Responsible Investing: A Growing Priority for Canadians (March 19, 2020)

Clear, consistent terminology and definitions must be established

Guest column for Investment Executive

By: Paul Bourque, President and CEO, The Investment Funds Institute of Canada

The investment funds landscape is continually evolving to meet the changing needs of investors. Responsible investing (RI) is at the forefront of this product evolution. As this investing approach grows in popularity, we need to develop industry-wide agreement around terminology and definitions for the various products and approaches to RI to ensure investors are clear on what they are buying.

Today’s investors want their investments to reflect what matters to them. Issues like the environment, climate change and human rights are factors many Canadian investors are considering, and investment management companies have responded by creating a range of products and strategies to meet this demand.

Broad approaches to RI include: integrating environmental, social and governance (ESG) factors into the investment decision-making process; screening out companies involved in controversial industries like tobacco or cluster munitions; and impact investing, where companies are selected for making a positive impact, like generating renewable energy.

The numbers illustrate the evolution. There is $2.1 trillion in assets under management falling within the broad definition of responsible investment in all categories of assets, according to the Responsible Investment Association (RIA) 2018 Trends Report. The vast majority of these assets are owned and managed by large institutional investors, while retail investment funds make up a smaller proportion of the total.

There has also been considerable growth in RI funds. According to IFIC’s recently released 2019 Investment Funds Report, since 2013, RI funds have more than doubled in assets to $12.7 billion, revealing growth that has outpaced the overall industry. Sixteen firms now offer a total of 69 RI mutual funds and 10 firms offer 23 RI ETFs. RI assets account for 0.7% of total mutual fund assets and 0.3% of ETF assets respectively.

It seems likely that RI fund popularity will continue to increase, particularly since research demonstrates that RI strategies and the integration of ESG factors can, in fact, lead to impressive returns over time. A quarterly report prepared by the RIA and Fundata shows that nearly two-thirds of Canadian RI funds outperformed their average asset class return over the one-year period ending in December 2019; 70% outperformed over three years; 73% outperformed over five years; and two-thirds outperformed over a 10-year period.

The growing popularity of RI funds has led to industry discussions about the need to develop clear, consistent terminology and definitions. Standard terminology and classification would help ensure that investors’ interests are best aligned with the objectives and strategies of each respective investment fund. Uniformity in terminology and definitions will help investors make informed product choices, and it will help firms effectively communicate their approaches to advisors and investors.

IFIC, as a non-voting member of the Canadian Investment Funds Standards Committee (CIFSC), is supporting efforts to provide clarity and standardization with regard to RI funds. CIFSC is an independent third party that has standardized the classification of Canadian mutual funds for more than 20 years. We believe CIFSC is well-placed to take on this challenge. CIFSC has approved the formation of a responsible investing roundtable, with expert representation from the investment industry to provide direction and guidance around standard terms and criteria. IFIC is also preparing a whitepaper to provide some clarity on the range of approaches to RI in the investment funds industry.

As more investors direct their savings to investments that align with their values, it is the role of the investment industry to ensure those investments achieve clients’ responsible investing objectives.