It’s official: we are now at a historical junction for responsible investing (RI) in Canada.
During some recent public speaking engagements, I argued that we have reached a tipping point for RI in Canada. I made this argument based simply on what we have been seeing in the market. But that’s no longer just my viewpoint; it’s a fact. New data show that RI now makes up a majority of assets under management (AUM) in Canada.
Specifically, a staggering 50.6% of AUM in Canada were managed according to one or more RI strategies in 2017, according to the Responsible Investment Association’s 2018 Canadian Responsible Investment Trends Report. This marks a significant increase from 2015, when RI stood at 37.8% of AUM in the Canada, and from 2011, when RI accounted for only 20% of AUM in Canada.
There are now $2.1 trillion in RI AUM in Canada. To say that RI has grown rapidly in recent years would be an understatement. The rise of RI in Canada has been simply meteoric, growing by 41.6%, from $1.5 trillion, in 2015 and by 255%, from $600.9 billion, in 2011.
Of course, with numbers that large, a significant proportion of those assets are managed on behalf of large institutional clients. For example, pension funds account for 65% of RI AUM in Canada. But a sizeable portion of those assets — about $435.7 billion — are managed on behalf of individual clients who rely on financial professionals for advice.
AUM in retail RI mutual funds grew by 34% during the past two years, to $11.1 billion in 2017 from $8.3 billion in 2015. AUM in RI ETFs experienced even stronger growth, to $240.6 million from $97.9 million, during this period. The growth of AUM in retail RI products reflects the rising demand for RI among individual investors.
So, why are investors shifting their assets into RI? In large part, the growing business case for incorporating environmental, social and governance (ESG) factors into investment decisions has driven the meteoric rise of RI in Canada.
Furthermore, investors reported the following top six reasons for considering ESG factors in the 2018 Canadian Responsible Investment Trends Report: To improve risk management; to improve returns over time; to meet client/beneficiary demand; to fulfil fiduciary duty; to align investments with their values; and to pursue social/environmental impact.
So, on top of the growing business case for RI, investors are increasingly seeking to align their investments with their values and make a positive impact on society.
The investment industry is undergoing disruption in many ways, and financial advisors are on the frontlines. Advisors are well aware that trends in technology, regulation and demographic shifts are driving change in the advice business. Advisors who want to maintain an edge over their peers can add one more disruptor to mix: RI.
Investments that ignore ESG factors are now in the minority, and we are now at the point at which investors tipped the scales in favour of RI. For advisors, the case for incorporating RI into your practice is stronger than ever — and it’s only going to get stronger as more and more clients learn about the benefits of RI, which now is simply too big to ignore.