Environmental, social and governance-themed investing has taken its knocks this year, from fines levied against fund managers for misleading claims to attacks from U.S. conservative politicians who portray sustainability as a leftist plot.
An alternative, impact investing, has grown in Canada, and its proponents hope that more retail investors will soon have access to options that promise measurable social and environmental improvements along with financial returns.
Impact investors focus on addressing United Nations Sustainable Development Goals. This means providing capital in such areas as renewable energy, sustainable agriculture, microfinance and accessible health care and education, in the form of fixed income, private equity, cash and other instruments.
Kelly Gauthier, president of Rally Assets, one of Canada’s best-known players in the field, calls it “the deep end of the pool” of responsible investing. The firm works with institutional investors, foundations, family offices and philanthropists.
There is a misconception, certainly among many retail investors, that funds touting environmental, social and governance (ESG) attributes are set up to deliver improvements in a number of areas, from climate change to gender and racial equity, she says. But often, fund managers amass portfolios of companies with high ESG scores within their industries – a measure of how they are protected against non-financial risks. Some managers screen out certain sectors, such as fossil fuels or firearms.
That has fuelled confusion, and added to concerns among investors and regulators about greenwashing, or exaggerating the benefits of buying into such products. Now, following a boom in ESG investing in the first part of the pandemic, the field has become a target for criticism.
“ESG has always been intended to minimize risk, and to consider E, S and G risks as they relate to financial value, but all still within an orientation around financial value. Impact investing is oriented quite differently,” Ms. Gauthier said.
“The impact investing that we do is not looking for concessionary returns. It’s looking for market-rate returns, and we’re doing impact investing across all asset classes. But it’s certainly intentional impact that’s being created.”
In the past decade, analysts and fund managers have increasingly considered environmental and social factors when assessing any potential investments, to the point where doing that research has become standard operating procedure.
Now, the early adopters of sustainable investing are moving over to the impact world as they seek greater alignment with their values, she says. They may also be seeking to distance themselves from some of the controversies.
Regulators are cracking down on false ESG-related marketing to ensure investors are aware of what goes into the financial products they buy. In May, police raided the Frankfurt offices of Deutsche Bank AG’s asset-management division, DWS, in connection with accusations of fraud related to environmental and social claims. The unit has been the subject of investigations in Germany and the United States. The CEO of DWS resigned following the raid.
Meanwhile, ESG is facing pushback from politicians in Republican-dominated U.S. states. In the latest instance, Florida Governor Ron DeSantis and the State Board of Administration said on Tuesday that investment decisions for the state’s US$190-billion retirement system cannot include ESG considerations. Mr. DeSantis said in a statement that his government is “reasserting the authority of republican governance” and “prioritizing the financial security of the people of Florida over whimsical notions of a utopian tomorrow.”
Some of the biggest names in private equity have amassed billions of dollars for impact funds, including Brookfield Asset Management and TPG Inc. But in Canada, a lot of the investing is done by philanthropic organizations, family offices, credit unions and smaller private equity firms. The sector is still relatively small.
In developing and emerging markets, for instance, impact assets under management totalled $3.5-billion in 2021, up 70 per cent from 2019, according to the Canada Forum for Impact Investment and Development (CAFIID). The federal government’s $770-million climate finance fund accounted for half that growth. Agribusiness, financial services and renewable energy were the top investment targets.
The Table of Impact Investment Practitioners, which collaborates with CAFIID, says $1-billion of investments in social impact funds are aimed at providing benefits in Canadian communities in areas such as community development, housing, employment and biodiversity.
Currently, options for retail investors to participate in impact investing are limited, as much of the industry focuses on private equity rather than public securities. More options are expected, especially as younger investors seek them out and as more investment advisers learn about the options available, Ms. Gauthier says. One target for growth is within credit unions, which bring together like-minded members.
“As folks come to understand impact in public markets better and start to build out that product suite, we’re seeing more of those pieces come to market, and there’s a huge opportunity there. We know that every financial institution out there is chasing millennial dollars.”
Jeffrey Jones writes about sustainable finance and the ESG sector for The Globe and Mail. E-mail him at jeffjones@globeandmail.com.