Explore Sustainable Canadian Funds Here
Sustainable investing enjoyed another successful year of growth, performance and influence in 2021. Global sustainable funds attracted record inflows in the first three quarters of the year alone, while their total assets under management approached $ 4 trillion. Performance remained solid. Based on cumulative returns as of mid-December, 56% of sustainable funds ranked in the top half of their respective Morningstar categories, and only 44% ranked in the bottom half. Sustainability concerns, particularly around the climate crisis, are on the agenda of regulators around the world.
If you are one of the many individual investors or financial advisers who are considering adding a sustainability lens to your investments in 2022, here are four things to keep in mind about sustainable investing:
1) Sustainable investing is not just one thing: it represents a range of specific investment approaches.
Sustainable investing is not a one-size-fits-all approach, but rather represents a range of methods that investors can use to generate competitive investment returns while helping to generate positive results for people and the planet. Our Sustainable Investing Framework describes six distinct approaches to investing for sustainability. Any given sustainable fund can use one or a combination of these approaches. Additionally, these approaches are used in conjunction with standard investing practices that emphasize things such as style, quality or momentum.
What does this mean to you? It’s important to take the time to understand what’s hiding under the hood. Do not assume that funds whose names include terms such as “sustainable” and “ESG” are the same investments. A good example is the treatment of fossil fuel exposure in sustainable funds. Some funds completely avoid such exposure. Others have “best-in-class” environmental, social and governance standards for fossil fuel companies to incorporate into their portfolios. Many funds that include fossil fuel companies have stepped up their engagement with these companies to push them to reduce their emissions. Some fixed income funds may buy green bonds issued by fossil fuel companies to help them finance renewable energy projects. And funds focused on renewables can be heavily exposed to fossil fuel companies that invest heavily in renewables.
So it’s important to look under the hood to understand the details of any sustainable fund you are considering, especially now that there are over 500 open and exchange-traded sustainable funds available to US investors. A lot of the “greenwashing” allegations really have to do with a mismatch between investor expectations and a fund’s specific sustainable investing approach. Funds can better inform investors about the exact approach (s) to sustainable investing that they take. Due to the urgency of the climate crisis, all sustainable funds should issue a climate change statement outlining how they are tackling climate-related issues.
2) Sustainable investing continues to evolve and innovate.
Sustainable investing is linked to broader global changes. We are moving from a time when most investors accepted that SOEs make money for them while generating negative social or environmental consequences, to a time when investors increasingly expect companies to make money for them while generating negative social or environmental consequences. earn money while avoiding such costs or generating positive impacts. Rather than focusing only on how ESG risks can affect an investment, more sustainable investments also assess the impact of an investment on people and the planet. Innovations include funds focused on improving business behavior through deep engagement and proxy voting, and funds beginning to apply net zero criteria to their investment selections.
3) Sustainable investing must offer competitive investment performance.
Sustainable investments can be expected to generate competitive performance over the long term. Sustainable investors should neither expect to always outperform nor always underperform, but they should expect investment returns that are competitive with those of conventional investments. It has been difficult to shatter the myth that sustainable investments underperform. This has certainly not been the case in recent years when, on the whole, sustainable funds have performed better than conventional funds. Keep in mind that sustainable fund returns are not determined only by the use of sustainability criteria, but also by other investment criteria employed by fund managers, so it is difficult to sort out the effects. relative of each on performance. That is why I recommend evaluating the overall performance of a sustainable fund in a holistic way and comparing it to that of all funds that invest in the same broad asset class or investment category.
4) Sustainable investments are primarily focused on yield, but they can have a wider impact.
Sustainable investing is primarily about investing, not social or environmental activism, but it impacts the world. You may be drawn to sustainable investing because of your own social or environmental concerns, but the main goal of a sustainable fund is to generate competitive returns on your investment to help you achieve your financial goals. That said, by making a sustainable investment, you have more of an impact with your money than if you invested the conventional way.
Here are four ways that sustainable investments help generate impactful results for people and the planet:
- The overall growth of sustainable investing is prompting companies to address important ESG issues that they may have overlooked or considered irrelevant. Today, few companies wish to be excluded or underweighted in ESG indices, or otherwise identified as having poor ESG performance. They know this reflects poorly on the broader perceptions of the company’s stakeholders, which affects reputation, brand and regulatory decisions. Sustainable investors inspire companies to tackle issues that impact workers, customers, communities and the climate. The investment reinforced the idea of shareholder primacy; today, sustainable investing enables the transition to stakeholder capitalism.
- Sustainable investors have a more direct impact by stepping up what we call “active ownership” activities: by engaging directly with companies on sustainability issues, by proposing resolutions to shareholders and by supporting those resolutions through their vote. vicarious. In the last year alone in US public companies, 35 shareholder resolutions proposed by sustainable investors attracted a majority of voted shares; 75 attracted at least 40% of the vote. This is a radical change from the recent past, when it was seen as a victory for a shareholder proposal to generate 10% of the vote. These activities help companies understand ESG best practices, highlight the extent to which investors care about ESG issues, help companies find solutions to the ESG issues they face and bring new issues to the fore. day. This year, for example, investors demanded that racial equity audits be performed at eight major companies, including Citigroup. (VS), Johnson & Johnson (JNJ), and Oracle (ORCL). These proposals obtained on average around 35% of the votes. The popularity of such measures prompts boards to sit down and consider incorporating these views into company policy and strategy.
- Sustainable investors channel capital to companies making goods and services that will fuel a more sustainable economy and finance projects through green bonds and other sustainability-focused bonds that are believed to have positive impacts on the economy. climate or other environmental and social issues.
- Just as the overall growth in the field pushes companies to tackle important ESG issues, the growing emphasis on impact has started to draw attention to the impacts of companies on the world. Underlying this is the idea that SOEs should have a mission that contributes positively to the world and minimizes their negative impacts. Investors and, in some cases, companies themselves use the United Nations Sustainable Development Goals as a framework for assessing impact.
Having reasonable expectations for any type of investment is important for the success of investors. For sustainable investing, keep in mind that it includes an ever-changing range of approaches, so it’s important to look under the hood of any sustainable fund to make sure it meets your expectations. Also, keep in mind that sustainable investments are primarily performance driven and should be held to the same reasonable performance standards that you would expect from any investment. And while the impact may be secondary to performance, sustainable investments have a broader impact in several ways. I expect to see more innovations on the impact dimension in 2022.