ESG rules!

Hey there, time traveller!
This article was published 20/02/2021 (1700 days ago), so information in it may no longer be current.

Responsible investing is having a moment.

Or rather the investment style putting environmental, social and governance (ESG) at the top of the list when analyzing stocks, or just about any other investment, is on the cusp of a golden — er, green — age.

Leading the way is growing interest in environmentally friendly investing, particularly in the theme of clean energy.

Investors through 2020 piled into, for example, funds involved in wind and solar.

Most notably, Invesco’s Solar exchange-traded fund (ETF) — with the catchy ticker TAN — soared to bubbly heights with a one-year return of almost 240 per cent.

The renewable energy sector has been red-hot these days after a decade of being largely overlooked, says Patti Dolan, portfolio manager with Mission Wealth Advisors (Raymond James) responsible investment adviser.

“There probably is more upside, but my crystal ball doesn’t work that well.”

As such, the Calgary-based responsible investment specialist — offering ESG-themed solutions to clients for more than a decade — admits even she worries the sector’s newfound sizzle.

“It’s a bit unnerving, so you have to be careful.”

What’s more, many investment companies that previously have not been involved in ESG and, more specifically, ‘green investing’ are jumping into the game.

And with that comes the danger of ‘greenwashing’ whereby an investment may have a catchy, earth-friendly name but its underlying assets are much less so, Dolan says.

Still, the broader ESG theme — with G, or ‘governance,’ essentially meaning good corporate behaviour — has become the new standard among many corporations and the investment industry itself.

“Most large companies are practising ESG as organizations,” Dolan says. That includes massive investment firms like RBC Global Asset Management, which recently announced its funds will be managed using a ESG mandate. Dolan notes that’s largely a result of their partner for ETF solutions, BlackRock Inc. — the world’s largest asset manager — making sustainability a key pillar of how it operates and invests.

These moves make sense given investor demand. A recent report from the Responsible Investment Association found responsible investment assets under management in Canada alone reached $3.2 trillion in 2019, up 48 per cent from two years prior. All told ESG investment assets make up almost 62 per cent of all invested assets in Canada.

Now more than ever, that includes the real estate investment sector, says Claudia Reich Floyd, a managing director at Hazelview Investments.

“In Europe, the focus on ESG has been quite substantial for a while, especially driven by the Paris Agreement and other goals governments have set for themselves,” says Floyd, a real estate specialist based in Germany.

Today, however, these considerations are also embraced by large-scale real estate asset managers around the globe, including many REITs (real estate investment trusts) listing on the Toronto Stock Exchange.

In fact, REITs are pushing the movement forward as they invest increasingly in energy efficiency and promote other ESG metrics like, social well-being (i.e. walkable developments). The reason being, REIT managers take a decades-long view as owners of very long-term assets. Furthermore environmental considerations and regulation will only become more omnipresent with each passing year, Reich Floyd says.

“The main message is that REITs can be a very good sounding board and driver of ESG because they are very sophisticated managers of some of the largest portfolios of real estate assets in some countries.”

Reich Floyd adds ESG has made up part of Hazelview’s investment process for some time because its institutional clients, like pension funds, have been demanding this approach for several years.

But she notes ESG is now a must for large asset managers. “It’s not just a nice add-on,” she says, adding governments are pushing that new developments are greener and address social concerns like affordable housing. Consequently developers recognize projects are more likely to get greenlighted quickly if they include ESG principles, she adds.

Of course this approach is also profitable.

“You can see in the past year in the capital market returns that investors have preferred companies with a higher ESG score,” Reich Floyd says.

The environmental part of the equation is the most attractive to investors today with, as previously mentioned, clean energy leading the way in recent months.

A laggard sector for a decade, it has grown rapidly in popularity especially after a new administration was elected in the U.S. in November.

Yet, until last month, Canadians had no clean energy ETF options — despite Canada being home to some leading renewable energy companies (i.e. Northland Power, Brookfield Renewable Partners and Innergex Renewable Energy). That changed with the launch of BMO’s Clean Energy Index ETF (ZCLN), which launched shortly after Harvest Clean Energy ETF (HCLN).

“By and large, (this trend) is a greater recognition of our impact on the planet, and that our energy needs in the future will need to be met more and more from renewable sources,” says Mark Raes, head of product at BMO Global Asset Management Canada.

While the sector has been arguably too in-demand, long-term trends favour clean energy, and all kinds of ESG investing for that matter, Raes says.

“We can’t predict short-term price movements but, if you look long-term, there is absolutely growing demand that will support growth.”