Rebuilding trust in ESG

One way to rebuild that trust is by having stricter rules and regulations to help standardize the language used and ensure that investment funds aren’t greenwashing. The Canadian Securities Administrators brought forward guidance on the issue, but they’ve stopped short of establishing binding rules.

This needs to change, as Canada now lags behind the U.S. and Europe.

One place where trust in responsible investing remains strong is among institutional investors such as foundations and pensions. Activist campaigns from groups such as 350.org, Shift Action for Pension Wealth and Planet Health, and Stand.earth are working, and the so-called smart money is aggressively moving to adopt responsible investment strategies.

The 2022 Canadian Responsible Investment Trends Report showed that the industry is maturing. The top-level figure for assets under management dropped from $3.2 trillion at the end of 2019 to $3 trillion at the end of 2021. In the U.S., a recent report found that assets labelled as sustainable dropped by US$8.7 trillion during the same period. This sounds discouraging, but it turns out institutional investors are being more careful about how they classify their assets, confirming suspicions that greenwashing is now the biggest deterrent to growth. The public remains skeptical, and the responsible investment industry needs to take further steps toward building trust as it comes under heavier scrutiny from critics and regulators alike.

The long-term prognosis for responsible investing remains strong, and ESG issues are only becoming more relevant.

Companies with happier employees and diverse leadership are more profitable. Climate change risks and opportunities are emerging faster than expected. The tech sector is seeing a rash of bad governance structures implode, with CEOs running their companies like fiefdoms. Love it or hate it, you can no longer ignore ESG and responsible investment strategies.

What can responsible investors do?

There’s been lots of talk and voluntary guidance issued but very little action from North American regulators. It’s still a wild west for responsible investors, so rankings like this one are an invaluable resource. Sadly, the onus is still on us to decide which funds align with our values. The funds listed are not recommendations and should be viewed as a high benchmark and a starting point for your own research.

Remember, diversification is our best friend. Only equity funds are listed, so they should be combined in a portfolio with fixed income or bond funds. Additionally, the geographic ones (Canadian, U.S. and international) are more broad-based and should be the core of your portfolio. The global equity ones are more focused on green companies but tend to be less diversified and more volatile.

Investors should consider the risks and carefully decide how much to invest in each category. And if I’ve completely lost you with the previous paragraph, you might consider speaking to an expert before investing.

Tim Nash is the founder of Good Investing.