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Once relegated to the fringes of crunchy granola credit unions, ethical investing is now stepping into its power. From millennials wanting to purchase with purpose all the way up the corporate ladder to the world’s largest investment houses vowing to put climate action at the heart of investment decisions, responsible investing is quickly rising to become the defining investment issue of the new decade.*

Of course, that was before the coronavirus began pummelling the economy. COVID-19 is only deepening our desire to support companies that behave nobly and put people and planet ahead of profits.

It just so happens that corporations with better environmental, social and governance (ESG) scores are proving themselves to be more financially resilient during the pandemic. Yes, sustainably minded funds have taken a big hit because of COVID-19, but Bloomberg found that they have been outperforming their conventional peers. Bloomberg’s analysis of 2,800 responsible investing (or RI, also known as sustainable, socially responsible or ethical investing) funds globally found that the average RI fund has fallen by about 12% this year as of March 12. That stings, but it’s just half the decrease seen by the S&P 500 Index over the same period.

According to Ipsos polling released by RBC Global Asset Management in January, two thirds of Canadians surveyed say they’re interested in RI. Nearly three out of four believe RI is “the way of the future.”

So why do so few Canadian banks offer any sustainably focused investing options?

Most bank advisors are poorly informed about ethical options

Corporate Knights anonymously visited Toronto branches of the Big Five banks in January and inquired about ethical investing. While some bank advisors were enthusiastic and fairly well informed, many advisors didn’t know whether their banks offered ethical investments or what those offerings entailed. Some advisors downright discouraged us from putting our savings into RIs. Notably, BMO and RBC were the only two banks that had dedicated RI funds.

The Toronto-based Responsible Investment Association (RIA) did its own polling with Ipsos in 2019 and found that while 79% of Canadian respondents would like their financial services provider to inform them about RI options, only 23% have been asked by their banks if they’re interested in RI. That helps explain why only a quarter of Canadians say they already have responsible investments, according to stats from Wealthsimple, BMO and the RIA.

In the U.S., meanwhile, new investments into sustainable funds quadrupled in 2019 compared to 2018 (pulling in a record US$20.6 billion in new money last year), and European investments doubled to a record-busting €120 billion, according to Morningstar.

Push to regulate the wild west of green investing

The tricky part for would-be purchasers is figuring out what investments genuinely align with their values. One CIBC branch advisor told Corporate Knights that “all the mutual funds we offer have gone through these ESG checks.” Ditto for all of RBC’s funds around the globe. That doesn’t mean they screen out any dubious companies or sectors. Only exclusionary funds with negative screens do that – and they may just screen out, say, tobacco and gambling but not thermal coal and oil. Part of the problem is there’s no universal standard for how terms like “ESG,” “low carbon” and “fossil-fuel free” are defined or applied, leaving funds vulnerable to “impact washing.”

Many Canadian ethical fund managers choose not to screen out fossil-fuel companies, instead investing in those they consider sector leaders. Which is fine for some responsible investors – if funds are transparent about it. But after the RIA received flak for listing fossil-fuel-free funds in its directory that were later exposed to contain oil and gas companies, the association is now considering creating a certification process for RI funds in Canada.

It gets even more muddled when retail investors start exploring the wider world of self-directed online trading accounts and robo-advisors (digital platforms such as apps that rely on software to offer financial advice), which often offer access to a number of American and international ETFs, or exchange-traded funds. (Branch-level bank advisors are generally not able to sell ETFs despite their booming popularity.) One ETF known as iShares MSCI ACWI Low Carbon Target ETF was called out for having holdings in Shell, Chevron and a number of other high-carbon companies.

To counter potential “impact washing” in Europe, the EU sets standards for the labelling of financial products, mandating that financial advisors disclose the sustainability risks of a finance product to investors, “regardless of the sustainability preferences of the end investors.”

Canada’s federally convened Expert Panel on Sustainable Finance recommended we do something similar here. The panel (which included Tiff Macklem, a Scotiabank director and Rotman School of Management dean, as well as RBC director Andy Chisholm) recommended that Finance Canada create “financial incentive for Canadians to invest in accredited climate-conscious products through their registered savings plans.”

How green are the banks’ own investments and loan books?

Many climate-conscious investors will also want to know just how their banks are dishing out their own money. All five banks have signed on to the UN-supported Principles for Responsible Investment, promising to fold ESG factors into investment decisions, though research by Corporate Knights has found that while the Big Five invest billions in sustainable-solution companies, they also invest billions in controversial weapons, for-profit prisons and severe environmental violators, as well as a number of other themes that would register as egregious on many responsible investors’ radars. All five also have loan books bulging with fossil fuels in relation to their renewable energy lending, putting them at odds with global money trends.

With former Bank of Canada governor Mark Carney cautioning that firms that ignore the climate crisis “will go bankrupt without question,” Canadians should be able to readily invest their retirement savings in environmentally-conscious options, sustainable finance champions say

 

Overall rank Bank Renewable loans ($M) Oil & gas loans and acceptances ($M) Sustainable solutions Investment ($M)** Harmful investments ($M)***
1 BMO $3,900 $9,168 $17,812 $16,359
2 RBC $2,200 $16,406 $14,690 $8,708
3 CIBC $1,500 $7,439 $3,986 $2,729
4 TD $2,563 $6,579 $9,833 $9,036
5 Scotiabank $0 $14,800 $6,430 $4,489

 

With even central bankers now warning of climate-induced systemic financial crisis and former Bank of Canada governor Mark Carney cautioning that firms that ignore the climate crisis “will go bankrupt without question,” Canadians should be able to readily invest their retirement savings in climate-conscious options, sustainable-finance champions say.mo

In the meantime, the first RRSP deadline of the new decade gives Canadians a chance to rethink their finances, knowing there are now some options on the shelf that allow them to bank on a sustainable future.

 

Big Five ethical investing report card

 

We visited Toronto-area branches of the Big Five banks and asked advisors what ethical or sustainable investment options they offered. Here’s what we found:

 

Scotiabank

Ethical options: No responsible funds available in branch, though Scotiabank said in a statement that it has “considered” ESG factors in the investment process, and added, “Scotia iTRADE offers sustainable investing tools [online].”

Fossil-fuel-free or climate-conscious funds: No.

Knowledge of adviser: The personal banking adviser was unaware of any sustainable options and returned five minutes later to confirm that no options exist that the bank’s financial advisers were aware of.

Cost of values-aligned portfolio: N/A.

Bank loans and investments (clean vs. dirty): Scotiabank dishes out the second-most oil and gas loans ($14.8 billion), compared to zilch in loans to renewables.

Score: D-

 


TD Canada Trust

Ethical options: TD Canada discontinued its sustainability funds in 2013, and at this point there are no specific RI-themed­ funds available to Canadians at branch level. TD did not respond to our request for comment.

Fossil-fuel-free or climate-conscious funds: No.

Sustainability knowledge of advisor: One bank advisor was blunt, saying “To be completely honest, most socially aware investment funds don’t make a lot of profit. As such, we don’t have funds that invest in these companies.”

Cost of values-aligned portfolio: N/A.

Bank loans and investments (clean vs. dirty): TD has the smallest oil-and-gas loan book of the Big Five, but its investment book is another story. Among the Big Five, it has the worst ratio of investments in sustainable-solution companies to harmful companies.

Score: D-

 


CIBC

Ethical options: No specific RI funds. CIBC’s VP of Public Affairs says that “ESG factors are included in our investment process across all funds.”

Fossil-fuel-free or climate-conscious funds: No.

Sustainability knowledge of advisor: Initially, the branch manager said that CIBC has some ethical funds that “don’t invest in tobacco companies or oil companies,” but the manager and a financial advisor weren’t aware of specifics, so they placed a phone call. “We don’t get asked this question frequently,” the manager said. After their call, the manager updated earlier comments: “The good news is there’s no specific mutual funds that actually do that since all the mutual funds we offer have gone through these ESG checks.”

Cost of values-aligned portfolio: N/A.

Bank loans and investments (clean vs. dirty): CIBC says all its funds are filtered through an ESG lens, but it has $2.7 billion, or 6.4% of assets, invested in companies flagged for harmful products and activities, including palm oil deforestation and severe human rights violations. On the bright side, the bank has 9.4% of its investments in companies tagged as sustainable-solution providers, because they earn more than a fifth of their revenue from themes like renewable energy and electric cars. On the loan side, CIBC’s exposure to oil and gas companies is almost five times as large as its renewable energy book.

Score: D

 


RBC

Ethical options: RBC’s Vision line uses ESG filters to determine holdings while screening out weapons makers, as well as traditional sin stocks like tobacco and alcohol. RBC Vision also has a Women’s Leadership fund.

Fossil-fuel-free or climate-conscious funds: Yes: the RBC Vision Fossil Fuel Free Global Equity Fund. Though a financial planner at one branch said the bank doesn’t offer entirely fossil-free options, suggesting that omitting a whole sector could limit the opportunity to grow. RBC’s Vision Fossil Fuel Free fund actually outperformed RBC’s Global Equity Fund in both 2018 and 2019.

Knowledge of adviser: The financial planner was well versed in the Vision line (besides fossil-free funds) and enthusiastic about the Vision balanced fund, saying it has outperformed RBC’s regular balanced fund (“being green is saving companies a lot of money down the road”).

Cost of values-aligned portfolio: Varies, but many are slightly lower than conventional funds.

Bank loans and investments (clean vs. dirty): Canada’s largest bank has the highest total amount of oil-and-gas loan exposure on its books ($16.4 billion). That’s more than seven times more than its renewable loans, which gets it into trouble with environmental activists, though it also has the biggest ratio of investments in sustainable solutions to harmful companies among the Big Five.

Score: C+

 


BMO

Ethical options: Branches offer BMO’s Sustainable Opportunities Global Equities mutual fund, as well as a Women in Leadership fund. There are eight new ESG ETFs for self-directed online accounts.

Fossil-fuel-free or climate-conscious funds: Yes: the BMO Sustainable Opportunities fund.

Knowledge of adviser: The personal bank associate was enthusiastic about BMO’s sustainable opportunities fund, explaining that she invests in it herself, but she cautioned that it is mid-to-high risk and is best for longer-term investments. A financial planner follows up via email to discuss ESG options further.

Cost of values-aligned portfolio: Fees vary, but the Sustainable Opportunities fund has a somewhat lower fee than comparable BMO funds. The ESG ETF fees are also priced lower than many non-RI equivalents.

Bank loans and investments (clean vs. dirty): BMO has both the biggest renewable-energy loan book and sustainable-solutions investment book among the Big Five, but it has the largest amount invested in companies classified as “harmful.”

Score: B-


A version of this article appeared in the Toronto Star.

*Note: This article was updated for the Spring Issue of Corporate Knights magazine.

 

** Sustainable solution investments includes 512 companies in the Corporate Knights database that earn more than 20% of their revenues from products or services (such as reneable energy, energy efficiency, electric cars, public transit and organic food) that benefit the environment or society as tracked by Corporate Knights Radar.

*** Harmful investments include 451 companies in thermal coal, weapons, for-profit prisons, as well as companies with severe human rights and environmental violations, and other types of egregious products and misconduct tracked by Corporate Knights Radar.

 

 

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