If given the choice, Canadian investors would prefer to invest in companies that not only make a profit, but make a difference.
That's one of the conclusions from the 2017 RIA Investor Opinion Survey, which provides new insights into individual investors' interest in responsible investing (RI) and points to tremendous potential for financial advisors who are willing to leverage RI as a business-building opportunity.
The survey, which was published by the Responsible Investment Association (RIA) and sponsored by OceanRock Investments Inc., found that 77% of investors are interested in responsible investments that incorporate environmental, social and governance (ESG) factors. More than three-quarters of investors agreed that companies with good ESG practices are better long-term investments and 71% reported interest in impact investments that are dedicated specifically to solving social or environmental challenges.
Despite these strong levels of interest, only about a quarter of investors reported being knowledgeable about RI and a staggering 73% know very little or nothing about it. These figures reveal the "RI awareness gap" — the chasm between interest in RI vs low levels of knowledge.
Given the significant interest in RI, what would help turn that interest into action? When Canadian investors were asked what would make them more likely to choose responsible investments, their leading response was that they would be more likely to act on this interest if their advisors suggested suitable RI options.
As most Canadian investors are interested in RI and rely on financial professionals to suggest suitable RI options, it's clear that advisors who are knowledgeable about RI are equipped with tools that can help attract new clients and add value to existing client relationships.
"These results reveal a great opportunity for client-facing financial professionals to take the lead in closing the knowledge gap by educating their clients on RI and its benefits and showing them that responsible investments perform as well if not better than traditional investments," says Fred Pinto, CEO of OceanRock Investments and vice president, head of wealth and asset-management with Qtrade Financial Group.
Fortunately, although RI is a relatively hidden gem for individual investors, global asset managers representing trillions of dollars of investible assets – including many of the world's largest pension funds – have already incorporated RI strategies and investment practices in their day to day decision-making processes. So, even though RI may be underrepresented in individual investors' portfolios, the resources and issues related to RI are becoming increasingly mainstream.
"The really interesting thing about ESG is that investors are driving the impact of ESG factors on stock prices without even knowing it," said David Rutherford, NEI Investments' vice president of marketing, at the 2017 RIA Conference in Vancouver in early June. "When someone films a person getting dragged off a plane, they are actually pointing to how bad United's governance is. The symptom of it is someone being dragged off a plane, but the underlying issue is an ESG factor."
It takes a relatively small pivot for advisors to incorporate RI into their businesses once they recognize how RI contributes to core values of trust, fiduciary responsibility, transparency and engagement between an advisor and a client.
Equally important is recognizing how RI can strengthen investment risk mitigation as well as contribute to stronger long-term returns and greater investment differentiation and diversification.
"We have long believed that the best companies to invest in are those that are committed to strong ESG business practices," said Pinto. "It stands to reason that those companies tend to be more efficient and productive, more respected, better able to mitigate risk and more likely to create sustainable value over the long term. The strong financial performance of responsible investments over the past decade demonstrates that they can deliver returns comparable to non-RI investments."
RI encourages investors to think long-term and invest in well-governed companies while avoiding companies that are losing relevance in society. It can also motivate people to start investing earlier in their careers by providing opportunities to tap into long-term trends that appeal to the next generation of investors such as the increased need for sustainable food, fresh water and clean energy. The result is that responsible investors can feel emotionally comfortable throughout the market cycle because their investments are focused on issues that matter to them.
Noted Vicki Bakhshi, head of governance and sustainable investment with BMO Global Asset Management at the RIA Conference: "In the investment industry, we spend a huge amount of time trying to answer: Is it OK to do ESG? Can we deliver alpha through ESG? But when you think about what people actually want and why they want RI, is it because of financial metrics or just because they think it's right? I think often it's because they just think it's the right thing to do."