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Asset managers discuss the rise of responsible investing

Innovative approaches to solving "the biggest problems of our time"

The rise of responsible investing is reshaping the asset management industry, as investors seek to incorporate social, environmental and other factors into investment decision-making.

Key insights

  • The umbrella term “responsible investing" incorporates multiple approaches to investing, and developing a common language is often a first step in approaching responsible investing
  • Across the asset management industry, investors are increasingly looking for approaches and products that align with their values, and advisors who are not ready to respond may risk falling behind
  • Educational initiatives could help build investor awareness of all of the dimensions of responsible investing, including corporate governance issues

Prompted by increasing demand from investors for greater transparency about how their funds are invested, and growing awareness of the extent to which these practices and factors can influence investment outcomes, responsible investing was one of the key topics of discussion at KPMG in Canada's Asset Management Forum 2019.

The forum included a panel that discussed and considered the current and future state of responsible investing. The panel featured representatives from across Canada, including Catherine Philogène, VP, Product Management, RBC Global Asset Management.

The dimensions of responsible investing

Philogène launched the discussion by providing some working definitions of different dimensions of responsible investing. These include:

  • Environmental, Social and Governance (ESG) integration: the systematic integration of ESG factors into investment processes
  • Socially Responsible Investing: the application of positive and or negative screens to include or exclude companies from the investment universe based on a defined set of values
  • Impact Investing: investments into companies, organizations and funds with the intention to generate a measurable, beneficial social or environmental impact along with a financial return

The umbrella term “responsible investing" may refer to any of these related components, commented Philogène, and often the first conversation with clients about responsible investing is to sort out these different aspects. “When we're working with clients," she said, “these may be new conversations—and there isn't universal understanding of these terms and distinctions."

Responding to a changing marketplace to capture growth

One of the most important factors driving the growth of responsible investing in Canada is the extent to which investors are asking for products that align with their values, the panelists noted. If investment advisors are not prepared to meet that demand, “they can be caught flat-footed," commented Philogène, which may result in investors going elsewhere to ensure their concerns will be accommodated.

Investors are asking for products that align with their values

The panelists also noted that there are certain demographic differences in approaches to responsible investing. For example, female investors and younger investors highly value environmental and social factors when making investment decisions, while the “governance" factor—covering issues such as executive compensation, board independence and composition, and shareholder rights—tends to be relatively overlooked by all investors. This may be the result of insufficient knowledge about corporate governance issues, the panelists said, yet corporate governance drives the other aspects of ESG investing. “It all starts with governance," they agreed.

The panel concluded that asset managers should look to develop ways to engage investors around the topic of governance, including developing specific measures for success in the governance dimension. Developing more refined strategies for investor engagement was identified as a clear priority for the coming years, as well as increasing corporate disclosure practices.

High-growth opportunities linked to solving pressing problems

The panel noted that increasingly, the term “responsible investing" is losing its distinctive meaning as the asset management industry, as a whole, moves to incorporate responsible investing practices.

Responsible investing is 'where the puck is going'

The trend to incorporate responsible investment factors within “mainstream" investing is being driven by a series of underlying shifts:

  • The asset management industry increasingly recognizes that incorporating ESG practices is a way to mitigate balance-sheet risk. “Companies that don't manage ESG will have contingent liabilities on their balance sheets, which makes them relatively less attractive to investors," the panel agreed.
  • The “most compelling problems" we face—from climate change, providing access to clean water, to reducing reliance on fossil fuels—also provide high-growth investment opportunities, meaning that investors do not need to “choose between" higher expected growth and investments that align with their values.
  • An increasing number of asset managers are expressing the view that “responsible" investing is not a separate approach to investing, but is already incorporated into investment best practices. “Responsible investing is 'where the puck is going,'" commented a panelist, “and we're skating to it."

To help ensure managers can deliver the responsible investment products and services that investors are demanding, the asset management industry will need to continue to demonstrate leadership.

Along with product innovation, managers may also look to provide more comprehensive educational initiatives to inform investors and advisors about the “underlying bigger picture". These initiatives could focus on corporate governance as a driving factor in implementing responsible investing, and the tools that investors may have available to influence the governance element of their investment choices.

Looking forward, the panelists agreed, the area of responsible investing promises to provide compelling and rewarding challenges in solving “the big problems of our time."

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Sources

  1. KPMG Asset Management Forum 2019 (Toronto)