After 20 years of slogging in the wilderness, responsible investing has cleared its biggest hurdle and is now growing rapidly, creating an opportunity for credit unions whose values match those of most investors.
That huge hurdle was the persistent concern by investors that screening their investments to be sure they meet environmental, social and governance (ESG) objectives would result in lower returns. For many people the fear of retiring in poverty overwhelmed their desire to do good with their money.
But the results of the past decade show they don’t need to worry. Funds invested according to these criteria match or beat returns that are not screened. That has opened the dam, releasing a flood of investment dollars. “There has been a change in perspective,” says Rosalie Vendette, senior adviser, Responsible Investing, Desjardins Group (seven million members, $258.4 billion in assets). “People used to be leery of socially responsible investments (SRI or RI) because they thought the returns were lower. Now it’s clear that the returns are similar and people feel RI investments are actually safer because they reduce risk of climate-change losses,” Vendette says.
With the creation of Aviso Wealth through the merger of NEI Investments, Qtrade Canada and Credential Financial, the credit union sector is poised to consolidate its position as the responsible investing powerhouse. “My view is that NEI, Credential and Desjardins coming together is going to create a comprehensive wealth management solution for credit unions that will focus on RI,” says Dustyn Lanz, CEO of the Responsible Investment Association, which is Canada’s membership association for RI.
Lanz notes that an association report last spring showed 38 percent of assets under management were in responsible investing funds. An update, due to be released soon, will show that number is even higher.
Millennials driving investment
Another factor favouring an increase in responsible investing is that surveys consistently show millennials want to ensure their investments match their values. While many may not have that much money now, they do have influence. “Most of my new clients that are now interested
in responsible investments are millennials,” says Cheryl Crowe, senior financial adviser, Socially Responsible Investments, at Assiniboine Credit Union (111,000 members, $4.5 billion assets). “They have chosen to live their lives in a sustainable way and want to incorporate their social and environmental values into their investment decisions.”
“They have chosen to live their lives in a sustainable way and want to incorporate their social and environmental values into their investment decisions.” – Cheryl Crowe
As well, millennials will inherit billions over the next couple of decades. “An Ipsos survey of millennials show they are twice as likely to be interested in investing to meet social and environmental objectives,” Lanz says. “We regularly get calls from financial advisers who want to learn about RI, because their clients’ kids are asking for them.” Vendette adds that “our financial advisers are often talking to the younger members of the family — even though they haven’t inherited the money — but they are included in the conversation and they have an influence and do bring up environmental, social and governance issues.”
Crowe adds that “most members belong to credit unions because they believe they want to contribute to their community, whether that is to stimulate economic growth in a sustainable way to have social impact, or make an environmental difference in their community. So they want their money doing more than just making a profit.”
Robert Walker, vice-president, ESG Services, NEI Investments says that “over the past few years,
we’ve seen a flood of interest in responsible investing, much of that coming from public pension funds and extremely large asset managers. That does pose the question: when does the retail investor and adviser get on board? I think that’s happening right now.”
Internationally, one of the fastest growing areas is green bonds, which is money raised to meet climate change goals, such as installing solar power, more efficient lighting or building new infrastructure. According to the Climate Bonds Initiative, the total of climate bonds issued globally was US$120 billion in 2017, up 48 percent from US$81 billion in 2016.
Most of those bonds are snapped up by pension funds and institutions. Walker says the fact that green bond offerings are usually over subscribed by pension funds suggests a growing need for them. “Whether we do that ourselves, or we’re looking to buy them, we do have our eye on the green bond market.” Steve Eng, manager, Business Optimization, at Vancouver City Savings Credit Union (523,000 members, $21 billion assets) says that Canada is “a bit behind compared to the United States and the UK.” However,“there is definitely more demand and greater interest by retail investors. We still have a lot of room to catch up to offer real, green retail products.”
Potential for scandal
Walker says that investing in green funds requires advisers and investors to do their homework. “A challenge with green bonds right now is getting clarity around the use of proceeds to make sure that the money raised from those bonds is being allocated to projects that can be qualified as green,” he says. “There is lots of conversation around that. There is a potential for scan-dal that people really want to avoid. They want to avoid tarnishing what should be a growing part of the business.”
For example, China is one of the countries leading the way in issuing green bonds but it doesn’t adhere to principles set out by the Climate Bonds Initiative and includes clean coal plants, something green investors are unlikely to want. “Generally, people don’t walk into our adviser’s office and ask specifically for green bonds,” Vendette says. “What they are interested in is associating more and more of their assets with investments that are aligned with a low-carbon economy.”
Vendette notes that Desjardins has 11 RI products in total with close to $3 billion in assets under management.
Wide variety of options
In Canada there are three options for individuals who want to invest directly in green bonds.
Desjardins offers its Desjardins SocieTerra Environmental Bond Fund. At the end of 2017 it had $163 million in assets, 93 percent invested in foreign bonds and only 1.7 percent in Canadian, illustrating the need for Canadian projects. Since its inception in 2016 the fund has actually lost money for investors: $10,000 invested then is now worth $9,916.
“There is definitely more demand and greater interest by retail investors.” – Steve Eng
Another option is CoPower Green Bonds, which are available to investors online with a $5,000 minimum investment. It offers a five percent return on a bond held for five years. The Montreal-based company says it carefully evaluates projects to ensure they meet green principles.
A third option is Solar Share, an Ontario cooperative that invests in solar projects. It currently has more than 1,500 members and over $34 million in investments. It offers a five-year bond with a return of five percent, with a minimum investment of $1,000. It also has a 15-year bond with a six percent rate and $10,000 minimum.
TD Bank is the leader in the green bond marketplace in Canada. In 2014 it issued the first green bond from a Canadian bank, a $500 million three-year bond that matured in 2017. TD issued its second green bond, a US$1 billion three-year bond maturing in 2020. TD Green Bonds support North American projects that contribute to the low-carbon economy through renewable energy generation, energy efficiency and management and green infrastructure and sustainable land use.
One of the challenges with helping members invest responsibly, or in green products, is the lack of understanding of investment basics, let alone RI offerings. Cheryl Crowe of Assiniboine has been speaking to groups for years to raise awareness, doing at least 150 public presentations. “Sometimes I explain responsible investments this way: with traditional mutual funds you get financial returns. When you invest in responsible investments, you are getting financial returns and social returns, which include things like the companies paying attention to the environment or progressive labour practices and safe products.”
Assiniboine, adds Crowe, has invested a lot of time and resources to ensure staff are well informed in this area. “Most of our advisers have taken the Responsible Investment Specialist online course and have the designation, which was created by the Responsible Investment Association.”
Helping out in pandemics
The World Bank has gone a step beyond green bonds, issuing US$322 million in pandemic bonds, which were quickly grabbed by international pension funds. The bonds will pay investors a regular coupon but they lose some income or capital if a catastrophic infectious disease takes hold. The funds will be channelled to developing countries facing a pandemic and to charities and aid agencies working in those countries. The initiative was inspired by the 2014 Ebola outbreak in West Africa, which killed 11,000 people. International donors spent $7 billion to fight the disease but studies showed that if the affected countries had access to money in the early stages of the contagion only a tenth of those deaths would have occurred.
So far, such bonds aren’t available to retail investors in Canada but it seems likely they will be coming our way sooner rather than later. ◊