Less than one-third of participants in a Responsible Investment Association survey believe growth in responsible investing will come from financial advisors recommending the investments to their clients.Szepy/iStockPhoto / Getty Images
Advisors play a critical role in connecting investors with responsible investment (RI) options, but not enough of them highlight these products to their clients, according to a new report from the Responsible Investment Association (RIA).
The RIA says advisors are missing a “significant opportunity” to engage with investors – particularly younger clients – looking to align their values with their investments.
According to the RIA’s 2024 Canadian Responsible Investment Trends Report, 70 per cent of asset managers and owners surveyed said retail inventors are the group most likely to drive growth in RI over the next two to five years, followed by regulators and institutional investors at 61 and 58 per cent, respectively.
Less than one-third of survey participants (29 per cent) believe growth will come from financial advisors recommending responsible investments to their clients.
“It’s interesting to see investors and advisors at opposite ends of the spectrum,” said Glen Pichanick, the RIA’s head of advocacy and industry insights, during a webinar on Nov. 19 to present the report’s findings.
He said the results mirror other RIA studies that show a “service gap” between investors and advisors around RI. A 2023 RIA Investor Opinion Survey notes that two-thirds of investors surveyed want their advisors to tell them about RI, yet less than a third of advisors do.
Should there be an RI standard for advisors?
The new RIA report states advisors need a “working understanding” of RI funds and strategies to help clients make decisions.
About two-thirds (64 per cent) of survey participants believe there should be an RI standard for advisors – 27 per cent said it should be mandatory and another 13 per cent say RI knowledge should be required in existing advisor designations. There was no consensus on who should be responsible for the education and certification required.
“Advisors have differing opinions on who should provide education and certification,” the report states. “Providing clarity around this will be critical to ensuring advisors receive the education and certifications required to service their clients.”
Fate Saghir, senior vice-president and head of sustainability at Mackenzie Investments in Toronto, believes RI should be mandated for advisors.
“It’s absolutely important advisors come along on this journey,” she said during the RIA webinar. “The investment community and everyone who participates in it should know how to speak to this subject.”
Adelaide Chiu, vice-president and head of responsible investing with NEI Investments in Toronto, said advisors should tie their clients’ investment needs to their values. She notes RI topics are also encouraged as part of the know-your-client process established by the Canadian Investment Regulatory Organization.
“Advisors don’t need to be experts in responsible investing,” Ms. Chiu said during the webinar, pointing to different organizations and resources that can provide information. “They just need to have the confidence to initiate these conversations with their clients.”
RI assets reach record market share
The RIA report argues advisors need a better understanding of the funds and strategies available to guide their clients’ RI decisions, particularly given the rise in assets in recent years.
RI investments in Canada grew to a new high of almost $4.5-trillion in 2023, the RIA said. That’s up from $3.7-trillion in 2022 and $1-trillion in 2013.
The RIA says the growth comes alongside a rise in investor confidence driven by clearer definitions of RI strategies and improved ESG reporting practices. The survey shows 60 per cent of participants have increased confidence in the quality of ESG reporting.
About half of the survey participants expect moderate growth of RI assets in the coming years, despite concerns about greenwashing, a lack of reporting standards and “perceived performance concerns.”
Performance was one of the top three RI deterrents cited in the report, rising significantly to 33 per cent from 14 per cent in last year’s survey. Misconceptions about greenwashing and lack of disclosure standards were tied for first at 44 per cent each, but down from 64 per cent and 57 per cent, respectively, last year.
“While the growth of RI is encouraging, concerns around perceived performance have surfaced as a notable barrier, alongside greenwashing and regulatory uncertainty. Addressing these complexities will be critical to sustaining the current momentum of RI adoption,” stated RIA chief executive officer Patricia Fletcher in the report.
Roger Beauchemin, president of Addenda Capital Inc. in Montreal, said RI is intended to be a long-term approach that takes a while to work.
“You have to be comfortable with the strategy that you’re invested in, and you have to understand your product,” he said during the webinar.
“For instance, if you prefer, as an investor, not to be involved in the fossil fuel area … that’s fine. But then when energy runs like it did after Ukraine got invaded [in 2022] and … prices went through the roof, don’t be surprised to see your portfolio leave something behind.”
According to the report, the top three stewardship issues addressed by RI include climate change/risk (67 per cent), greenhouse gas emissions/net zero (48 per cent) and diversity and inclusion (34 per cent).
Executive compensation is expected to become much more prominent, the report states, with 68 per cent of participants saying they anticipate using it during the next two to five years, up from 42 per cent in last year’s report.
The top three industries to be screened out of funds were weapons and military (96 per cent), tobacco (88 per cent) and gambling (59 per cent).
The top three reasons survey participants cited for considering RI include minimizing risk (77 per cent), improving returns over time (63 per cent) and fulfilling a fiduciary duty (47 per cent).