Companies like startup Act Analytics, Morningstar, and its subsidiary Sustainalytics, as well as Bloomberg and Refinitiv, are providing either ESG portfolio tools or data to help advisors and investors pick and screen investments based on their individual responsible investment criteria.ipopba/iStockPhoto / Getty Images
Advisors are tapping into a growing number of tools to help them choose sustainable investments that best meet clients’ increased interest in areas such as companies’ environmental, social and governance (ESG) performance.
Toronto-based startup Act Analytics Corp. launched its ESG portfolio analytics platform earlier this year to help advisors compare, contrast and construct customized, ESG-themed portfolios for their clients. In July, Morningstar Inc. finalized its acquisition of well-known ESG ratings and research firm Sustainalytics, the latter of which made its ESG risk ratings on more than 4,000 public companies publicly available on its website that month.
In addition, Bloomberg LP and Refinitiv are now providing ESG data and scores to help advisors and investors pick and screen investments based on their individual responsible investment (RI) criteria.
“Over the past two or three years, we’ve seen an uptick in demand for responsible investing solutions,” says Asmita Kanungo, national director, ESG practice management, at NEI Investments in Toronto, who helps advisors understand and implement RI in their business. “Investors are looking for more than just returns.”
The annual Canadian Mutual Fund & Exchange-Traded Fund Investor Survey that Pollara Strategic Insights conducted on behalf of the Investment Funds Institute of Canada shows that 61 per cent of both mutual fund and exchange-traded fund investors who don’t currently own RI are likely to include them in their portfolios in the next few years.
The interest comes alongside both the growth and outperformance of RI in the first half of 2020, according to Morningstar data. A recent Morningstar report titled Sharpening the Tools of the ESG Investor, also suggests advisors are responsible for managing ESG risks for clients.
Before choosing one or more ESG portfolio analytics platform, Ms. Kanungo says advisors need to figure out the RI criteria they need. For example, a client might want only fossil-fuel-free investments or to invest in companies with a higher-than-average social performance.
“What advisors are really seeking is a data source [with a] methodology that aligns with their thinking and that they can explain to their clients,” she says.
The tools can then be used to confirm investment styles and align with RI goals and values, says Ms. Kanungo, who also recommends advisors do their own due diligence to ensure the investment is the right fit for clients.
Act Analytics, co-founded last year by Mike Unwin and Zachary Dan, launched its ESG platform in February to enable advisors to weight specific ESG investments based on a client’s values and beliefs. For example, an advisor might choose investments with a 50-per-cent focus on environmental factors, 30 per cent on social and 10 per cent on governance.
“We want to make it easy for the advisor to use these scores to build a portfolio and then talk about the indicators, rather than talk about the scores,” Mr. Dan says. “Clients aren’t going to talk about scores, that’s not the language of the average person … and I think that’s one of the current errors of the ESG landscape.”
The company recently added a new function that gives advisors a sense of an investment’s ESG performance based on the news.
Morningstar has provided sustainability ratings for funds since 2016, with a focus on providing assessments of ESG risk for investors, according to Ian Tam, director of investment research, who says the ratings are rooted in individual company ESG risk scores from Sustainalytics (formerly Jantzi Research), which was founded in 1992 and is now part of Morningstar.
Mr. Tam says Morningstar’s individual company scores can also help advisors better understand a company’s ESG risk relative to peers.
“Advisors aren’t going to have time to do all of the detailed reading about a particular company or a fund, they want to rely on a score,” he says. “From that angle, I think it’s very useful for advisors to see how ESG friendly a stock or fund is.”
The scoring system for stocks is from zero to 100; the higher the score, the greater the ESG risk.
“Anything above 40 is considered extremely risky from an ESG standpoint,” Mr. Tam says.
Some of the information can be found for free at Morningstar’s of Sustainalytics’ websites, or there’s a fee-based Morningstar Advisor Workstation platform that provides more detail.
While some advisors are very experienced at ESG investing, Mr. Tam says many are still trying to wrap their heads around how to approach it.
“It’s a very personal decision for clients … there are tons of different ways to go about it and it depends on their preferences,” he says.
Ian Robertson, vice-president and portfolio manager at Vancouver-based Odlum Brown Ltd., says ESG investment tools are constantly evolving, driven by growing investor interest. Companies are also disclosing more information to be measured, under pressure from stakeholders such as investors and activist organizations.
“[Advisors] want to get robust, standardized data so that they can put it into their equation the same way they use the balance sheet and income statement for companies,” he says.
What would really help advisors and their clients, he believes, is even more information and standardization of ESG factors. He believes that will come as ESG investing continues to move more into the mainstream.
“It’s happening,” he says. “Ideally, it would happen faster, but in the grand scheme of things, ESG information has come a long way ... although there’s more room for innovation.”