A major tipping point for RI?

Interest in RI has risen sharply in recent years. In fact, assets under management (AUM) in RI increased by 50% to $1.5 trillion in 2015 from $1 trillion in 2013, according to the RIA’s 2016 Canada RI Trends Report. Although most of the growth in RI came from institutional investors, AUM from individual investors has grown even more acutely (by 91%) to $118.5 billion during this time.

Much of this growth in AUM occurred because more asset-management firms are integrating environmental, social and corporate governance (ESG) factors into the selection and management of investments, according to the RIA’s report. In fact, ESG integration now is the leading RI strategy in Canada, whereas shareholder engagement previously was the most prominent RI strategy in Canada.

“Interest in sustainability will continue to grow because the world’s sustainability challenges will continue to grow,” says J.P. Harrison, president of Vancouver-based Genus Capital Management Inc., which introduced its first ESG portfolios in 1994. “As a result, the [asset-management] industry will continue to do more sustainable investing and will continue to learn more about ESG issues and how to incorporate those into their investment approaches.”

Toronto-based RBC Global Asset Management Inc. (RBCGAM) is one asset-management firm that’s focusing more on ESG. The company plans to ensure its investment teams employ an ESG strategy when selecting investments.

“We’re not eliminating companies from the investment universe,” says Jason Milne, vice president of corporate governance and RI at RBCGAM, in Toronto. “We’re making sure that we understand the ESG risks that we’re taking on in our portfolios and that we’re managing those risks. It’s ESG integration across all of what we do.”

Although this RBCGAM initiative began in 2014, Milne says, the firm plans to spend the next year formalizing the process and working with investment teams to ensure they have the necessary research and support.

The reasons that large, global asset-management firms are taking ESG factors into account when selecting investments is clear: there’s growing recognition among academic research and asset managers that doing so is not injurious to financial returns, says Doug Morrow, associate director of thematic research in Toronto with Sustainalytics, an Amsterdam-based firm specializing in ESG research. Instead, companies that score well in ESG criteria are considered better equipped to manage risks related to trends such as water scarcity, climate change and gender diversity.

“[RI] has really shifted from an ethical concern to this idea that companies that perform well on ESG metrics make better long-term financial bets,” Morrow adds.

One of the challenges RI will face in the year ahead is ESG data disclosure from publicly traded companies. Many fail to release metrics on greenhouse-gas emissions, energy consumption and payroll data, Morrow says.

Still, the trend toward adopting an ESG strategy in selecting investments is expected to continue unabated, and Lanz predicts that topics such as gender diversity, climate change, executive compensation, cannabis, cybersecurity and other technology-related trends, such as blockchain and artificial intelligence, will receive greater scrutiny this year from asset-managers.

Furthermore, water management, especially in mining and textile industries, also will receive much greater focus in the year ahead, Morrow says: “We expect to see a real uptick in the amount of water infrastructure that’s being financed over the short term.”

In addition to ESG integration, impact investing is another trend likely to gain momentum in the year ahead. This strategy seeks to generate a social return alongside a financial return by devoting capital to ventures that aim to produce social or environmental benefits.

“Impact investing [suggests], ‘I want to make capital more plentiful to those who are trying to improve the world’,” Harrison says. “I see [this factor] really growing, largely because it’s more positive and inspirational. It’s about being a part of the solution.”

As a result, large asset managers are considering their approach to impact investing. Says Jamie Jenkins, head of the responsible global equities team with Toronto-based BMO Global Asset Management: “We’re looking at what we want to contribute to the impact investing space and [asking ourselves if] we need new funds to make that contribution.”

But while asset-management firms will focus on their products and investment approaches in the year ahead to meet the growing demand for RI, the RIA will be making education a top priority for 2018.

The RIA plans to launch an online platform on which investors can find advisors who focus on RI, as well as find RI products and services.