Contribute cleanly toward a greener future

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This article was published 02/09/2023 (775 days ago), so information in it may no longer be current.

Recent wildfires, floods, droughts and other catastrophic weather make it increasingly difficult to ignore climate change.

And it’s easy to become anxious and feel powerless about what the future may hold as the planet heats up even more.

Yet besides voting in elections with the climate on your mind, you can put your dollars to work too. Responsible investing — commonly referred to as ESG (environmental, social and governance) investing — is gaining steam among investors who fear for our collective future.

ESG investing has never been more accessible, offering a diverse array of investments, from broad-based funds, excluding climate change laggards, to investments focused solely on clean energy.

“It’s definitely a good time for investors to think about what they want from ESG,” says Tiffany Zhang, vice-president of exchange-traded funds and financial products research at National Bank Financial.

Now, to be clear, ESG investing is not without its warts.

It alone will not save the planet. Government regulation remains critical to success.

But ESG investing is not a fad without impact either.

Rather, it’s becoming the way to invest as the world’s biggest investors — pension funds and large asset management firms — increasingly make ESG a central mandate.

A recent report by Millani — a Canadian-based ESG advisory firm — surveyed Canadian asset managers, who oversee more than $5.8 trillion dollars, and found ESG metrics, which include companies’ efforts to reduce their climate impact, are now fundamental to investment analysis.

What’s more, the recent pushback on ESG, mostly seen in the U.S. from far-right politicians, is having the reverse effect, it found.

More and more, the investors these asset managers serve want ESG to be factored into how their money is invested.

That’s a trend Winnipeg wealth adviser and portfolio manager Michael Silicz has seen grow over the last decade.

“Ten years ago, maybe one or two clients were very interested, but for most people, it wasn’t on their radar,” says Silicz, with National Bank Financial.

Now, it’s on the mind of most clients.

“People see the negative news — fires and floods — and they start to wonder if this stuff is connected and how all this might affect the value of their portfolio.”

While investors have more ESG investments to choose from, they also have more tools to help them choose investment, which is important because “people can feel overwhelmed with all the information out there,” says Douglas Chow, Toronto-based founder and chief executive officer (CEO) of PortageBay, provider of ESG analytics software for the investment industry.

Even asset managers, who may not have as deep knowledge of ESG metrics as they do analyzing corporate financial reports, are looking for clean data to guide decisions.

PortageBay does that, offering an-easy-to-use tool that leverages artificial intelligence, trained to scour the web to find ESG related data on all publicly traded companies in North America.

For the time being, it serves institutional clients — pension funds — but offering it to retail investors — average individuals — is on the radar, Chow says.

Other options for do-it-yourself investors include Morningstar.ca, MSCI and Refinitiv.com. These can provide partial access for free, allowing investors to search company ESG ratings.

But these measurements, including carbon emission reporting, are still evolving. You can sometimes get very different perspectives on a company, depending on the data provider.

For example, Suncor Energy Inc. is rated by some providers as a climate leader among oil and gas companies. Yet by some measures, at least those relating to climate, the Canadian energy company’s current efforts to mitigate climate change are misaligned, for example, with global goals to limit the increase to 1.5 C.

That said, reporting is improving, Silicz says.

“There are legitimate international bodies that are quantifying this.”

That includes the Sustainability Accounting Standards Board, aiming to establish global financial accounting practices around ESG measurements.

“But what really matters is where institutional investors are putting their money, and we’ve seen in a quantifiable way a lot of money flow into these types of funds,” he says.

Indeed, big money is talking.

PWC recently reported that ESG strategies encompassed more than $18 trillion globally in 2022, and are forecast to grow to nearly $34 trillion by 2026.

While these mandates include social and governance aspects, the big driver is the environment, he says.

“Whether you like ESG investing or not, it’s a good way to measure the value of a company.”

He further argues it addresses risks — from sketchy financial reporting to poor labour practices and lacklustre climate change initiatives.

One other challenge for investors, beyond getting into reeds of actual ESG reporting, is finding investment vehicles to suit their needs, Zhang says.

“You need to look under the hood,” she says about the many choices from mutual funds to exchange-traded funds (ETFs).

Canada has 150 ETFs focused on ESG, totalling $15 billion in assets under management, or about five per cent of the total ETF market, she adds.

The mutual fund market is even larger with $39 billion in assets across more than 250 funds, according to National Bank research.

Not all funds are for everyone.

While some are broad-based that, for example, encompass the TSX Composite Index while excluding companies with poor ESG scores, that could fit the risk profile of many investors, others are much riskier.

That includes Horizons Global Hydrogen Index ETF, which involve clean technologies that are still evolving, Zhang says.

Expect even more choices as more dollars flow into the space as climate change’s impacts become more dire, Silicz says.

“When people see headlines of wildfires and floods, they start to look for solutions.”

Increasingly, they’re considering how they invest as one of those possible solutions.