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Climate change is a top global issue and the biggest source of opportunity for Canada’s $3-trillion responsible investment sector, while concerns about greenwashing and increasing regulatory scrutiny are slowing the sector’s growth.
Investing through an environmental, social and governance (ESG) lens is becoming more sophisticated, as asset managers deploy different strategies to address risk, from integrating a basket of metrics into buy-sell decisions to focusing on specific themes, such as climate, Canada’s Responsible Investment Inclusion and water conservation in the workplace, according to a state-of-the-industry report from the Association (RIA).
All this comes amid growing controversy following high-profile investigations and fines for false and misleading environmental claims, as well as a backlash against ESG efforts, particularly in the US. The resulting chill is seen as a limiting factor in the sector, the report found.
The survey was conducted by Environics Research on behalf of the RIA. It found that, over the past two years, assets under management specific to responsible investing fell from $3.2-trillion to $3-trillion, RIA officials see as a floor for its members. RIAs include asset managers, asset owners, pension funds, service providers and others who collectively oversee $42-trillion in assets.
The decline was due to a number of factors, including changes in reporting methods as the RIA hired a new firm to collect and evaluate data. In addition, major asset management firms have become more careful about how they define responsible investment (RI) and ESG assets, said Patricia Fletcher, chief executive officer of RIA.
Asset managers are hiring responsible investment teams with more experience and knowledge than in the past, and they are much more critical about how assets are defined, Ms. Fletcher said in an interview.
“The definitions of RI are becoming clearer. A lot of global initiatives related to ESG and RI disclosure are being implemented and emerging and there is a really conservative tone being taken,” he said.
The report shows that ESG integration — where investors employ a comprehensive set of ESG metrics to manage risk — is the most commonly used strategy, at 94 percent of RIA members, up from 89 percent two years ago. This is followed by negative screening, or excluding companies or industries based on their products or business practices, at 91 percent, up from 72 percent. The top industries targeted by the exclusionary policy are arms and military hardware, tobacco, fossil fuels and gambling.
Other key strategies include corporate engagement, or using shareholder clout to push green and social propositions, as well as positive screening and thematic investing – building portfolios that pursue well-defined sustainable solutions.
46 percent of respondents run impact funds, which are structured to generate measurable environmental and social outcomes in addition to financial returns.
On corporate engagement, the RIA was a force in this year’s launch of Climate Engagement Canada, a coalition of organizations pushing 40 companies in industries such as energy, utilities, mining, transportation and consumer goods to improve climate-related disclosures and align their support. Goals of the Paris Agreement.
Meanwhile, increased regulatory and public scrutiny of ESG investments is easing tensions after years of growth, the survey found. In addition to greenwashing concerns, the industry is awaiting clarity on disclosure and reporting standards, as well as definitions of what constitutes green technology from various organizations. These include securities regulators and the new International Sustainability Standards Board, Ms. Fletcher said.
Over the past year, ESGOs have become the target of political backlash, particularly in the United States, where some politicians in Republican-controlled states have tried to prevent institutions from using sustainability measures in investment decisions, in an effort to protect lawmakers. Fossil fuel industry.
At the same time global credibility has been questioned. Last spring, the US Securities and Exchange Commission fined BNY Mellon US$1.5-million for misstatements and omissions about ESG factors that went into investment decisions for some of its mutual funds. In the same month, police raided the Frankfurt office of DWS, Deutsche Bank AG’s wealth-management division, on allegations of greenwashing-related investment fraud.
“I think there’s a wait and see mode of what’s going to happen in the coming months, and an active desire for clarity and certainty to help shape where the industry goes from here,” Ms Fletcher said.
Despite the growing scrutiny of ESG, responsible investing is still a big opportunity in Canada, the report says
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