ESG sustainable growth
iStock.com / mrPliskin

For investors who are as conscious about environmental, social and governance (ESG) issues as they are risk-averse, the recently launched RBC ESG Market-Linked GIC may be appealing. However, this principal-guaranteed product provides only watered-down equities exposure.

And, depending on the term of the GIC an investor chooses, they may not participate fully in the index to which the GIC is linked.

The non-redeemable RBC GIC is available in four-year or six-year terms and requires a minimum investment of $1,000. The product is covered by the Canada Deposit Insurance Corp. (CDIC).

The GIC’s underlying index — the MSCI World ESG Quality Select Low Volatility 8% Risk Control 3% Decrement index — was developed jointly by Royal Bank of Canada’s capital markets division and New York-based MSCI Inc. This index excludes companies with poor ESG ratings, as calculated by MSCI, and then excludes the top 20% of carbon emitters within the remaining stocks.

The rest are screened for quality. Companies that meet both ESG and quality criteria are weighted to achieve the lowest-risk portfolio with at least 50 holdings, subject to sector, geographical and individual stock exposure.

The underlying index has two other features that will reduce potential returns. One is “volatility-targeting” to keep the portfolio’s annualized volatility to 8% — far below that of the MSCI World index. This could result in the portfolio going entirely to cash during periods of extreme volatility. Conversely, during periods of low volatility, the GIC could have leveraged exposure to its underlying index.

The other is the dividend “decrement,” which always deducts 3% from the index, eliminating any dividend-related returns. The amount is deducted even if the portfolio is wholly or partly held in cash.

By comparison, index ETFs based on total-return indexes will deliver higher returns over time to unitholders willing to tolerate the global market’s ups and downs. For example, the iShares MSCI Min Vol Global Index ETF has provided an annualized 12.1% return since its inception in July 2012. Deducting three points would reduce that return to 9.1%.

Those figures assume full participation in the index returns, which doesn’t necessarily happen with the RBC ESG Market-Linked GIC.

There’s no upper limit on how much the GIC can earn, but an investor must hold the GIC for six years to fully participate in the index’s returns. The index’s settlement level is based on the average month-end closing value for the 12 months before maturity.

For the four-year term, the participation rate is only 50%. “The RBC ESG Market-Linked GIC’s returns match the index multiplied by a participation factor that is known, disclosed and committed to at the time of purchase,” stated an email from RBC’s term investments and savings team.

The RBC North American MarketSmart GIC also launched in late July, with the same $1,000 minimum investment and CDIC guarantee. Returns are linked to an equally weighted portfolio of 20 well-established Canadian and U.S. stocks.

RBC set minimum and maximum rates for this nonredeemable GIC, which is available in two-, three-or five-year terms. The highest payout will be for the five-year term, with RBC quoting a minimum of 4.25% and a maximum of 14%.

These rates are per maturity term, not per year, which means in compound annual terms, rates range from 0.84% to 2.66%. By comparison, RBC’s best guaranteed rate for a five-year non-redeemable GIC is 1.45%.

“RBC’s equity-linked GICs are more for clients who are not looking for an annual interest payment and are comfortable with a variable return,” stated the email from the RBC GIC team. “Comparing [the new GICs] to a non-redeemable GIC that pays a guaranteed amount every year may not be the most like-for-like comparison.”