With the majority of Canadian investors now at least curious about responsible investing (RI), you would do well to learn how to discuss key RI concepts with your clients.
Almost eight in 10 Canadian investors (79%) say they would like their financial services provider to inform them about responsible investments that match their values, according to the 2019 RIA Investor Opinion Survey published by the Responsible Investment Association (RIA).
But, only 23% of respondents had been asked by their advisor if they were interested in RI, and 72% said they knew little to nothing about RI.
Aligning values with investments isn’t a new concept. RI’s modern roots stretch back to the 1970s, initially as a response to the South African apartheid, says Dustyn Lanz, CEO of the RIA. As an act of protest, faith-based groups and concerned investors campaigned for others to divest their holdings in South African companies. Many of the companies affected by the divestment then lobbied the South African government to end apartheid.
RI has its roots in ethical screening — “an exclusionary approach that avoids companies based on moral or ethical considerations,” Lanz says. But other practices have joined the RI mix, such as shareholder engagement, in which investors use their influence as shareholders to encourage companies to adopt responsible practices; and ESG integration, in which investors support companies that adopt responsible ESG policies.
In addition to making a positive impact, RI is increasingly recognized as making good business sense.
“Investors are recognizing that a company is more than just numbers, and [realize that] looking at a company’s governance and how it’s managing social and environmental issues can help [them] get a clearer view on how it’s going to perform over the long-term,” Lanz says.
Given the growing interest in RI, advisors can benefit from introducing RI into their discovery process, particularly when discussing a client’s risk tolerance and time horizon. For example, a client who has a low-to-medium risk tolerance and has a 20-year horizon presents an opportunity to discuss how the economy may change during that period, and how climate change and other societal issues may factor in, Lanz says.
In response to the proposed client-focused reforms released by the Ontario Securities Commission (OSC) in 2018, the RIA has advocated for bolstering know-your-client requirements to include collecting information on clients’ ESG preferences. The OSC has not yet indicated whether it will act on the RIA’s suggestion.
“There is lots of potential upside in bringing up RI with clients from a service perspective, but no downside at all if they are not interested, as they will just decline and the conversation will move on,” Lanz says.
Stephen Whipp, investment advisor with Stephen Whipp Financial in Victoria and managing director of responsible asset management at Calgary-based Leede Jones Gable Inc., asks new clients to complete an RI survey before their initial meeting so he can better understand their views on RI and the issues they care about most.
The questionnaire helps Whipp determine clients’ level of interest in investing in companies such as those that “design, manufacture and distribute products that reduce carbon emissions” or offer their employees “diversity and equal opportunities, work/life balance, anti-bullying and stress reduction.” This information helps him to build a screen for clients while also fostering discussion.
“The first conversation we have with potential clients is not about returns,” Whipp says. Instead, it’s about clients’ values and their understanding of RI issues such as alternative energy. RI, like other aspects of the financial services industry, can be laden with jargon, so this is an opportunity to break down concepts in a way that resonates with clients.
“There’s an anxiety that’s building [around climate change affecting investments] and we see that in our clients,” Whipp says. “They want to know what they can do.” Incorporating RI into the discovery process is an effective way of digging deeper into the concerns many clients have.