Get Ahead of the Curve on Future Regulation
It’s no secret that the RI movement has grown exponentially in a short amount of time. Increasingly more mainstream investors have come to accept that RI is no longer a “niche-style” of investing – or a stylistic trend – but rather, a fundamental best practice.
In the institutional market, growth has also progressed enormously on the RI front, spurred by significant regulatory developments. Numerous environmental, social and governance (ESG) integration policies have been legislated globally, including the 2015 Pension Benefits regulations in Ontario. And further top-down intervention can be expected, especially as regulators and central banks take heed of the potential financial implications of climate change, and encourage greater transparency from investors on how these are being managed..
Case in point: the Federal Government created the Expert Panel on Sustainable Finance to investigate ways the financial sector can help encourage and direct capital flows to support low-carbon Canadian initiatives, which included formal recommendations to promote sustainable investment as “business as usual” within the asset management community, and to provide investors with the opportunity and incentive to connect their savings to climate objectives.
Retail Demand: Percent who feel sustainable investing is more important now than five years ago
- Millennials: 86%
- Generation X: 79%
- Baby boomers: 67%
79% of retail investors want to be proactively informed about RI options from their financial services provider, yet only 23% have ever been asked if these products interest them.
Perhaps the biggest hurdle facing Advisors is the fear that RI approaches could conflict with fiduciary duty, or that these strategies can detract from performance. In fact, numerous studies have found evidence to support that taking ESG into account can actually help protect against volatility and downside risk.3
The Client Conversation: Becoming the Subject Matter Expert
Whether it means taking a course, or speaking to an expert, it’s incumbent on the Advisor to grow your knowledge base as part of your professional development.”
I would then encourage Advisors to proactively broach the conversation and let clients know the different ways RI can manifest in their portfolios should they be interested. For example, you can recommend that you will diligence investment managers on their behalf to assess how ESG factors are integrated. Taking it one step further, pose the question: “do you have any specific values or beliefs you would like to see incorporated into the management of your portfolio?” If clients are passionate about certain causes (e.g. gender diversity, or climate change), then take them through their available options – from negative exclusion to thematic, or impact investing, the latter of which yields both a financial and social/environmental return.
Accountability: Delving Under the Hood
Holding investment managers accountable is key, and the biggest component of this is delving under the hood.
Moving Forward with Climate Change
Looking ahead over the medium term, there’s no doubt that climate change will take the focus of the ESG landscape. As such, Advisors should educate themselves on the issue, and try to assess how much climate risk has been priced into their clients’ portfolios. In the run up to the critical COP26 climate meeting later this year, we can anticipate further government intervention, and while this is somewhat removed from the end client, we expect to see disruption in the financial sector if more top-down climate regulation is introduced. Therefore, prioritizing climate change as a central piece in holding investment managers accountable to these environmental factors will help soften the impending blow in the next three to five years.
Your Essential RI Resources
Also in the February 2020 issue of Insights:
- Accenture, “The ‘Greater’ Wealth Transfer – Capitalizing on the Intergenerational Shift in Wealth,” 2012.
- Morgan Stanley Institute for Sustainable Investing, “Sustainable Signals – The Individual Investor Perspective,” 2019.
- BMO Global Asset Management, “Performance with Principles”, 2017; University of Oxford and Arabesque Partners, “From the Stockholder to the Stakeholder,” 2015; Bank of America Merrill Lynch, “ESG Part II: A Deeper Dive,” 2017; Morgan Stanley Institute for Sustainable Investing, “Sustainable Reality,” 2015.
- RIA Canada Q2 Funds Highlights, July 2019.
- 2019 RIA Investor Opinion Survey.
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