Are You Ready For ESG?

Don't wait for your funds to catch up. Morningstar Canada's Director of Manager Research, Danielle LeClair has some tips for when you're ready to swap.

Ruth Saldanha 8 February, 2022 | 4:38AM
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Ruth Saldanha: Sustainable investing or environmental, social and governance investing, often called ESG is inescapable these days. In fact, almost every fund house has ESG products, and even funds that are not specifically ESG have started applying the sustainable lens on almost all of their offerings. So if you've been on the fence about ESG, should you do anything? Or should you just wait for ESG to catch up with your portfolio? Morningstar Canada's Director of Manager Research, Danielle LeClair is here with us today to share her thoughts about this. Danielle, thank you so much for being here today.

Danielle LeClair: My pleasure. Thank you.

Saldanha: First up, ESG is everywhere. Do you anticipate that ESG lenses will become the norm going ahead?

LeClair: Absolutely, in my opinion, the heightened consideration for ESG risks and opportunities that we've seen across the world really, is going to become more ingrained as a core component of risk management, regardless of a fund's objective. And if I were to outline three reasons why that's my opinion, first of all, investors are going to become much more informed about ESG factors and how they impact financial returns, and ultimately hold their investment managers accountable for these types of considerations. Secondarily, ESG data is improving, and investment managers are already becoming much more comfortable with analyzing these factors and assessing how they impact the securities that they own. And then lastly, whether we like it or not, regulation is coming. And in some cases, it's already here. And these types of things are mandating disclosures around ESG issues, which will only make it push more into the forefront.

Saldanha: So if ESG becomes the norm, for investors who have not done anything yet about the sustainable aspects of their portfolio, should they do something or should they just wait for the market to catch up with their funds?

LeClair: There's a risk in waiting and although we've seen a substantial push from fund companies in terms of launching or repurposing existing products towards more ESG, enhanced or ESG focused options, the way each one of these firms and each one of these funds are implementing that can vary. So really, now's a great time for investors to look at how and where ESG is integrated into the funds that they own today, and where and how those fund firms fall along their ESG journey. A lot of fund companies have enhanced their websites to provide context around their ESG related values, philosophies and processes. So really, right now is a good time for investors to be proactive when it comes to understanding the sustainable aspects of their portfolio and make changes where they see necessary.

Saldanha: So if investors do want to proactively swap their funds, what are some things to keep in mind when picking a mutual fund?

LeClair: It's a really great question because although the market for ESG related products has grown and improved every day, there's a lot of really good options out there already. So that said, though not all ESG funds are alike, one of the things I would tell investors is to first off understand what their own values are when it comes to ESG. Are you looking for investments that directly impact environmental, social and governance issues? Or are you looking to avoid a certain area of the market? Or are you looking to just make sure that your investment managers are really appropriately considering these types of risks. So once investors understand their own philosophies and beliefs around ESG, they can appropriately find themselves in an investment option that aligns with their views. And then secondarily, and equally as important is to consider your ESG objective alongside your financial objectives. So although ESG integration can help improve risk adjusted returns, if you're, for example, an income oriented investor, putting in a water fund for a higher income fund might actually you know, change how that impacts your ultimate financial objectives. So I would consider the ESG as a component of your portfolio construction as well.

Saldanha: Well, thank you so much for joining us today, with your perspective, Danielle.

LeClair: Thank you.

Saldanha: For Morningstar I'm Ruth Saldana.

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Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Follow her on Twitter @KarishmaRuth.


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