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Responsible Investing Ready To Step Into The Limelight

The year ahead is poised to mark a watershed moment for responsible investing in Canada with an ever-growing number of investors weighing environmental, social and governance (ESG) factors when evaluating an investment. We expect ESG screening will move from predominantly serving as a risk management tool for institutional investors to one that pushes asset managers to take a long-term approach toward value creation. At the same time, fund manufacturers are going to increasingly tailor their products to address the growing investor desire for ESG components in their portfolios.

The industry is recognizing that in addition to its values-based appeal, responsible investing has a very practical dimension. A growing number of investors are integrating ESG factors into their investment analysis and portfolio construction. Why? Research suggests that responsible investments meet or exceed traditional investment returns.

The trend to integrate ESG factors into investment decisions is becoming much more than just a trickle. A 2017 study by Canada’s Responsible Investment Association found that 82% of retail investors want to allocate some of their portfolio to responsible investing, and 77% agreed that companies with good ESG practices are better long-term investments. The association reports that the Canadian responsible investing industry surpassed $1.5 trillion in assets as of 2015, and is growing rapidly.

There’s a generational dynamic at play here, too: socially and environmentally conscious millennials want to see their values reflected in their investments.

Capital Markets Impact

Institutions, advisors, fund companies and corporate issuers have all noticed the broad and accelerating responsible investing shift, and we expect that 2018 will mark an inflection point in Canada.

ESG is driving product innovation, with growing numbers of ESG-focused exchange traded funds coming to market. Passive index products in this category are already available around the world and growing at a rapid pace. And as robo-advisors grow, it’s likely they will also start to market responsible investing portfolios in a more aggressive way.

Some great examples of recent Canadian, ESG-driven investment vehicles that have launched on NEO are AGFiQ Enhanced Global ESG Factors ETF (QEF), Mackenzie Financial’s Global Leadership Impact ETF (MWMN) and RBC Vision Women’s Leadership MSCI Canada Index ETF (RLDR).

On the corporate side, companies have long used their commitments to communities, the environment and to good governance to protect and enhance their brands. Now, they’re increasingly using ESG factors to attract the next generation of top talent, and to help drive shareholder engagement.

Improving ESG Disclosure

The path to full, mainstream adoption of ESG investing isn’t without obstacles.  While investors are becoming more vocal about the need for companies to adopt ESG policies and report on related metrics, there is still a lack of adoption of standardized ESG disclosure which would let investors compare such factors with greater ease.

That’s why NEO has voluntarily joined stock exchanges around the world in the Sustainable Stock Exchanges Initiative by making a public commitment to promote sustainable business practices in our market. We recognize our responsibility as a change agent, not only to provide a fair market but one that encourages greater transparency in the areas of environmental, social and governance issues. And in due time, we will work toward developing a set of responsible investing disclosure standards for NEO listed issuers.  We will also continue to partner with the Responsible Investment Association which shares our commitment to educating investors on responsible investing in Canada.

We’re proud of the growth and interest in responsible investing that we’ve seen in Canada to date, and we look forward to working with like-minded funds and corporate issuers to make ESG factors a true fixture of our capital markets.