The growth of ESG has been one of the major investment stories of recent years, as environmental, social and governance factors have become a dominant force in the industry.
That’s especially the case for ETFs, where there are now 84 ESG-focused ETFs in Canada. Of that number, 34 launched in 2021 alone, and 19 of the 41 ETF issuers in this country now have an ESG strategy.¹
ETF ESG assets have grown by 125.8% on a year-to-date basis, with $3.2 billion in net flows so far in 2021, representing 10% of the overall ETF flows for 2021.¹
Impressive numbers for sure, but there are still naysayers out there who say this shift in the industry is merely a fad.
The Global Sustainable Investment Alliance’s recently published Global Sustainable Investment Review 2020 reveals that sustainable investments amounted to US$35.3 trillion at the end of 2020.
Such scale should dispel any idea that ESG and sustainable investing is simply a flavour of the month—fads don’t generally account for trillions in assets.
Speaking on the topic recently, Franklin Templeton Canada President and CEO Duane Green said: “We believe that all investing will eventually be ESG investing—that one day it will no longer be considered a separate discipline.”
Of all the misconceptions about ESG, however, the most prevalent regards its negative effect on returns. I have found this opinion to be more commonplace among advisors, but I’m quick to counter the idea that performance suffers when adding ESG principles to a mandate. The track records of some of our new specialist investment managers attest to that, with ClearBridge Investments, Martin Currie and Brandywine Global operating successful ESG-focused strategies for years now in the United States.
These retail strategies are also now available for investors in Canada as ETFs.
- Franklin ClearBridge Sustainable International Growth Active ETF (FCSI)
- Franklin ClearBridge Sustainable Global Infrastructure Income Active ETF (FCII)
- Franklin Martin Currie Sustainable Emerging Markets Active ETF (FSEM)
- Franklin Martin Currie Sustainable Global Equity Active ETF (FGSG)
- Franklin Brandywine Global Sustainable Income Optimiser Active ETF (FBGO)
These solutions have a core assumption that sustainability and positive returns are not mutually exclusive, or as Duane Green explained: “Many companies exhibiting strong ESG principles also tend to be better operated. That in itself often correlates to good returns. You don’t have to sacrifice performance now to find firms that are really focused on being sustainable.”
Of course, at its core, the growth of ESG is reflective of client demand. That’s the case today and will be even more of a factor going forward, as issues like fiduciary duty, workers’ rights and, perhaps most of all, climate change become crucial considerations for investors.
Just as the three letters “ETF” dominated the investment industry in the post-2008 period, “ESG” looks likely to have similar prominence in the years ahead. I hope ETFs continue to provide innovative solutions to the myriad of problems our world is facing, while at the same time fulfilling their primary objective of generating returns for investors.
¹ Source: Scotiabank ETF Services estimates, Bloomberg L.P. As at August 17, 2021
Commissions, management fees, brokerage fees and expenses may be associated with investments in ETFs. Please read the prospectus and ETF facts before investing. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. Performance of an ETF may vary significantly from the performance of an index, as a result of transaction costs, expenses, and other factors. Indicated rates of return are historical annual compounded total returns for the period indicated, including changes in unit value and reinvestment distributions, and do not take into account any charges or income taxes payable by any security holder that would have reduced returns. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated.
Ahmed Farooq’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.