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Dale Jackson

Personal Finance Columnist, Payback Time


The old saying “nice guys finish last” is being put to the test.

Investment products with a focus on ethics are outperforming their peers despite a widespread perception that taking the high road leads to lower returns.

Last year, 64 of 87 sustainable funds tracked by Morningstar outperformed their category peers on a risk-adjusted basis after fees.

As ESG (environmental, social and governance) investment products become more mainstream another study by SOM for Desjardins shows responsible investment funds outperformed traditional Canadian equity, U.S. equity and global equity funds over three, five and 10 year periods.

Yet, the same study includes a survey showing 28 per cent of Canadians believe responsible investments would be less profitable than traditional investments. That’s up from 24 per cent in 2018 and 16 per cent in 2016.

A similar survey by Pollara for Mackenzie Investments found 40 per cent of respondents believe environmentally sustainable investing leads to lower returns.

It’s hard to pin down why ethical investments outperform their all-inclusive peers. Conventional wisdom tells us funds with the widest range of investments should do better. Shares in tobacco and alcohol producers often pay generous dividends and - let’s face it - customers with physical addictions to a product give them an edge most companies don’t have.

But companies that deal in what many see as unethical behavior are facing increased pressure to their bottom lines from legal, regulatory and public relations risks.  

A likely explanation for the success of ESG investments lies in wider global trends towards transparency and sustainability. Governments around the globe have been pouring money into financial incentives for alternative energy sources to replace tradition fossil fuel producers. Costs to produce alternative energy are normally higher but as efficiency increases, those costs come down and profits increase. 

It seems many Canadian investors are catching on. According to the Desjardins survey, 54 per cent of respondents said return potential is the main reason they invest responsibly.

And the investment industry is responding. According to the Investment Funds Institute of Canada (IFIC), mutual funds and exchange traded funds (ETFs) represented $20.1 billion in assets by the end of 2020 – a 55 per cent increase from the previous year. 

Most investment dealers provide a line of ESG funds, often with the help of specialized sub-advisors like Sustainalytics and Jantzi Research. Toronto-based financial planner Good Investing is one of a flurry of smaller investment firms focused on socially responsible and green investing.

Desjardins offers a series of climate-themed ETFs that range from low-carbon emitters to fossil-fuel-free funds for investors who want to go further.

Horizons ETFs also offers the fossil-fuel-free Global Sustainability Leaders Index fund.

The popularity of ESG investing has also brought out unscrupulous fund providers hoping to cash in by making false claims, known as green washing.

U.K.-based environmental investment watchdog InfluenceMap recently analyzed 118 ETFs and mutual funds around the world marketed under a climate theme and found an aggregate exposure to fossil-fuel producers in line with the benchmark MSCI World ETF.

Of the funds studied, 22 were found to have exposure to thermal coal, or oil and natural gas reserves.

It’s important to understand the screening process included in the fund prospectus to be sure it lives up to its marketing material. Even if it checks out, mutual funds are not required to disclose all holdings or keep changes in their portfolios up to date.

ETFs, on the other hand, are more transparent but can still present challenges. Roughly one third of an ETF that tracks the TSX Composite Index, for example, holds natural resource-related companies and another third holds financial companies that likely have dealings with natural resource producers. 

Responsible investing takes on another level of confusion when you consider not all of us share the same values. Some funds exclude companies involved in tobacco, alcohol, pornography or gambling. Others attempt to reflect the values of specific religions.  

If you want your portfolio to reflect your values it’s best to speak with a qualified investment advisor. Most firms are required to provide a form to list specific objections. If a form is not available be sure to provide a written statement listing which investments are acceptable to you, and which are not.