Financial advisors can educate themselves on sustainable investing so they can answer their clients’ questions and allay concerns about greenwashing and a lack of transparency in corporate governance.WANAN YOSSINGKUM/iStockPhoto / Getty Images
More than 1,700 responsible investment leaders and professionals from around the world will descend on Toronto this week to attend the PRI in Person responsible investing conference. They’ll be discussing emerging issues and global trends within the rapidly evolving policy and regulatory landscapes around environmental, social and governance (ESG) investing.
One of the reasons Canada was chosen to host this prestigious event is that the energy transition is very much underway in our country – and Canadian investors are in the driver’s seat.
Climate change, social unrest and governance failures have prompted investors to demand more sustainable investment options and greater transparency and accountability from companies claiming to engage in ESG practices, which have financial consequences on any investment. These factors must be considered in the investment process to build the most resilient portfolios and to maximize value for investors.
Increased pressure from investors incentivizes companies to build sustainable business models, which leads to stronger companies, more ethical labour practices, reduced environmental impact and elevated governance structures.
In Canada, asset managers have a relatively high participation rate and commitment to the Principles for Responsible Investment (PRI), a United Nations-supported international network of investors promoting sustainable investment by incorporating ESG into investment decision-making.
Additionally, Canada has reached two other important milestones in this space. The first was when Alberta turned off its last coal power plant ahead of schedule in June, contributing to Canada’s goal of achieving coal-free electricity by 2030. The second was when the IFRS Foundation’s International Sustainability Standards Board opened an office in Montreal in May, an initiative led by CPA Canada with the support of many Canadian asset managers and owners, which will encourage more sustainability disclosures from companies.
Yet, despite these successes, there’s still much more to do.
According to the most recent UN report on progress toward its sustainable development goals, the world is on track to achieve only 17 per cent of its stated 2030 targets. The pandemic and other factors have led to 23 million more people living in extreme poverty and 123 million people suffering from hunger in 2022 compared with 2019.
The consequences of climate change are also becoming a harsh reality for millions of people, costing economies and companies billions of dollars, with the Intergovernmental Panel on Climate Change projecting the global cost of damage from climate change to reach up to US$3.1-trillion per year by 2050.
Sustainable funds in Canada are on the rise, but the journey has its challenges. The fund classification has seen significant outflows this year but overall assets continue to grow, topping $60-billion in the second quarter, according to Morningstar.
The need for a transition to a sustainable future can’t be overstated. That’s not just about mitigating risks; it’s about seizing opportunities to create a better world for future generations and participating in the significant investment opportunities related to this transition. And advisors need to help.
To promote responsible investing and push companies in the right direction, advisors must support and guide their clients who are interested in making investment decisions that provide both returns and a positive impact on the world.
Become a sustainability expert
According to the Responsible Investment Association’s (RIA) 2023 RIA Investor Opinion Survey, more than two-thirds of Canadian investors want to discuss sustainable investing with their advisors. However, only about one-third reported that their advisor had raised the topic with them. This is a lost opportunity.
Financial advisors can educate themselves on sustainable investing so they can answer their clients’ questions and allay concerns about greenwashing and a lack of transparency in corporate governance – concerns that 61 per cent of Canadians said they have regarding sustainable investing.
The PRI and the RIA have educational resources and tools to aid advisors in these discussions.
Find the opportunities
While investors are expressing a growing interest in sustainable investing, many aren’t aware of the opportunities that exist in the ongoing energy transition. For example, investment in clean energy is outpacing fossil fuel investment by approximately 2 to 1, according to the International Energy Agency.
As the world continues to shift toward a low-carbon future, advisors should ensure their clients’ portfolios can benefit from these opportunities.
Work with the right asset manager
Finally, advisors must ensure they’re working with a trusted asset manager that considers material ESG risks in their evaluation of companies and issuers. In Canada, asset managers have among the highest proportion of assets that consider those risks in their investment process. Advisors should endeavour to understand this process and ask for fund reporting so they can share this information with their clients.
Capital markets play a crucial role in driving a sustainable future by mobilizing the necessary financial resources and influencing corporate behaviour toward more sustainable practices. Despite the progress in Canada, the financial industry, including investment managers and advisors, must do more to support clients in understanding and allocating to the opportunities associated with transitioning to a sustainable future.
Luke Gould is president and chief executive officer of Mackenzie Investments and Fate Saghir is senior vice president, sustainability, at the firm.