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January 2020 BYB: OUTLOOK 2020 Standards needed
INVESTMENT EXECUTIVE
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for RI products
Investors have shown interest in responsible investments. But what makes an investment responsible?
l BY GREG DALGETTY
retail investors have made their
interest in responsible investing (RI) clear, with 79% of participants in the Responsible Investment Association’s (RIA) 2019 Investor Opinion Survey saying they want to be informed of responsible investment options by their financial advisor.
What’s less clear is what actually makes an investment “responsible.” The RIA’s online RI Marketplace features a list of more than 150 mutual funds, ETFs and other investment products classified as RI. But judging just how responsible these products are is tough.
“If we don’t have standards, how does the consumer really know for sure that what they’re buying is what they expect?” asks Stephen Whipp, managing direc- tor, responsible asset management, with Victoria-based Stephen Whipp Financial, which operates under the Leede Jones Gable Inc. (LJG) umbrella.
Whipp says that “greenwashing” — a term used to describe the practice of passing off products as more environ- ment-friendly than they actually are — “will continue to be an issue until we get some standards.”
Such standards may be forthcoming.
In June, Canada’s Expert Panel on Sustainable Finance proposed creat- ing additional contribution room and a “super” tax deduction for “climate- conscious” investments held in RRSPs. If implemented, that would spur the federal government to draft legislation that sets standards for responsible investments, says Ryan Riordan, associate professor of finance at the Kingston, Ont.-based Smith School of Business at Queen’s University.
“[Right now] anyone can say, ‘We’re a green fund’ or ‘a sustainable fund’,” Riordan says. “Really, what does that mean? But if you come out and say, ‘We’re green, as per the requirements of the RRSP Green Investment Act,’ then at least we know something.”
As well, publicly traded companies may soon be reporting more consistently on their environmental, social and gov- ernance (ESG) practices.
“We are still at the beginning of what I hope is going to be a major evolution in corporate reporting to investors,” says Marie-Josée Privyk, founder of Montreal- based FinComm Services, which advises publicly traded companies on improving their ESG reporting.
While many companies do provide ESG reports, Privyk says, “ESG reporting is still very much voluntary” and can be inconsistent among companies.
“The metrics can be very different,” Privyk says, “so it makes comparability difficult in a given sector.”
Currently, there are no regulations in Canada requiring companies to provide ESG reports. While Privyk says regulations would “accelerate the pace of change,” investors demanding ESG reports will be a “huge motivator” for companies. “When [invest- ors] ask, companies respond,” she says.
Until RI standards and consistent ESG reporting are commonplace, you will have a crucial role to play in helping your cli- ents distinguish true responsible invest- ments from “greenwashed” investments, says Joss Biggins, investment advisor with Vancouver-based EthicInvest, which also operates under the LJG umbrella.
Biggins says his clients — whom he describes as “dark green” socially respon- sible investors — often have questions about just how green the investments they’re buying are. “They come to us with those questions, and one of our biggest value propositions is not being afraid to answer those questions,” he says.
Tena Rieck, founder of Toronto-based Honestly Invested, an RI consultancy, acknowledges that staying on top of all the developments in RI can be “very time-consuming” for advisors.
“On the one hand, I feel sympathy for advisors because they have a lot on their plate,” Rieck says. “But on the other hand, I personally feel that [RI] is the future, and if [advisors] want to stay relevant to their clients, they have to start getting educated about this.”
Rieck is hopeful that “more simple- to-read resources” will lead more clients to invest responsibly. “If we can somehow
convert all the technical knowledge into an easy-to-understand way for investors to participate, that will really be the catalyst to get things moving,” she says.
Biggins says he believes RI standards are “going to come with time,” but he stresses that we don’t have much time left to act on issues such as climate change.
“We have 12 years to [get to] a point [at which] we can’t reverse global warming,” Biggins says. “My take is that we don’t have time when it comes to our ethical considerations, our climate considera- tions, our biological considerations. We need to move [on] these things quickly.”
Biggins predicts we’ll eventually get to a point at which “responsible investing is just the norm.”
Biggins adds: “We’re going to move into a spot where we’re going to ask for a fund’s Morningstar rating, we’re going to ask for its return over the past 10 years and we’re going to ask for its ESG rating.” IE
Cyclical economies, such as Canada’s, could fare poorly
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and is “not concerned about making tac-
tical short-term portfolio shifts.”
Riach says his firm is underweighted in equities — primarily Canadian stocks — “because cyclical economies [such as Canada’s] tend not to do too well in a global downturn.” U.S. equities are favoured because that market offers bet-
ter exposure to more defensive stocks. Riach says his firm also is reducing exposure to corporate debt, but is slightly overweighted in government bonds and cash, which compensates for the under-
weighting in equities.
“We have been taking our corporate
credit down because vulnerabilities in equi- ties will affect corporate credit,” Riach says, “and spreads in corporate bonds, yields [of which] are hovering around 30-year aver- ages, are not as attractive.”
The overweighting in cash is “higher than normal” and a “reflection of market uncertainty.” This position facilitates tak- ing volatility out of portfolios. In the event that market conditions improve, the cash can be deployed, Riach says.
“There might be some opportunity to add longer-duration bonds because rates have really backed up, especially in Canada
since summer,” Riach says, adding that although yields on these bonds are relatively low, “the bias to rates in Canada is down- ward, so there is an opportunity for capital appreciation should rates head lower.”
Riach’s firm holds a neutral to slightly overweighted position in international markets, where, he believes, valuations are more attractive, reflecting the greater risk of investing in these markets. He sug- gests that rising populism and concerns over Brexit and trade, concerns that have been around for a long time, may already be priced into the market.
Riach is “very constructive longer- term” toward emerging markets (EMs), where he holds a neutral to slightly under- weighted position. He says EMs have undertaken structural improvements in areas such as policy reforms and now have greater reliance on domestic borrowing, thereby reducing their risk. He is, how- ever, cautious about the impact of trade uncertainties on EM economies.
Belchetz, on the other hand, says, “Regardless of where clients are in their investment cycle, we are staying the course based on their investment goals and objectives.” He notes that his clients’ asset mixes are customized to their cir- cumstances already.
“We are definitely not market-timers,” Belchetz says. “We could have done some- thing different a year ago, when a recession was first speculated, but it didn’t happen. Our modus operandi is to stay invested according to clients’ long-term plans — and if a recession happens, it happens.”
Riach takes a slightly different stance in setting the asset mix for clients, whether they are close to or far away from retirement. “Each client is unique, with different object- ives and constraints,” he notes. “The direc- tion of positioning doesn’t change across portfolios. Directionally, we would move portfolios, but the magnitude of the moves [in each portfolio] would be different.”
For example, if a younger investor had an 80% neutral position, Riach would reduce that position and do the same for an older client who might have a 30% position.
From a financial advisor’s perspective, Prem Malik, advisor with Queensbury Securities Inc. in Toronto, says he empha- sizes long-term, goals-driven investing based on clients’ objectives and time hori- zon, and never attempts to time the mar- ket. “I have been burned by sector bias and do not make sector calls.”
However, some clients climb a wall of worry during uncertain market conditions, Malik says: “If clients remain anxious after a
review of their objectives, I encourage them to get out of the market and remain in cash.” Should a recession happen, Belchetz says, sectors such as consumer staples and utilities — in which people would not necessarily cut spending — will con- tinue to perform well. But sectors that depend on discretionary spending tend to suffer. As well, the commodities and materials sectors also could experience
volatility.
In spite of uncertainty, there is an out-
side chance that equities could continue to perform well for an extended period. Riach says monetary and fiscal policies have been very accommodating, so there is room for stimulus.
In a U.S. election year, fiscal and mon- etary stimuli are more likely. “As long as there is monetary and fiscal stimulus and rates remain low, there is scope for equi- ties to continue to rise and the recovery could extend longer,” Riach says.
The end of 2019 also brought positive economic signals: agreement on the first phase of the U.S./China trade deal; and a majority for Boris Johnson in the U.K. elections, paving the way for the U.K. to leave the European Union. Still, these posi- tive signals do not outweigh the risks of an economic slowdown. IE
Currently, there are no regulations in Canada requiring companies to provide ESG reports
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