Responsible investment (RI) is growing faster than ever. The Investment Funds Institute of Canada reported that assets under management for RI grew by 55% in 2020, compared to 11% for funds overall. There are nearly 100 RI mutual funds and ETFs on the Canadian market, and ESG integration strategies are becoming more sophisticated.

As good as it is to have more RI options, it’s becoming harder for investors to choose the products that matter most to them. “There are more responsible [investment] and ESG products than ever, but the general public is still ill-equipped to understand the distinctions between the different products on offer,” says Marie-Justine Labelle, head of responsible investment at Desjardins Investments. “This challenge is exacerbated by the lack of standardization in names and terms used to describe RI products.” So, how can advisors cut through the noise and identify RI products that can benefit their clients the most?

“Look under the hood,” says Labelle, who adds that simply taking marketing materials at face value isn’t good enough. Many of the ESG-related performance metrics touted by companies to entice investors aren’t regulated yet. While the CFA Institute just announced new ESG disclosure standards, most of the materials that currently get sent out to investors focus on what product manufacturers and portfolio managers must disclose about an investment product, and may contain very little detail on how and to what extent responsible investment strategies are applied in the product.

Many fund and portfolio managers are also actively encouraging companies to adopt better ESG practices. Has the fund put forward or taken positions on shareholder resolutions related to ESG? Are the portfolio managers having a dialogue with the companies to influence corporate behavior directly?

It’s also prudent to weigh ESG integration in the investment process. That means assessing the degree to which ESG data is combined with traditional financial metrics to arrive at a comprehensive analysis of the investment opportunity. “Delve into the actual approaches and methodologies that are being used to bring the RI products to life,” she suggests.

Assessing the portfolio manager

One issue advisors and investors should be aware of is what's called greenwashing. That’s

when disclosures or advertising materials intentionally or inadvertently mislead investors about the ESG approaches or characteristics of an investment product. Greenwashing can lead to mistrust in the investment industry, especially around ESG products.

Desjardins takes great care to properly create, oversee and market its ESG offerings. When recruiting portfolio managers to manage its fund portfolios, Desjardins asks them to fill out an ESG due diligence questionnaire. The questionnaire covers their philosophy and expertise regarding RI, the way they engage with companies, their work process and the way they monitor ESG considerations. Only those teams that score highest on these and other criteria are entrusted with Desjardins’s responsible investment funds—and a minimum score is expected to manage even their traditional funds, too. “A portfolio manager that shows a genuine commitment to these issues, and a documented process they can stand by, is bound to have a more robust approach to RI ” says Labelle.

Before working with any external portfolio manager, Desjardins looks at what the company’s management team stands for as a firm, the expertise of its investment staff and its process in managing assets.

Links between ESG and returns

When sifting through RI offerings, advisors should also pay attention to the links between ESG performance and financial performance.

“What studies generally find is that companies that do well in ESG are resilient, have good foresight of long-term systemic risks and this helps them manage risks better,” says Labelle. “From a portfolio angle, when you take a broader view of risks and opportunities, you’re bound to potentially make better investment decisions.”

Unfortunately, investment advisors don’t always know how to raise this topic with clients, even though most want to learn about RI. A Desjardins survey found that 75% of Canadians are interested in knowing more about RI. Yet only 16% said their advisors have talked to them about this kind of investing. And in most of those cases, the client brought it up. “Get the conversation started by knowing what your clients want and stand for more generally,” says Labelle. “Understand what might drive their interest in RI.”

It’s important to understand that for every investor's need, risk tolerance, region and asset class, there’s an appropriate RI product. “These products exist,” she says. “RI isn’t a separate class. It’s just a more comprehensive way of investing.”