More responsible investment options for wealthy clients

If a client asks about responsible investment (RI), let them know there’s more than one approach.

The most commonly known RI strategy involves stock pickers or funds screening and divesting to manage exposure to undesirable markets and activities (e.g., tobacco and gun manufacturing). There’s also the more traditional, indirect approach that involves analyzing environmental, social and governance (ESG) factors as part of the regular review of company fundamentals and long-term outlooks.

Read: Divest of fossil fuels for better returns: study

A more involved approach is referred to as impact investing, a strategy that’s focused on finding solutions for ESG-related issues such as homelessness and health, said Adam Jagelewski, director of the MaRS Centre for Impact Investing, during a session at CFA Society Toronto’s Annual Wealth Conference this week.

He offered one example involving a partnership between the MaRS Centre, the Public Health Agency of Canada and the Heart and Stroke Foundation. Starting in 2017, roughly 12 participants (the group included large organizations and some wealthy, private investors) invested in Canada’s first health-focused social impact bond launched by the Heart and Stroke Foundation.

For the participants to earn back their investment, plus interest, from the government, the foundation has to successfully set up a program to help 7,000 pre-hypertensive individuals prevent their blood pressure from progressing to full hypertension, according to a 2016 Heart and Stroke Foundation blog.

The structure involves the risk that the program won’t meet its targets, and Jagelewski says this type of investment is for those who understand that risk.

This type of RI is important, says Jagelewski, because it’s “outcome-focused” and “strengthens the link between funding and impact.” Also, it helps charities, organizations and governments focus less on securing funding and more on solutions.

Read: Why ESG analysis is critical: fund manager

This type of investment is hard for retail investors to take part in so far, but the space is growing, he says. The global impact investment market was worth US$114B, according to a 2017 survey, while Canada’s share had surpassed $9B at the time. (He suspects those were conservative estimates based on the difficulty of measuring all impact investing activity.)

One reason the space is growing, Jagelewski says, is big banks are entering the space, “and that will continue.”

Still, despite the surge in RI interest, there’s a lack of knowledge in the advisory community. Jagelewski cited survey results that found nearly 90% of high-net-worth Canadians are interested in impact investing and would pay more for the offering, but that they’re held back by a lack of qualified advice.

His suggestion? Do your research, know clients’ values and options, and seek outside expertise when you need it. Advisors should be “better connectors” for investors, he says, since you can’t know everything about social issues and the evolving RI space.

For more on RI, read these stories.

Why and how to address clients’ ESG values

Why ESG investing provides competitive advantage

The ins and outs of green bonds

Canada among OECD’s cleanest countries: Fraser Institute study

Responsible investment here to stay, despite hurdles