Has responsible investing (RI) finally made the transition from a narrow niche market to a mainstream sector?

Evidence suggests RI (formerly known as socially responsible investing, or SRI) is playing an increasing role in Canadian investment portfolios. According to the 2015 Canadian Responsible Investing Trends Report, a biennial report published by the Responsible Investment Association (RIA), RI assets under management (AUM) in Canada reached the $1-trillion mark as of Dec. 31, 2014. That’s a 68% increase since January 2013. RI now accounts for almost one-third (31%) of Canadian AUM.

As your clients become more concerned about issues such as human rights and climate change and how their investment choices can affect those areas, a strong argument can be made in favour of making RI options available to your clients.

We don’t consider it a niche anymore, says Gary Hawton, president of OceanRock Investments Inc., a subsidiary of Qtrade Financial Group, in Vancouver.

Much of the growth in RI has been driven by institutional investors, as RI pension fund assets make up 81% of Canada’s AUM pie. But the retail side appears to be following suit. The same report reveals that the growth of RI mutual funds exceeded that of non-RI funds in the two-year period, expanding by 52% (to $6.6 billion from $4.4 billion), vs the 30% growth in traditional funds over the same period.

Hawton, who has been in the RI business for almost two decades and is the founder of Meritas Funds, a family of RI mutual funds, says that institutional investors leading the trend is not unusual. Often, the brightest institutional portfolio managers catch on to a wave years ahead of retail investors.

The advisor community and the retail investor can sometimes lag, he says.

However, Hawton adds, thanks to more product availability and increased interest in environmental, social and governance (ESG) issues by Canadian investors, RI is gaining momentum on the retail side. At the beginning of 2013, only 24 investment-management firms reported Canadian RI AUM; today, that figure is 41.

Hawton expects RI growth will continue to accelerate. That growth, he believes, will be spurred by recent research that debunks the myth that RI investors must sacrifice returns in order to make ethical investments.

Still, many financial advisors who specialize in RI see themselves as working within a niche.

I’m still considered an outlier, says Patti Dolan, financial advisor with D olan

Wealth Management (which operates under the Raymond James Ltd. banner) in Calgary. But I’m gaining a lot more respect and credibility.

Dolan, who started as an advisor in 1994, began looking into RI after a client made inquiries about it. At the time, RI was more about elimination or negative screens excluding companies, sectors, projects or countries that were ethically suspect from investors’ portfolios. I was skeptical about the concept, Dolan says.

However, as RI strategies became more sophisticated, the concept now involves the blending of ESG data with traditional financial analysis. RI also uses corporate engagement and shareholder action to encourage companies to take responsibility for their impact on the environment, human rights and their corporate governance. That is a departure from the RI’s earlier sole dependence on negative screening, which simply was refusing to invest in companies and sectors with poor environmental or human rights records.

In the early days of Dolan’s transition to RI, she used to assess companies on her own on behalf of clients. Dolan would peruse annual reports in the hope of finding some mention of ESG concerns, which often was covered in no more than a paragraph. From there, she would try to detect the legitimate examples of corporate responsibility amid the copious greenwashing that grew out of what was then a mostly unmonitored landscape.

Today, sources are available to help to educate both advisors and fund portfolio managers in selecting legitimate RI investments.

One source is Sustainalytics, an ESG research and analysis firm based in Amsterdam and headed by Canadian Michael Jantzi, founder of Canada’s first SRI index. Another is the RIA, a Torontobased association of fund companies and other institutions and participants involved in RI. A third is the Shareholder Association for Research and Education (SHARE), which works with institutional investors to integrate ESG issues into their investment-management process.

There clearly is a move afoot, says Stephen Whipp, advisor with Victoriabased Stephen Whipp Financial, a division of Wolverton Securities Ltd., who specializes in RI. Wolverton recently launched an RI-dedicated arm of its wealth-management division, of which Whipp is managing director. He is hoping to build a team of advisors with a passion for RI to serve this looming demand. And he’s confident that advisors currently unsupported or even discouraged from employing this style of investing will join him.

If we’re going to take this to the next level and make responsible investing available to the majority of retail investors in this country, Whipp says, we need a dealership that focuses on that and provides the training.

Wolverton has committed to working with Sustainalytics for research and with SHARE to cover the shareholder engagement component of its ESG investing, Whipp says.

Canadian clients are indeed more interested in RI than most advisors realize, says Deb Abbey, CEO of the RIA. Abbey points to a study conducted by Northwest and Ethical Investments LP of Toronto last year that indicates 75% of Canadian investors would like their advisors to consider ESG issues when recommending investments. Yet, the same study shows, only about 10% of advisors raise the issue.

There’s a tremendous opportunity, Abbey says, for advisors willing to train up and understand responsible investing.

To that end, the RIA has relaunched its certification course with two designations: the responsible investment advisor certification (RIAC) and the responsible investment professional certification (RIPC). For both designations, advisors need to pass courses offered by a third-party educator, the London, U.K.-based PRI Academy, which serves Canadian advisors through a Toronto office and offers global RI training based on the United Nations’ Principles of Responsible Investing.

I think everyone cares about access to clean air, food and water, Abbey says. And now we’re all concerned about catastrophic weather and environmental degradation and human rights. If we don’t change the way we live, those are issues that will affect everyone. More important, we now know that the companies we invest in have to share those concerns or they simply won’t be profitable in the long run. [Companies] don’t exist in a vacuum, and when they ignore their stakeholders, they ultimately pay the price in terms of their share value.

The belief that RI investors have to be willing to sacrifice returns in the name of ethics has been one of the biggest hurdles facing the RI sector. According to Hawton, mounting evidence from several studies over the past few years has gone a long way toward debunking that belief.

There’s always the nagging question from advisors and investors, Hawton says, that if you narrow your investment universe, you must be increasing risk.

A new study commissioned by Ocean-Rock and released at the RIA conference last month in Banff, entitled Canadian RI Mutual Funds Risk/Return Characteristics, contradicts the traditional notion. The study found that financial returns of RI funds are higher than those of their non-RI peers and provides the first Canadian comparison between the risk characteristics of RI investments and non-RI investments over one-, three-, five- and 10-year timelines.

The study confirms what those who have been keeping track of RI performance over the past decade already believe: RI equity mutual funds outperformed their traditional counterparts 63% of the time, while RI fixed-income and balanced funds fared better than their non-RI peers 67% of the time.

The more gratifying surprise came from the risk metrics results, says Tessa Hebb, director of the Carleton University Centre for Community Innovation and leader on the study. Canadian-based RI equity mutual funds had stronger Sortino ratios than their non-RI benchmarks 72% of the time. (The Sortino ratio measures the risk-free rate of return, taking into account downside volatility. The stronger the ratio, the lower the probability of suffering a large loss.) Fixedincome RI funds and Canadian balanced RI funds were in line with their non-RI peers when it came to risk reduction.

For those who support RI, this finding makes intuitive sense, says Hebb: There are many studies that show that negative events for a company are punished by the financial markets.

So, by using ESG measures to screen out companies that are most at risk of negative events environmental, social or corporate before taking them on, a portfolio manager is avoiding long-term risk.

What I hope, Hawton says, is that this [study] makes it easier for every advisor, whether they’re a convert or a naysayer, to meet the needs of their clients or prospects who want to do responsible investing.

How one advisor integrates a passion for social issues into her practice

Although Gail Taylor has been a financial advisor since the early 1990s, she began integrating responsible investing (RI) into her practice only about five years ago.

Taylor, an investment advisor with Taylor Remy Investment Group (a division of CIBC Wood Gundy) in Edmonton, had hired a business coach to help her grow her business. Through that process, Taylor discovered that her passion for addressing poverty and human rights issues, which she pursued after hours through charity work, could be integrated into her advisory practice. She could help clients who shared her interest by ensuring their investments were in line with their values.

Taylor points out that the old model of shareholder supremacy, in which a corporation’s only duty is to make a profit for shareholders, is flawed because it does not factor in the risks posed by harmful environmental, social and governance (ESG) practices, some of which were brought to light after the 2008 global financial crisis.

Stakeholder theory

This flawed model is being replaced slowly by the stakeholder theory, which takes all of a company’s stakeholders such as employees, shareholders, clients and members of the community from which the company draws its resources into consideration when assessing the sustainability of the firm’s practices. Although profits still matter under this model, there are other factors ESG issues that also can affect a company’s performance.

Taylor argues that screening for RI is an important risk-management strategy.

Instead of talking about how you’re going to keep the carbon footprint down, Taylor says, you can talk about how you’re going to end up with as much, if not better, returns because you’re managing the risk by excluding that [bad] reputation.

Armed with several studies supporting the idea that stock price performance is positively influenced by good sustainability practices, Taylor began introducing the RI idea to her clients. She wasn’t expecting miracles: When we shifted gears, I suspected I was going to take a haircut and I’d lose 20% on this. My clients weren’t paying me to be a do-gooder.

Attracting clients

In fact, Taylor’s book of business, which is made up of high net-worth baby boomers, grew significantly to $125 million in assets under administration from $80 million in 2009 once she introduced RI. She says she has very few clients who don’t participate in the RI landscape. Much of Taylor’s new business stems from prospects seeking her out because of her RI specialization, she says.

I attract people who specifically want ESG, Taylor says, and I have a unique edge for people who haven’t heard of it before but are thinking about a new advisor.

Taylor is not interested in debating the merits of Company X over Company Y with each client. I tend to attract clients who want to delegate that conversation to me, she says. This approach, Taylor says, eliminates the issue that many advisors who are considering offering RI worry about: debating the sustainability of every company with clients who may have an unrealistic

view of RI. Taylor offers an example of a client walking into an advisor’s office and declaring the oil industry to be off-limits or refusing to invest in a company that might have underpaid


An advisory business would become very dysfunctional if it tried to engage all clients in such a way, Taylor says, because this strategy would pull the advisor in too many directions.

It’s impossible to tailor a portfolio to the whims and needs of individual clients, Taylor says. Instead, she asks her clients to agree to work with companies or portfolio managers that are using ESG in their decision-making process. That means they’re seriously engaging corporate accountability in one way or another.

Although this approach may not satisfy every environmental or human rights activist, it’s a way to ensure change occurs, Taylor insists.

Companies are aware

If you want [companies] to listen to you, she says, you had better be a shareholder. If there are 10 companies, we are going to choose the top four and engage them to get even better.

Many companies, Taylor adds, are aware that they are being judged against this RI template, making ESG qualifiers even more important.

You don’t have to abandon all traditional investing to embrace RI, Taylor says: [Advisors] can pick up three or four investments and offer them along with existing baskets, and see from there how much interest there is.

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