The rise of ESG investing
Canada has kicked off 2020 with a slew of new products aimed at investors who want to incorporate environmental, social and governance factors into their investment portfolios.
Seven ESG-focused exchange traded funds began trading in January, the biggest month for launches of those funds since March 2019, when eight ESG products were created, according to National Bank Financial. The new funds are being launched after two years of strong net flows for Canadian-listed ESG ETFs -- more than $300 million in 2018 and almost $150 million last year.
The availability of such products in Canada has ballooned as asset managers try to capitalize on rising demand for funds that screen out companies that don’t meet certain environmental and governance criteria. Canada now has more 30 pure-play ESG ETFs. The U.S. has more than 80, though none have been launched this year, said Daniel Straus, vice president of ETFs and financial products research at National Bank Financial.
Investors have also been piling into one of Canada’s oldest ESG ETFs. The iShares Janzi Social Index ETF, which goes by the ticker XEN, attracted more than C$120 million in new capital from 2017 through 2019, according to data compiled by Bloomberg.
“ESG investing as a buzzword is not new,” said Straus by phone. “It’s been around for a long time. It did seem to pass a tipping point in terms of attention about a year or two ago, both in Canada and the U.S.”
U.S. ESG ETFs took in $8 billion of inflows in 2019, almost double the amount from the prior year, according to data compiled by Bloomberg.
ESG ETFs offer a less expensive way for investors to get exposure to the responsible investing trends and are more liquid than active mutual funds. Last month, Larry Fink said BlackRock Inc. will put climate change at the center of the firm’s strategy by prioritizing sustainability in its investment funds.
“The number of inbound requests we’ve been getting for ESG has been skyrocketing,” Straus said. “It remains to be seen whether that interest becomes true grassroots retail investor flows -- that we have yet to observe.”
One firm was responsible for all seven new ESG ETFs last month -- Bank of Montreal. The bank is following larger rival Royal Bank of Canada, which launched six new ESG-focused ETFs last year that are now managed by BlackRock Asset Management Canada Ltd.
“We didn’t want to come out with one or two and look like we were doing a token launch,” Mark Raes, head of product at BMO Asset Management, said by phone.
National Bank’s Straus said more ESG funds will come online. Millennials and Gen-Xers are expected to inherit $30 trillion of wealth in a massive generational transfer over the next 30 years, and many want to avoid investing in companies with a large climate footprint.
“It’s the realities of the world we live in -- the increasing economic power of younger investors and decision makers and the headlines around climate change and social justice issues that are turning investor decision-making processes toward ESG factors,” Straus said.
The large inflow of capital into ESG funds in 2018 was primarily due to new launches like the RBC Vision Women’s Leadership MSCI Canada ETF, which received interest at inception from institutional investors, said Straus. “Both in Canada and the U.S., the creation activity for ETFs in the ESG category has been pretty spiky, suggesting that most of the buying interest is institutional in origin.”
--With assistance from Rachel Evans.