Retail investors have made their interest in responsible investing (RI) clear, with 79% of participants in the Responsible Investment Association’s (RIA) 2019 Investor Opinion Survey saying they want to be informed of responsible investment options by their financial advisor.
What’s less clear is what actually makes an investment “responsible.” The RIA’s online RI Marketplace features a list of more than 150 mutual funds, ETFs and other investment products classified as RI. But judging just how responsible these products are is tough.
“If we don’t have standards, how does the consumer really know for sure that what they’re buying is what they expect?” asks Stephen Whipp, managing director, responsible asset management, with Victoria-based Stephen Whipp Financial, which operates under the Leede Jones Gable Inc. (LJG) umbrella.
Whipp says that “greenwashing” – a term used to describe the practice of passing off products as more environment-friendly than they actually are – “will continue to be an issue until we get some standards.”
Such standards may be forthcoming.
In June, Canada’s Expert Panel on Sustainable Finance proposed creating additional contribution room and a “super” tax deduction for “climate- conscious” investments held in RRSPs. If implemented, that would spur the federal government to draft legislation that sets standards for responsible investments, says Ryan Riordan, associate professor of finance at the Kingston, Ont.-based Smith School of Business at Queen’s University.
“[Right now] anyone can say, ‘We’re a green fund’ or ‘a sustainable fund’,” Riordan says. “Really, what does that mean? But if you come out and say, ‘We’re green, as per the requirements of the RRSP Green Investment Act,’ then at least we know something.”
As well, publicly traded companies may soon be reporting more consistently on their environmental, social and governance (ESG) practices.
“We are still at the beginning of what I hope is going to be a major evolution in corporate reporting to investors,” says Marie-Josée Privyk, founder of Montreal-based FinComm Services, which advises publicly traded companies on improving their ESG reporting.
While many companies do provide ESG reports, Privyk says, “ESG reporting is still very much voluntary” and can be inconsistent among companies.
“The metrics can be very different,” Privyk says, “so it makes comparability difficult in a given sector.”
Currently, there are no regulations in Canada requiring companies to provide ESG reports. While Privyk says regulations would “accelerate the pace of change,” investors demanding ESG reports will be a “huge motivator” for companies. “When [investors] ask, companies respond,” she says.
Until RI standards and consistent ESG reporting are commonplace, you will have a crucial role to play in helping your clients distinguish true responsible investments from “greenwashed” investments, says Joss Biggins, investment advisor with Vancouver-based EthicInvest, which also operates under the LJG umbrella.
Biggins says his clients – whom he describes as “dark green” socially responsible investors – often have questions about just how green the investments they’re buying are. “They come to us with those questions, and one of our biggest value propositions is not being afraid to answer those questions,” he says.
Tena Rieck, founder of Toronto-based Honestly Invested, an RI consultancy, acknowledges that staying on top of all the developments in RI can be “very time-consuming” for advisors.
“On the one hand, I feel sympathy for advisors because they have a lot on their plate,” Rieck says. “But on the other hand, I personally feel that [RI] is the future, and if [advisors] want to stay relevant to their clients, they have to start getting educated about this.”
Rieck is hopeful that “more simple- to-read resources” will lead more clients to invest responsibly. “If we can somehow convert all the technical knowledge into an easy-to-understand way for investors to participate, that will really be the catalyst to get things moving,” she says.
Biggins says he believes RI standards are “going to come with time,” but he stresses that we don’t have much time left to act on issues such as climate change.
“We have 12 years to [get to] a point [at which] we can’t reverse global warming,” Biggins says. “My take is that we don’t have time when it comes to our ethical considerations, our climate considerations, our biological considerations. We need to move [on] these things quickly.”
Biggins predicts we’ll eventually get to a point at which “responsible investing is just the norm.”
Biggins adds: “We’re going to move into a spot where we’re going to ask for a fund’s Morningstar rating, we’re going to ask for its return over the past 10 years and we’re going to ask for its ESG rating.”