Sustainable ways to offer responsible investing

If you’re not helping clients consider ESG (environment, social and governance) factors when investing, it’s time to start. Since 2006, Canada’s responsible investment (RI) industry has exploded, growing from nearly $460 billion in assets under management to $1.5 trillion by the end of 2015, says the Responsible Investment Association (RIA).

As RI strategies and products become more complex, you don’t want to risk falling behind the curve, says portfolio manager Patti Dolan, of Raymond James in Calgary (see “What’s driving RI”). Dolan and three other advisors share how and why they help clients choose responsible investment.

Patti Dolan

portfolio manager with Sage Investment Advisors, Raymond James, Calgary

Typical clients: Wealthy families and foundations. Says Dolan, “We don’t have a minimum but, in our managed portfolios, the average account size is $1.2 million. We accept smaller accounts too.”

Percentage of AUM dedicated to RI: 50%, but target is 100%

Years in RI: 22 years

How do you define and choose RI assets? Where are you invested and how do you diversify?

We have about 40 companies in our portfolio. Since there’s no real standardization in ESG reporting so far, we do a deep dive by using a number of different indicators to analyze companies. We use Bloomberg, CDP (formerly the Carbon Disclosure Project, an international charity that makes environmental disclosures available) and Sustainalytics. The first step is looking at corporate sustainability reports along with financial information (e.g., ROE, cash flow, dividends).

[As of April 2017], our RI weighting is more outside of Canada, with a focus on Europe and the U.S., because there are just certain opportunities that you can’t access domestically, such as in the healthcare space and some international conglomerates. We can adjust our exposure when needed. When it comes to diversification, we would never be overweight in one company, sector or country.

Who starts the conversation, and how do you explain RI to clients?

We mainly run discretionary portfolios so we start the conversation during initial meetings. I describe myself as a responsible investment specialist because I have my responsible investment advisor certification (RIAC). I explain our investment process and use this analogy: if you look at a company like an iceberg, the top part would be the financial information, which is transparent, and the bottom would be ESG analysis. I explain that ESG issues normally don’t show up on financial statements, but they can have a huge impact on the financials of a company. Overall, my RI clients love hearing stories about the companies they invest in. I don’t razzle-dazzle them with ROE and PE numbers because they mainly want to know where their money is going and what it’s doing.

Fees are a hot topic these days, so how do you discuss RI fund fees?

RI fund versus non-RI fund fees aren’t an issue for us because we choose individual companies. We could use an ETF for access to a market, in the fixed income space, but typically don’t. We’d choose ETFs over mutual funds since those are very expensive.

Michael Silicz

investment advisor with Silicz Birdsall Advisory Group, National Bank Financial Wealth Management, Winnipeg

Typical clients: Clients of all ages, but with a focus on younger professionals who are building their careers

Percentage of AUM dedicated to RI: 10%; moving toward 15%

Years in RI: Three years. (He and one of his partners, portfolio manager Charlene Birdsall, are the only two RIAC-licensed advisors in Manitoba. He got his RIAC in 2015, while she got hers in 2016.)

Want to learn more? CFA Institute’s current curriculum includes information on ESG and responsible investment, across levels one, two and three. Plus, the Responsible Investment Association offers three RI certifications, including the Responsible Investment Advisor Certification (RIAC), which costs more than $1,000. Part of getting the RIAC is completing Concordia University’s Sustainable Investment Professional Certification program.

How do you define and choose RI assets? Where are you invested and how do you diversify?

The RIA tracks the returns of all of the Canadian funds and ETFs in the space, and it releases a list quarterly. We look at that in conjunction with Morningstar data; Morningstar ratings for RI funds don’t change very often. To make sure we diversify, our chief economist, Stéfane Marion, [monitors] our asset allocation. Depending on the client, we try to set up an even split between bonds—Canadian and global—and equities (Canadian, U.S. and international), but the average split may be 60% equities and 40% fixed income. We pick funds accordingly, rebalancing and adjusting exposure when needed.

Who starts the conversation, and how do you explain RI to clients?

I mainly bring up the conversation. Generally, whether you do so depends on a client’s risk tolerance and time horizon, but I’m more willing to have the talk with a younger person than someone who’s living off their RRIF and doing very well. With existing clients, I explain what ESG stands for and give examples to quantify and look at each aspect. If it’s a client we’ve worked with for a long time, we’ll know one issue is dear to them and we can bring that up to make the discussion more personal. With prospects, I explain at the start that I try to buy investments that align with their values. I ask, ‘Do you want to invest with your dollars as well as make a difference?’ Unless someone asks, I don’t go into too much detail on how companies are rated by organizations like Sustainalytics.

Fees are a hot topic these days, so how do you discuss RI fund fees?

Our book is 70% transactional, so we disclose right away the front-end cost of a mutual fund or the direct cost of buying a stock. For a lot of younger people, or people just starting out doing RI, we may use a low-load versions of a fund, explaining how the MER works and what it is. For more established investors who have more money, we could use a fee-based account where we would just charge an annual fee, and use F-class versions of funds, which have lower MERs.

Lindsay MacPhie

investment advisor with The Wooding Group, CIBC Wood Gundy, Edmonton

Typical clients: Wealthy families, business owners and professionals (e.g., physicians); the group also specializes in Indigenous clients and managing Indigenous trusts

Percentage of AUM dedicated to RI: 30%, and MacPhie notes her group was among the top 23 nationally at CIBC Wood Gundy in terms of overall AUM, as of 2016. For her team’s Indigenous trust assets, the allocation is closer to 35% to 40%

Years in RI: A few years. MacPhie and her team formalized their involvement in the space with RIAC certifications in 2016.

How do you define and choose RI assets? Where are you invested and how do you diversify?

We run a very conservative wealth management practice, for both our RI clients or our standard portfolios. With our RI portfolios, we run a model that we developed, where we blend active managers with passive ETFs versus choosing individual stocks and taking on that risk. When picking managers, we look at what they’ve owned and have face-to-face interviews. We look at their exclusion lists and ask, “Does your process ever change, and how do you review companies you own to ensure they continue to have good standards?” We generally choose funds that focus on environmental, social and governance metrics. We put them through our system to see how much they overlap with clients’ current holdings to ensure diversification.

As of April 2017, we always hold between 10% and 20% in Canada, and then the rest of our equity positions globally. That can change depending on the economic environment, but we would never be 100% Canadian. If anything, we’d be tilted more globally for RI.

Who starts the conversation, and how do you explain RI to clients?

Before investing for a client, we figure out their values and how we can build a portfolio that reflects those. We start the conversation, but are seeing more organic interest across our client base. When we talk about ESG with our clients, we talk about mitigating their risk. The chances of a company being a good investment is pretty low if it doesn’t have good corporate governance and if it isn’t socially and environmentally responsible. When it comes to our Indigenous clients, some communities are really interested in responsible investment but some aren’t. Impact investing is really large in some of the communities because it allows them to have a voice at the table.

Fees are a hot topic these days, so how do you discuss RI fund fees?

Generally speaking, RI funds are more expensive. But most clients are all right with that because they’re investing based on their values. The cost also depends on the manager, but we try to blend active and the passive, and we use ETFs where we can [to help] drive down costs.

When clients (or colleagues) don’t like RI

A growing number of clients are interested in RI, says Lindsay MacPhie, investment advisor with The Wooding Group, CIBC Wood Gundy. While it can come from corners you wouldn’t expect, there will always be those who resist. Here’s how to address concerns from clients, or even colleagues.

Fear of lower returns. “Clients definitely like reasonable returns,” says Patti Dolan, portfolio manager with Sage Investment Advisors, Raymond James. “For those concerned about returns dropping, you can point to the Jantzi Social Index. Over the last 17 years, it has actually has outperformed the TSX. Also, through RI, you’re generally eliminating potential risks and reducing volatility by identifying potential problems with companies, and buying into the best that are positioned for possible change.”

Fear of change. “If people have done well investing the way they always have, they might want to keep the same exposure to gas, oil and coal, and industries that are dependent on fossil fuels, for example,” says Michael Silicz, investment advisor with Silicz Birdsall Advisory Group, National Bank Financial Wealth Management. “Further, ESG analysis isn’t as substantiated as the financial side of things and people have strong faith in financial ratios—[they may argue that] people like Warren Buffett didn’t make money by looking at the composition of boards or whether companies had climate change policies. When trying to explain how to quantify ESG analysis, there are helpful materials offered by the CFA Institute. I’ve used those to help change people’s minds.”

Holding on to biases. “The term ‘responsible investment’ has had a bit of a stigma attached to it,” says MacPhie. “Even though we’ve always considered ESG factors, we haven’t really talked about it with the label of RI because that was a whole different conversation. But if you look at the growth in Canada and the global space—in retail and institutional—that stigma is going away. At Wood Gundy, we have a national RI committee that supports those specializing in the area and helps educate advisors.”

Paul Borisoff

senior investment advisor and portfolio manager with Canaccord Genuity Wealth Management, Vancouver

Typical clients: Retired people who are living off capital; average client is 65 years old.

Percentage of AUM dedicated to RI: Low, as his RI mandate has only been running since July 1, 2016. He says, “The reception from clients so far has been very positive. Once we get through the one-year mark, in July, I’ll formally market to a much wider audience.”

Years in RI: He followed the clean energy trend for 20 years and got his RIAC in 2016

How do you define and choose RI assets? Where are you invested and how do you diversify?

I set up my RI core income and growth portfolio shortly before I obtained my RIAC in September 2016. The mandate is part of Canaccord’s private investment management program and it uses a mix of third-party RI managers, as well as ETFs. The screening that we’re doing is all provided by the fund and ETF managers. For my RI mandate, I wanted it to be pure and for the analysis to be outsourced, so I don’t choose individual companies. As of April 2017, 50% is exposed to global equity markets, including the U.S. Then, 30% is exposed to Canada, half of which is oriented toward high-dividend or income positions. The rest is cash, with a long-term target of 5%, and bonds are 15% for diversification.

Who starts the conversation, and how do you explain RI to clients?

This mandate is not suitable for all clients, as most are older, retired and have a lot of income investments. Also, the minimum for the program is $100,000. So far, I’ve introduced it to six groups of clients, five of which are now set up. But, there are strict rules around how I can market it until the one-year mark in June. When introducing this program, I explain that ESG screens eliminate a lot of potential problems that can negatively impact returns. I see a big opportunity in this space; the creation of this program helps us test the mandate and show how it’s done, and create a performance track record for clients.

Fees are a hot topic these days, so how do you discuss RI fund fees?

We’re 100% transparent when it comes to fees. Our RI mandate is fee-sensitive, targeting a weighted average MER of below 0.85% on the underlying portfolio—what I charge is on top of that on a sliding scale. On a pure ETF mandate, the fees are lower. However, I find the gap between RI and non-RI funds is closing; many F-class funds are coming in at 1% or below that range. As long as people can see what they’re getting, there’s no hesitation, and in many cases, you have to pay to get access to some of these new management techniques.

What’s driving RI?

There are four drivers of growth in responsible investment.

Those are: more investment managers are becoming involved in the space; investors are more aware of ESG opportunities and risks; more pension funds are using RI; and millennials are driving change, according to the Responsible Investment Association’s latest trends report.

Portfolio manager Patti Dolan, of Raymond James in Calgary, has focused on responsible investment since the mid-1990s, and has seen a big shift since then. “Back then, a university professor from Haskayne School of Business asked me about the Dow Jones Sustainability Index (DJSI), which was launched in 1999, sparking my interest. At that time, the index was one of the first to do a deep dive into companies’ environmental policies and governance, and into how they work with the communities.”

When it launched, the DJSI World included 229 companies, 18 of which were Canadian [DASH] that list included major financial, telecom and energy names such as CIBC, BCE and Suncor, according to data from RobecoSAM, an investment specialist focused exclusively on sustainability investing. Nowadays, RobecoSAM says the DJSI World holds 362 companies, nine of which are Canadian. Out of the 155 companies currently listed in the DJSI North America, 19 are Canadian. There are nine indices in the DJSI family.

Not wanting to miss out on potential opportunities, Dolan was inspired to “look at companies a bit differently, such as at how they’re being proactive on environmental initiatives.”

Nowadays, clients seek out her expertise. Dolan says major turning points for RI were the years 2000, when the Jantzi Social Index was launched, and 2008, “when people were really disillusioned about how companies had leveraged themselves and reported poorly on governance. They wanted more answers than they were getting and, now, reporting is becoming incredibly sophisticated and complex, allowing better analysis of companies and risks.”

Currently, RIA supports seven RI indices. And, the number of companies that are becoming signatories to United Nations-supported principles for RI is growing.

From a regulatory point of view, CSA’s 33-403 proposed reforms include a mention of how advisors, under a best interest standard, would have to ask about clients’ values. Further, TSX-listed issuers are under increasing pressure to consider ESG-related risks.

As well, experts suggest RI proponents are becoming more concerned about stranded assets. They also expect people may start divesting from companies that directly or indirectly promote poor health (e.g., junk food manufacturers) along with those that traditional ignore ESG factors.