Clean Money: Our Guide to Sustainable Investing Tracks the Market’s Growth, the Rate of Returns and Its Outlook
Sustainable investing often involves buying stocks in renewable energy, eco-friendly fashion or plant-based foods. Photo: Viaframe/Getty Images; Inset: Andriy Onufriyenko/Getty Images
Whether you call them sustainable, responsible or ESG, investments that cater to people’s values, ethics and social conscience have gained traction in recent years.
Sustainable investing, which aims to make a financial return while weighing an investment’s environmental and social impact or benefits, could mean buying stocks in companies specializing in renewable energy, eco-friendly fashion or plant-based foods. The strategy also favours businesses in any industry that operate responsibly, along with projects that tackle challenges such as poverty and climate change.
Although this approach isn’t new, growing public concern about environmental and social issues is helping drive its uptake. Worldwide, sustainable assets under management in five major markets, including Canada, hit US$35.3 trillion as of early 2020, the Global Sustainable Investment Alliance reports. While assets rose 15 per cent over the previous two years, Canada led the way with 48 per cent growth.
To explain the fundamentals of sustainable investing, we spoke with two industry insiders: Tim Nash, a certified financial planner and the founder of Good Investing, a Toronto-based firm that offers research and coaching to DIY sustainable investors; and Wayne Wachell, co-founder, executive chair and co-chief investment officer of Genus Capital Management in Vancouver, which specializes in sustainable investing for families and institutions.
Follow Your Conscience
Sustainable investing falls into three buckets, Wachell explains. The first: ESG integration (an analysis of a company’s environmental, social and governance practices), whereby a portfolio manager might look at how much a company pollutes, how well it treats employees and how ethical its leadership is – all with an eye to gauging its risk as an investment. The second bucket involves using so-called negative screens to avoid certain types of investments, such as fossil fuels, tobacco or guns. “The big idea there is to have your portfolio aligned with your values,” Wachell says. The third is impact investing, “in companies that are changing the world for the better,” says Wachell, citing solar panels, electric vehicles and education.
For Nash, sustainable investing falls into two broad categories: doing less evil and doing more good. The former includes ESG analysis, screening and shareholder engagement, all used by most sustainable investors, he says. “The goal here is to earn market rates of return, but to do it in a way that incorporates a values perspective.” Under “doing more good,” Nash groups impact as well as thematic investing. “We’re going out of our way to invest in specific themes, like renewable energy or water infrastructure.”
Room for Growth
The Canadian sustainable investment market stood at $3 trillion in assets under management as of Dec. 31, 2021, according to the Toronto-based Responsible Investment Association. That’s a slight dip from $3.2 trillion in 2019. “Every single major bank in Canada now has a responsible option,” Nash says of the hundreds of sustainable mutual funds and exchange-traded funds (ETFs) available to retail investors.
But with pension funds and other institutions driving the market, retail investors account for just a sliver – “in the ballpark of about 2.5 per cent of total assets,” Nash says, adding not all advisers have embraced the concept. The sustainable investing market will continue to grow because its financial case is strong, Nash argues, citing climate change. “As we have more policy and as climate risk and opportunity become financially material,” he says, “companies that are ahead of the curve on this issue, that have better strategy, are positioned to outperform.”
Who Is Investing?
I work with regular, everyday folks who give a damn,” says Nash, who counts doctors, lawyers, consultants and non-profit and social enterprise workers among his clientele. About 30 per cent are 50 or older, a group he coaches with some the biggest portfolios. He feels older people are starting to think more about their legacy, making investments “for their kids, for their grandkids.”
During the pandemic years of 2020–21, interest in sustainable investing exploded along with the number of products, Nash says. But 2022 saw pushback, thanks to fossil fuels’ performance as energy prices soared, as well as charges that companies were “greenwashing” their credentials in order to appeal to socially conscious investors.
“A lot of the funds were over-promising, were using somewhat deceptive marketing language,” Nash recalls. Now regulators – the Canadian Securities Administrators and the New Self-Regulatory Organization of Canada – are stepping in. “We’re expecting more rules and guidelines around ESG and responsible investing, specifically on the
communication side, how these funds get labelled and branded,” Nash says.
If you’re shopping for sustainable investments and concerned about greenwashing, quiz your adviser or salesperson. Wachell’s top question: “What is your ESG rating on your funds?” Nash suggests asking two questions: “No. 1, what is the methodology?” That information often appears in the fund’s investment objectives, and it will definitely be in the prospectus. And No. 2, ask for the fund’s full list of holdings. “You want to at least review them; scan through the companies and look for red flags,” he says.
Not at our firm,” Wachell replies when asked if investors pay premiums (often called greeniums) for sustainable investment products. Many offerings, especially mutual funds, once had much higher fees than their traditional counterparts but “that’s not really the case anymore,” Nash says. For example, Mackenzie Investments launched its sustainable products with the same fees as its other funds.
Investors should ask if a sustainable mutual fund charges a premium. For those that still charge premiums, about 25 basis points is standard. The lowest fees are in the ETF market, with many sustainable funds charging about the same as traditional ETFs.
Impact investing definitely is the place right now in terms of where the interest is,” Wachell says. “We’re seeing some of our clients that don’t really have an interest in ESG or going fossil-free saying, ‘Yeah, I’ll put some of my money into impact investing. It’s making a change.’” For Nash, impact means direct investment in building a more sustainable local economy. Good Investing’s site (goodinvesting.com) lists active impact investments across the country.
Nash is also working with Toronto-headquartered Tapestry Community Capital, which issues community bonds that let charities, non-profits and co-operatives finance socially and environmentally impactful projects ranging from sustainable energy to affordable housing.
Many impact projects require an initial investment of $1,000 to $5,000, Nash says. “If everyone invested five per cent to 10 per cent of their portfolio into community bonds,” he notes, “that would unlock billions of dollars toward these types of projects.”
Return on Investment
Sustainable funds are built much like traditional ones, Nash says. “They’ve got a similar risk profile; they’ve got similar diversification.” And, like traditional funds, their values fluctuate. The sector had a tough 2022, Nash and Wachell admit. But they maintain that, in the long run, returns have been as good as for traditional investments, if not slightly better.
Research firm Morningstar examined the track records of 745 Europe-based sustainable funds in a peer group of roughly 4,900. As of December 2019, most of them outperformed their non-ESG counterparts over one, three, five and 10 years. From 1989 through 2022, the Genus Global Balanced Fund posted a 7.18 per cent average annual return, versus 7.63 per cent for the S&P/TSX Composite Index. Last year, only 21 per cent of Canadian-domiciled responsible investment products beat the average return for their respective asset classes, according to Morningstar. However, that number rose to 42 per cent for the three- and five-year periods ending Dec. 31, 2022.
The Future Is Bright
Wachell expects the market to keep growing. “The next generation is more concerned about some of these issues, and that’s what we’re seeing with our client base.” Global ESG investments could top US$53 trillion by 2025, Bloomberg projects, accounting for more than a third of total assets under management.
Besides enthusiasm from investors young and old, Nash points to the proliferation of sustainable investment choices. “As these products are developing the track record to say, ‘Hey, they’re going to earn about the same return,’ that’s going to give investors the confidence to be able to shift more of their assets.”
A version this article appeared in the Aug/Sept 2023 issue with the headline ‘Clean Money’, p. 34.