It was the best of times; it was the worst of the times. The integration of environmental, social and governance (ESG) factors investing is on the rise; the financial markets remain volatile. The new realities of the popularized “Stay Home” mantra have become to some investors a type of wake-up call1.
The consequences the pandemic has raged on their environment, their societies and their governments has brought to light a renewed interest in financial products with a conscience. That said, taking the next steps to find expert guidance on how to do so tends to leave them slightly dazed and confused. This… is a tale of two perspectives.
Advisor enthusiasm for the new product offering is a little harder to come by. To many, ESG is little more than a passing fad. Some have even gone so far as to express surprise that indices like the MSCI 400 Social Index have either met or outperformed benchmarks like the S&P 5002. That said, more and more client meetings – particularly with women, Millennials and Gen Z investors – touch on the topic of responsible investing. In fact, investors looking to discuss the option increased by almost 15% from last year3! So, what exactly is it that is diverting advisors from adopting the strategy with a little more heart?
Studies have revealed that one deterrent to advisor adoption is terminology and categorization4. Exclusionary screening. Impact investing. Ethical investing. Socially responsible investing. The list of responsible investment strategies looks extensive, but the consequence of this knowledge gap is that advisors may not be able to adequately respond to the investment objectives of their clients.
A short-term solution to the problem could be that ESG-agnostic advisors could weave partnerships with dedicated experts. This means that any ESG analysis of client portfolios would be outsourced to select advisors deemed ESG champions. Partnering with experts in the space may elongate the analysis process, but the resulting quality of service could ultimately see an improvement.
Significant training and education need to occur before advisors can confidently say they can respond to investors’ questions on the topic. Financial professionals must work together to ensure that their investors have a high-level understanding of the three pillars of ESG. When they hear “sustainable,” investors often think environment. Social and governance causes aren’t at the top of the list of priorities. Investors want to believe responsible investments are part of the future, but the true test lies in where to find market opportunities and gain trustworthy information.
Despite the varying views on the topic, we err on the side of hope for the future of ESG investing. According to a survey from RBC Global Asset Management Inc., it’s estimated that 63% of Canadians are interested on pursuing some type of ESG-related investment5. However, nearly 50% of investors don’t even know where to begin to get more information on how to go about making those decisions. This represents a huge opportunity: Canadian investors consider their advisors’ guidance to be of most value when considering ESG investments.
There is a clear client interest here to learn more about this emerging strategy: it’s the role of the advisors to better educate the investor by making sound investment suggestions and enabling them to make decisions aligned to their investment goals. The undeniable reality is that investors have access to more information on their investments and heightened awareness as to where their money is going and what activities it’s funding. A whopping 87% of Canadians believe ESG investing can even contribute to risk mitigation in these volatile time6. Advisors can safely assume that providing a repertoire of trustworthy ESG solutions and being able to speak to their merit would fulfill this investor expectation.
ESG practices are still struggling to gain advisor recognition. Those who have not yet embraced the trend still believe that performance may pay a price because of the smaller pool of options these portfolios can pull from. This alone sheds light on industry experts’ faulty assumptions; ESG can be integrated into an investment portfolio in a myriad of different ways.
Though historical performance is not indicative of future returns, responsible investments have demonstrated a fighting spirit; they’ve covered just as much ground if not more than their traditional counterparts… and it’s only the beginning.
1. J.P. Morgan. July 2020. Why COVID-19 Could Prove to Be a Major Turning Point for ESG Investing.
2. National Bank Investments (data via Bloomberg).
3. Advisor’s Edge. October 2020. Most Canadian institutional investors believe ESG portfolios will outperform.
4. ESG Clarity. August 2020. Rathbones study finds ‘significant gaps’ in advisers’ ESG knowledge.
5. RBC Global Asset Management Inc. January 2020. Nearly two-thirds of Canadian retail investors are interested in allocating more funds to responsible investment, RBC Global Asset Management survey finds. The findings are from an Ipsos survey conducted on behalf of RBC Global Asset Management of 1,500 Canadian retail investors that took place between Aug. 13-23, 2019. The survey is accurate within +/- 2.9 percentage points, 19 times out of 20.
6. Advisor’s Edge. October 2020. Most Canadian institutional investors believe ESG portfolios will outperform.
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