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As the Canadian responsible investment (RI) landscape matures, investments in this segment continue to deliver higher returns with lower risk. So it is no surprise that their adoption is also increasing.
In their 2023 report, the Responsible Investment Association (RIA) found that reported RI assets under management were just under $3 trillion. What that proves is despite global geopolitical and economic challenges, ESG investing remains a priority. In fact, RI market share continues to increase and finished 2023 at 49%. That’s right – nearly half of all Canadian professionally managed assets incorporate RI in their investment process.
Along with the growth in RI investments, the RIA further notes that investor confidence is also growing in the quality and standards of ESG reporting. This comes on the heels of an increase in the number of investment firms with comprehensive and formal disclosures for RI policies, ESG integration, shareholder engagement, and proxy voting guidelines – a figure that now stands at 52%.
When it comes to investment performance, research continues to emerge that supports ESG-specific factors as driving an increase in returns across a variety of outcomes, including investing with a long-term focus and protecting capital in a crisis.
For example, researchers at the NYU Stern Center for Sustainable Business found in a meta-study that studies with Alpha or Sharpe Ratio as an outcome showed evidence of superior returns 59% of the time, with only 14% experiencing a negative outcome. The researchers also established that outperformance was more apparent the longer the duration of time studied.
In addition, the paper by Whelan et al. (2021) found a strong correlation between lower sustainability risk and better performance, especially when it comes to asymmetric events. This means that sustainable investments may provide downside protection during a social or economic crisis.
Fundata’s 2023 FundGrade RI A+ Award winners are prime examples of investment funds with these characteristics – delivering superior returns from responsible investments while minimizing downside risk and volatility.
As a category of the annual FundGrade A+ Awards, now in its eleventh year, the RI A+ Awards recognize outstanding risk-adjusted performance of funds with an RI mandate. The award is given to the top RI fund in each of three categories: Fixed Income; Balanced; and Equity.
The winners this year include BMO Sustainable Global Multi-Sector Bond Fund in the RI Fixed Income category. This is the second consecutive RI A+ Award for the fund, which invests across the investment-grade fixed-income spectrum using a variety of RI strategies such as ESG integration, positive screening, and exclusionary screening. The ETF series of BMO Sustainable Global Multi-Sector Bond Fund (TSX: ZMSB) boasts a 5-year averaage annual compounded rate of return of nearly 3%, among the top returns of all RI Fixed Income funds.
In the RI Balanced category, iShares ESG Balanced ETF Portfolio (TSX: GBAL) takes home its first win in 2023 with a portfolio that employs ESG Best In Class, Exclusions, and Integration strategies through its underlying funds. A 2023 return of over 15% produced a Sharpe Ratio of 1.07 and was among the 10% of balanced funds that had a positive return in 2022.
Finally, NBI Sustainable Canadian Equity ETF (TSX: NSCE) came out on top in the RI Equity category. This fund is a first-time winner that uses exclusionary screens and ESG integration to find companies with durable attributes. This fund has earned an average annual compounded rate of return of over 11% for the 3 years since inception. An important component to that return is the fund’s Alpha generation, which is top-10 for the period and demonstrates the success of its RI selection process.
John Krisko, CFA, BBA, is Vice President, Investment Analytics at Fundata Canada Inc. and is Vice Chair of the Canadian Investment Funds Standards Committee (CIFSC).
Notes and Disclaimers
© 2024 by Fundata Canada Inc. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.
Commissions, management fees, and expenses all may be associated with exchange-traded fund (ETF) investments. Please read the simplified prospectus before investing. ETFs are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
Image: iStock.com/RomoloTavani
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