Sustainable Assets Grow in Canada

Ruth Saldanha: At the end of the second quarter of 2021, sustainable assets hit $26 billion of assets under management, which is a quarter-over-quarter growth rate of 22%, and a year-over-year growth rate of 130%. What is driving some of this growth? And is ESG just another temporary theme? Morningstar Canada's Director of Investment Research Ian Tam is here today to discuss this. Ian, thank you so much for being here today.

Ian Tam: Thanks for having me, Ruth.

Saldanha: In the second quarter sustainable investing landscape, you find that investor interest in sustainable investing has remained strong. What are some of the reasons for this?

Tam: If you want to look at the supply side of the equation, I think fund manufacturers are continuing to be pretty aggressive in launching new sustainable products in market, it has slowed down a little bit. In Q2, we detected five new sustainable funds, but in Q1, there was, well, a bit over 20. And if you look at, I guess the proportion of that it's kind of in line with what we saw last year. 2020, there's about 44 sustainable funds that were launched. So pretty aggressive in terms of fund manufacturers really capitalising on the popularity of this theme and because these funds are now more available, there's a wider breadth of funds available, of course, that's going to attract more attention. All the marketing that the fund manufacturers are doing to attract assets into these types of products seems to be working. And it seems to be making investors more aware of the availability of these types of products. That being said, I think investors are also becoming more educated in the types of ways that they can invest sustainably, not just ESG products, but also impact funds as well, where they can really make a difference in particular area, like gender diversity for example. So both in terms of supply, we're seeing an increased supply. And in terms of demand, I think a lot of that investor education has a lot to do with the growth in sustainable assets in Canada.

Saldanha: You mentioned more than one type of sustainable fund. Now what is the fund that's most popular? Is it ESG, exclusionary, impact or gender? What is the most popular and what are some of the reasons for the popularity of one section over another?

Tam: It's important to note, first of all, that sustainable fund can use multiple techniques. So an ESG integration fund can also be an impact fund, and vice versa, they're not mutually exclusive. But that being said, by and large, the most popular type of sustainable fund are those that use ESG incorporation, and in other words, they're assessing the degree of ESG risk that are within the investments in the portfolio. The reason that has been the most popular is again, because there are a large number of products that tend to use that type of type of technique, they've also been around for a bit longer. So the longer a fund has been around, the higher the probability that it's going to be able to gather assets. So a lot of the older funds within the sustainable investments world tend to use ESG integration as one of their core techniques. But that being said, on aggregate funds that have an impact objective actually grew quite a bit last quarter or last year, sorry. We detected a growth rate of 140% for impact funds. So certainly lots of demand in that area as well.

Saldanha: And do investors prefer an active or a passive strategy when it comes to sustainable investing?

Tam: At the end of the last quarter, by our count, roughly 80% of assets invested in sustainable mandates, were actively managed and that tends to follow the broader trend in Canada where Canadians tend to invest actively rather than passively.

Saldanha: And how have some of these funds performed?

Tam: Yeah, that's a great question. Broadly speaking, sustainable funds have performed very much like non-sustainable funds. So in Q2, just over half of sustainable investments outperformed their Morningstar category averages. But if you look a little further back a year-to-date, just under half tended to outperform their category averages. That being said, as an investor that wants to invest sustainably, you really shouldn't be expecting terribly exuberant returns either positively or negatively over the short term.

Saldanha: Now, earlier this year, we released the global thematic fund landscape. And since then, we've received questions about whether ESG and sustainable investing is just another hot temporary theme. What's your opinion on that?

Tam: Well, I think it's clear at this point that sustainable investing is not a temporary theme. You know, more and more, we're hearing about controversies in the news having to do with environmental, social and governance issues that typically stem from poor corporate policies or lack of corporate policies around those areas. And remember that when you look at ESG, or assessing ESG risks, you're really looking at the issues that will impact the bottom line, the financial bottom line of a company or an issue or that you're investing in. And those are types of things that are not usually made evident in traditional financial metrics. So as a prudent investor, it would make sense for you to consider those types of factors and not just the traditional financial metrics, regardless of what your values are. But that being said in terms of values, it's very possible that investing in line with your personal values may make those assets a little bit stickier. So you're more likely to stay invested in a fund if it lines up with your personal values. And staying invested, of course, is the name of the game.

Saldanha: Well, that certainly makes sense. Thank you so much for joining us with this quarterly review, Ian.

Tam: Thanks, Ruth.

Saldanha: For Morningstar I'm Ruth Saldanha.