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investments
Responsible investing funds are proliferating in Canada. And while more options may be good for clients, additional choices add to the challenge
of deciphering funds’ objectives and matching products to client preferences.
In an evolving landscape for responsible investing that lacks common standards, and where even key terms are debated, advisors have their work cut out determining client needs and matching those wishes to products.
“Advisors have a particularly tough challenge because sustainable investing can often be a very personal choice for retail clients,” says Ian Tam, director of investment research for Canada at Morningstar in Toronto.
“It’s very tough to match the needs of retail investors to the types of funds that are available.”
Global environmental, social and governance-themed (ESG) assets hit US$1.06 trillion in the first half of the year. In Canada, there were 114 “sustainable” funds to choose from as of June 30, with assets totalling $8.8 billion, according to Morningstar’s identification framework.
Daniel Straus, director, ETFs and financial product research at National Bank Financial in Toronto, says there are now around 50 ESG ETFs in Canada with more than $2 billion in assets — $1.2 billion of which flowed in dur- ing the first half of 2020.
“There’s a whole plethora of products, some of which agree with one another in how they approach things; some of them contrast or complement one another; and
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some of them disagree,” Straus said.
There’s no universal standard for investments that
call themselves responsible, sustainable or ESG. Issuers don’t always make material information available, a July report from Morningstar said, and ESG disclosures are often “inconsistent and non-comparable.”
Responsible investing funds can also have different objectives, mandates and holdings.
Morningstar’s sustainable investing framework breaks products into three main categories: ESG funds, impact funds and environmental sector funds (see below).
While funds can fit into more than one category, 99 of the 116 Canada-based funds that Morningstar iden- tifies as sustainable are considered ESG funds. Impact funds account for 54 and seven are environmental sec- tor funds.
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FALL 2020
Deciphering
the ESG landscape
Conflicting ratings and lack of standards leave plenty of work for advisors
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Morningstar’s sustainable investing breakdown
ESG funds: ESG risk factors are a central part of the investment pro- cess and/or managers actively engage with company management about ESG risks.
Impact funds: Seek to have a meas- urable impact on topics including the
environment, community develop- ment, and gender and diversity. Environmental sector funds: Invest in companies working in areas such as renewable energy, green transpor- tation, environmental services and climate resilience.