundy.
He reports that his team’s managed ESG funds have outperformed their non-ESG benchmark by about four percentage points, on an annualized basis, since their launch more than eight years ago.
Sustainable approaches are routinely part of the evaluation process whether or not a fund has an ESG mandate, says Jeff Bay, a portfolio manager with Cypress Capital Management Ltd. in Vancouver.
“Generally, integrating ESG factors alongside the traditional financial measures has always given a better picture of a company’s overall financial health, even if we didn’t call it sustainable investing,” Mr. Bay says.
ESG practices touch on areas such as greenhouse gas emissions, land protection, water use, diversity in the work force and boardroom, labour standards, ethics and accountability, community relations and human rights. Companies with solid ESG records tend to reduce risks, which can translate into their ability to generate consistent and growing cash flows, Mr. Bay explains.
While better performance with less risk is important, values also matter for an increasing number of investors, Mr. Rutherford says. The Responsible Investment Association’s 2021 investor survey found that more than seven in 10 Canadians expressed interest in more sustainable investing.
But sustainable investing strategies mean different things to different investors. Thematic strategies, for instance, allow people to invest in specific solutions, from wind and solar companies, to sustainable forestry and agriculture.
“Owning only companies involved in renewable energy, for example, involves a thin slice of the overall market and likely isn’t appropriate for most investors,” Mr. Isenegger says.
He adds most Canadians seeking sustainable strategies still require a large part of their portfolio to be diversified across geographies and industries. This is where mandates that involve selecting companies making measurable improvement in ESG areas are likely to prove elemental.
A related strategy is impact investing, where capital is used to generate a positive societal benefit. Heather McLeod, a responsible investment specialist and senior financial consultant with IG Wealth Management in Thunder Bay, Ont., says these funds often invest in specific projects such as a net-zero social housing apartment, or research and development of a new battery technology.
“These days there are impact funds investing in companies trying to address a specific environmental or social concern,” Ms. McLeod says. Given the variety of approaches, “the whole area of sustainable investing can be a lot to parse out for most investors.”
It comes down to positives for people, planet and performance, whether investors are drawn to broad ESG mandates or targeted impact investing.
“It’s not simply about growing wealth,” Mr. Rutherford says. “More Canadians now see sustainable investing as a means of changing the world for the better.”