Responsible Investing: Bridging The Gap Between Investors, Advisors And RI Providers

In short, investors and advisors are both open to RI, but neither is consistently starting the conversation about adding these products to investors’ portfolios.

The Responsible Investing Association’s 2020 Investor Opinion survey found that 72% of Canadian investors are interested in RI, but only 28% recall their advisor asking them about this topic. Perhaps advisors are waiting for investors to raise the topic. Through the Environics

Annual Advisor Perception Study

, half of advisors say they’re not actively pursuing RI, but will respond if a client asks for it. Few clients do: only 8% of Canadian independent financial advisors tell us their clients ask for RI. In short, investors and advisors are both open to RI, but neither is consistently starting the conversation about adding these products to investors’ portfolios. This gap suggests an opportunity for RI providers to offer additional support to both Canadian investors and advisors.

Since 1983, social values research conducted by Environics has tracked changing mindsets and norms in Canada; and analyzed how these views influence brand perceptions, product preferences and purchasing behaviours. From this research, we know that there are specific groups of Canadians who are more likely to own, or consider holding, responsible investments. These groups include those with a post-graduate education, those with higher levels of financial assets, and residents of Quebec and B.C. We find that 10% of Canadian investors report owning responsible investments now or previously; and a further 8% have seriously considered them. Among those familiar with responsible investments, those who have owned or are considering them are far more likely to agree that responsible investments select companies that are better managed over the long term (70%) and produce superior long-term investment returns (60%).RI enthusiasts are sometimes stereotyped as “hippies” or “tree huggers.” While it’s true that those who have invested in or are interested in RI are strong on values associated with a concern for the environment (

Primacy of Environmental Protection, Ecological Lifestyle, Attraction to Nature),

this group has many other defining values. Current and potential responsible investors express

Confidence in Big Business

and a preference for finding companies with a compelling story (

Brand Genuineness

) that they can become advocates for (

Consumption Evangelism

). Moreover, they’re confident that their financial future will be bright (

Personal Optimism, Financial Security

).These Canadians lead health-conscious lifestyles; eating well, exercising and making efforts to keep mind, body and soul in balance (

Effort toward Health).

For them, health – like wealth – is a process, not an outcome

.

They’re also open to new ideas, and see diversity as an opportunity to learn (

Global Citizenship, Multiculturalism, Openness to Others, Flexible Families, Adaptability to Complexity, Personal Creativity

)

.

Canadians who have invested in or are interested in RI seek authentic and close relationships with others, making it important for advisors to take the time to understand what’s important to them in their investments.Our advisor research finds that 28% of advisors have made responsible investing a core and growing focus of their practice. These advisors are fairly equally represented by channel, including IIROC, MFDA and insurance-focused advisors. RI advisors skew younger: Millennials and Gen X are overrepresented in this group, although one-quarter are Boomers. Perhaps surprisingly, they’re only slightly more likely to be women. Despite a younger age profile and an earlier stage of business development (more likely to be in the growth stage of business rather than the maturity or succession planning stage), these advisors skew toward somewhat larger-than-average practices, both in terms of number of clients and total assets under management – suggesting that embracing responsible investing enables them to appeal to a wider audience of investors, and that catering to these advisors may provide strong opportunities for future growth.

Beyond finding the right investor fit, education for both investors and advisors will be important to RI growth in Canada. Among investors who are interested in, but not yet using RI, knowledge is low. Among advisors, familiarity is frequently based on their experience helping clients who have asked for RI. There are a few key areas that advisors and investors can benefit from learning more about:

How Responsible Investments are constructed

It’s common to hear a responsible investment questioned or dismissed because of the inclusion of companies such as Amazon or Walmart. Describing the ESG rating system and how ratings are assigned will help address these knee-jerk objections. Additionally, explaining the different approaches (ESG integration, negative screening and impact investing) will clarify how RI products differ from one another. RI products that tout their values in their brands tend to be easy to understand; Green Bonds, Fossil Fuel-Free or Women in Leadership are fairly self-explanatory. ESG integration, however, can require more explanation.

RI categories and how to choose the right fit

Beyond understanding the composition of RI, another key task is navigating the growing number of investments options. Broad-based ESG funds can be disappointing to those with specific investing goals, such as being fossil fuel-free, or promoting diversity and inclusion. For advisors in particular, training and education, and wholesaler support will help them build their own knowledge and support their investors in adopting RI that fits their goals and values.

RI doesn’t need to mean giving up performance

There is a lingering perception that responsible investing may lead to under performance. Performance dimensions are critical to advisors when reviewing any investment, and RI is no exception. We know from our Advisor Perception Study that strong performance leads to increased sales with a provider; so, to sustain advisor buy-in, performance certainly matters. There is growing evidence that RI is currently outperforming benchmarks and traditional funds; these results should help to persuade advisors who have reservations about this category take a second look.

RI is no longer on the periphery of the financial services industry – and it’s important for investment firms, dealers and advisors to understand the opportunities that these investments present. Responsible investing involves new intricacies for both Canadian investors and their financial advisors; and both groups will benefit from education and training. The current gap between the number of investors interested in RI and the number who actually have RI in their portfolio likely reflects both a knowledge gap and an unmet demand. The financial services industry is well-positioned to help both advisors and investors learn more about RI and adopt more such products.The rising interest in RI comes at a time when we see and feel the devasting impact of the COVID-19 pandemic and more intense natural disasters across the world as a result of climate change. Responsible investing is based on the belief that we can create a better and more sustainable world while at the same time making money. No wonder more Canadians want to get on board.