'Hypocrisy does not belong in a portfolio'

For those new to the responsible investing space, the sheer variety in ESG products, standards, and portfolio analysis methods may seem intimidating. But to someone like Patti Dolan, it represents a desirable difficulty.

“The awareness of the different issues around responsible investing is massive compared to when I started looking at this in the mid-90s,” the portfolio manager with Alberta-based Mission Wealth Advisors, Raymond James, told Wealth Professional.

“Back then, there were only two ESG-focused mutual funds available, and they weren’t that great,” she said. “Now, there’s a lot of methodology around the analysis of companies and ESG issues, and there are many more products available. It’s very exciting, and it’s something I’ve looked forward to for decades.”

That increased diversity in the product and portfolio-management side is opportune given the increased awareness around responsible investing. It’s especially clear among institutional investors that, beyond wanting to minimize long-term ESG risks in their portfolios, now also recognize their duty to represent the values of their stakeholders. Fossil fuel companies, mining firms, and munitions companies are prime examples of companies that entities such as pension fund managers would want to at least consider steering clear of.

“You hear a lot of stories out there of institutions that invested on behalf of, let’s say, a doctors’ pension fund, and the doctors realized that it was investing in a tobacco company,” Dolan said. “It should go without saying that hypocrisy does not belong in a portfolio.”

Despite the traction that ESG has gained, many financial professionals still hesitate to embrace it. A recent survey of advisors conducted by Evolve ETFs found nearly half still do not consider it in their investment decision-making. In another poll by the Responsible Investing Association of Canada (RIA), only 23% of Canadian investors said their advisors had asked if they were interested in investments that aligned with their values.

“I think a lot of advisors haven’t let go of the idea that ESG-oriented funds underperform, which was certainly true of past products,” Dolan said. “If you look at the Jantzi index, which is a Canadian index that was established in 2000, it has outperformed the TSX by about half a percent since then. That’s month after month, year after year … it’s not a one-time thing.”

Some non-ESG funds do exhibit fatter returns, though they’re far from healthy. As Dolan noted, a portfolio that contains weapons and tobacco companies may outperform, but it also comes with high volatility; ESG funds, on the other hand, come with lower beta but more stability. Companies that pass responsible-investing requirements, she added, are typically more able to deal with or completely avoid black swan events, such as the BP oil spill or the Equifax data breach.

While some believe responsible investing only works for certain asset classes or geographies, Dolan said it’s not that simple. There may be some general limitations — small-cap companies typically do not report on ESG issues, for example, and emerging-market companies usually don’t adhere to ESG standards yet. But within those groups are upstanding firms that race ahead of the responsible-investing curve.

“When it comes to ESG investing, I think portfolio managers should recognize that assessments should be done company-by-company rather than based on broad assumptions,” she said.

These may be just some of the biases and misconceptions that are blinding advisors to the opportunity that ESG investing represents. Traditional financial planning holds that people should make their money work for them, which has meant generating passive investment income. But Dolan maintains that today, clients have a chance to do more — and advisors can spark that conversation.

“Discussions around gifting and philanthropy are a good jumping-off point,” she said. “If a client is interested in charitable donations and philanthropy, they’re usually aware of certain issues. They probably wouldn’t be comfortable with having sin products in their portfolio, so advisors certainly have a chance to extend the conversation naturally toward more purposeful investment management.

“When I speak with my clients about their values, I act almost like a coach — I get to talk about what their intentions are, think about what investments would resonate with them, and connect with them as good friends,” she added. “It’s respecting their individuality, and it just really solidifies my relationships with them.”