Special Feature

HNW Guide 2017

The high net-worth client sector is growing. Learn about the expectations and demographic characteristics of these clients, how to use teams to meet their needs in areas such as estate planning and what the future holds for advisors who choose to focus on this lucrative segment.

Rising numbers of HNW clients are asking about socially responsible investing

By Fiona Collie | Mid-October 2017

Socially responsible investing (SRI) is a growing category in Canada's investing landscape - one that's catching the eyes of the well heeled. To meet the SRI needs of your high net-worth (HNW) clients, you must be prepared to do your homework and talk to them about more than financial matters.

"[Clients] want to understand how they can manage their money differently and that their money does have an impact," says Patti Dolan, portfolio manager with SAGE Investment Advisors team, a unit of Toronto-based Raymond James Ltd., in Calgary. "It's a really kind of 'juicy' conversation."

SRI, in which environmental, social and corporate governance (ESG) factors are incorporated into the selection of investments, accounted for $1.5 trillion in Canadian investment assets in 2015, an increase of 49% from 2013, according to the Responsible Investment Association's 2016 Canadian Responsible Investment Trends Report. Although the bulk of these assets are held by institutional investors, individual investments are on the rise. For example, Canadian SRI assets owned by individual investors, including many wealthy clients, reached $118.5 billion in 2015, a 91% increase from 2013.

So, where do HNW clients fit into the SRI picture? Chris Nickerson, senior vice president, sales distribution and marketing, with Toronto-based NEI Investments, a division of Northwest and Ethical Investments LP, notes that his firm is seeing an increase in demand for SRI options among affluent investors.

"There is not only an interest but a need from the high net-worth segment for socially responsible investing," Nickerson says.

HNW clients may be drawn to SRI for several reasons, including the potential to reduce investment risk, a desire to leave a positive legacy and a wish to align their investments with the environmental and social interests of their beneficiaries.

Whatever the reason, you need to be prepared to educate your clients about SRI and to talk about more than just a company's return on investment (ROI). Says Dolan: "Advisors need to know a little bit more about [the companies] they're invested in rather than just rattling off financials such as ROI. [Advisors] need to have some stories behind what the companies are doing, and why."

Thus, you should be prepared to explain various SRI strategies. Exclusionary screening, for example, is a strategy in which certain sectors or types of companies are excluded from a portfolio because they do not meet ESG criteria. Your clients may tell you that they do not wish to hold shares of any companies in certain industries, such as oil or coal, in their investment portfolios.

However, Michael Silicz, an investment advisor in Winnipeg with Montreal-based National Bank Financial Ltd.'s wealth-management division, often cautions his clients against such a strict stance because the oil sector represents a key part of the Canadian market. "Even though [a client is] against oil, it's here today," Silicz says. He will discuss with his clients how to find oil companies that meet certain ESG criteria.

Beyond screening, a growing part of SRI is shareholder engagement, a strategy in which shareholders, such as fund portfolio managers, advocate for improvement in ESG factors within a company. For example, NEI Investments advocates for the improvement in ESG criteria within companies by talking with management, filing shareholder proposals and engaging in proxy voting during annual general meetings.

Another approach to SRI is "thematic" - in which clients invest in sustainable businesses that are focused on improvements in any of several environmental criteria, such as energy efficiency and water scarcity.

In trying to determine which companies meet ESG criteria, and how they do so, you can use several sources. Petra Remy, an investment advisor in Edmonton with Remy Brown Investment Group, a unit of Toronto-based CIBC Wood Gundy, works with Sustainalytics, an Amsterdam-based firm specializing in ESG research, to screen her clients' portfolios for ESG criteria. "The research company helps us tremendously," she says.

Other sources of useful information regarding companies' ESG practices include New York-based MSCI Inc., the Vancouver-based Shareholder Association for Research and Education (a.k.a. SHARE), mutual fund companies and corporate sustainability reports.

Pauline Shum Nolan, professor of finance with York University's Schulich School of Business and CEO and co-founder of Toronto-based PW Portfolio Analytics Inc., cautions that research firms and mutual fund companies may use different criteria when evaluating a company. So, you may need to use your discretion in determining whether the companies selected by these firms meet your clients' expectations for SRI.

Although finding the right SRI for your clients may take a little extra effort, advisors who work in this investment category, including Remy, Silicz and Dolan, say the effort is worth it. They believe that taking a socially responsible view of investments is not only important to their clients, but also represents the future of the investment industry.

"My goal is that within the next five to 10 years, what I do is not a niche area; it's just how business is done," Dolan says. "And I think that's [the direction in which] we're trending."

© 2017 Investment Executive. All rights reserved.