There is a lot of momentum moving towards ESG investing... and the hype is real.

Ahmed Farooq, CIMA®, CFP

Ahmed Farooq, CIMA®, CFP
Vice President - ETF Business Development at Franklin Templeton Canada

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The growth of ESG has been one of the major investment stories of recent years. From my conversations with different brokerages, it’s clear that environmental, social and governance factors have become a priority in the industry. That’s also obvious when you consider the products asset managers are bringing to the market, and particularly so in the ETF space.

According to data from Scotia’s ETF Research Desk, there are now 84 ESG-focused ETFs in Canada. Of that number, 34 launched this year alone, and 19 of the 41 ETF issuers in this country now have an ESG strategy.

ETF ESG assets have grown by 125.8% on a year-to-date basis, with $3.2b in net flows so far this year, representing 10% of the overall ETF flows for 2021. Impressive numbers for sure, but it’s worth remembering that many ETF analysts believe that these flows have been triggered internally by asset managers’ own multi-asset solutions businesses or from institutional trades. Retail trades by comparison are a much smaller piece of the pie, although this is changing.

In my experience, advisors have been slower to embrace this burgeoning part of the investment industry. Many advisors I have spoken to either have an implicit bias that ESG investing means sacrificing future performance, or they are simply overwhelmed with how large the ESG segment now is. When you consider the number of ESG products and the different methodologies used by providers, perhaps it’s not surprising that there’s still some hesitation out there.

The term ESG is also very broad and covers a range of solutions, from ESG-Integration to ESG-Tilted, Values-Driven, Thematic, and Impact. ESG-Integration may be best suited to an investor who wants to take a comprehensive look at the issues that can affect long-term returns, whereas ESG-Tilted would be for investors who want to meet their financial goals responsibly. A Values-Driven approach would be for someone who is seeking a return, but not at the expense of their values; Thematic targets investments that are working to address environmental and societal challenges; while Impact is for someone who wants their investment to make a measurable positive difference to society.

Of course, one aspect of investing that can be found among every group is the requirement for returns. In my conversations with advisors, I have been quick to counter the idea that performance suffers when adding ESG principles to a mandate. The track records of some of our specialist investment managers attest to that, with ClearBridge Investments, Martin Currie and Brandywine Global operating successful ESG-focused strategies for years now in the United States. 

These retail strategies are also now available for investors in Canada as ETFs.

The success of these mandates over the long term is not solely because of their commitment to ESG; rather, environmental, social and governance is part of a comprehensive investment strategy that considers all factors. As such, holdings must show strong fundamentals and good prospects for a return on capital to be considered for inclusion. This is an important point to note when conversing with some of the more ESG-averse advisors out there.

Just as the three letters “ETF” dominated the investment industry in the post-2008 period, “ESG” looks likely to have similar prominence in the years ahead. In my opinion, it’s an entirely positive development, so I’m happy to see this trend gathering pace. I hope ETFs continue to provide innovative solutions to the myriad of problems our world is facing, while at the same time fulfilling their primary objective of generating returns for investors.

1. Source: Scotiabank ETF Services estimates, Bloomberg L.P. As at August 17, 2021

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What Are the Risks?

Commissions, management fees and expenses may all be associated with investments in ETFs. Investors should carefully consider an ETF’s investment objectives and strategies, risks, fees and expenses before investing. The prospectus and ETF facts contain this and other information. Please read the prospectus and ETF facts carefully before investing. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. Performance of an ETF may vary significantly from the performance of an index, as a result of transaction costs, expenses and other factors. The indicated rates of return are the historical annual compounded total returns including changes in share or unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

Ahmed Farooq’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

All investments involve risks, including the possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.