Money for change: Sustainable investing hits the big time

New numbers in Canada and the United States show that sustainable investing is no longer a niche trend, but rather has become a powerful force in money management that won't be ignored.

A new report from the Forum on Sustainable and Responsible Investment in the U.S. recently calculated that almost $12 trillion US is currently invested in the country based on the principles of ESG — environmental, social and governance issues. 

That's an increase of 38 per cent from 2016's level and six times what it was barely two decades ago.

Canadian numbers show a similar trajectory. According to the recent annual report of the Responsible Investment Association (RIA), at the end of last year Canada had more than $2.1 trillion Cdn invested in assets based on at least one ESG principle. That's more than half of all the assets under professional management, and it's the first time the figure has tipped over the 50 per cent threshold.

What was once a niche part of the investment community has hit the mainstream to become a major determining factor when investors choose where to park their money. 

"Finally it feels like the world is catching up to me," says Tim Nash, a Toronto-based fee-for-service financial planner and investment coach. Nash works with individual investors to help their create their portfolios, and he says that sustainability is one of the biggest long-term issues he's warned investors to pay attention to for years.

Technically, the broad concept of sustainable investing runs the gamut of everything from environmental factors, to social issues such as fair labour practices to governance questions surrounding diversity and female representation. But Nash says, with environmental issues specifically, he sometimes has to deal with a negative bias where some people think that anything "green" is somehow by definition going to have a worse financial performance.

"If it's a cleaning agent, they want the harsh chemicals; if it's an electric car, they assume it doesn't go as far; and with an investment they just assume performance is going to be worse," he says, "against all evidence to the contrary."

Retail investors may have been slow to be convinced, but major institutional money has been pouring money into the space for years. With $6 billion US invested worldwide, Blackrock is the biggest single money manager in the world, and Tariq Fancy, the company's chief investment officer for sustainable investing, says investments in things like renewable energy attracting a lot of dollars not just to save the world, but to make money in the long run.

"The old way of looking at it was if you want to do sustainable investing you will lose some return, but the industry is realizing that there's no tradeoff," he says. "Looking at sustainability considerations actually does not entail losing return and potentially even can improve it."

Fancy says a big reason for the growth is that the industry has only recently discovered reliable metrics of monitoring sustainability issues. "There's an old saying that whatever isn't measured isn't managed," he says, which is why the financial community only truly accepts something once there is data to track it.

"Ten years ago you didn't think about how many steps you were taking because it wasn't easy to measure," he says. "Today you're wearing a Fitbit."

The data is so compelling that Canada's national pension plan is getting in on the action. Because the Canada Pension Plan Investment Board is mandated to invest funds to grow and last decades into the future, the appeal of sustainable investing isn't just to boost returns today, but make sure that money will exist for the long haul.

"Our job is to maximize returns without risk of loss for generations to come," says Ben Lambert, the CPP's interim head of sustainable investing. "And companies that do well on these sustainability issues extend their corporate life and are more likely to create value over the long term."

That's why the CPPIB has earmarked $3 billion Cdn toward renewable energy investments in the past two years, on top of issuing a $1.5 billion Cdn green bond this summer, to raise even more money that is earmarked to be invested in similarly sustainable investments.

"It's a win-win situation," he says. "It's about doing the right thing and generating returns."

According to the RIA, 88 per cent of money managers listed a desire to minimize risk as their No. 1 reason for investing sustainably. More than three quarters said improving returns was the main impetus.

Dustyn Lanz, CEO of the Toronto-based group, agrees the sustainable investing trend has hit something of a tipping point. The main motivation, he says, is a desire from investors to minimize the risks to which they are exposed. Those risks may not always show up in the places investors traditionally look for them, but they exist.

"Risks can be identifiable by investors," he says, "but you can't just find them on the financial statement or balance sheet

If the current trend continues, it's not hard to imagine a future in which sustainability is not some fringe fad, but a constant investment consideration just like any other.

To illustrate the point, Fancy notes that many investing trends were niche at first, before being so adopted by the mainstream that they became impossible to ignore.

Sixty years ago, the world didn't have standardized accounting standards, but now investors can't imagine a world without them, he notes. And as recently as 30 years ago, the concept of diversifying your assets wasn't universally accepted as being the smart thing to do. The same thing is happening now with sustainability, he argues.

"In 20 years, people won't think about this as sustainable investing," he says, "they'll just think of it as investing."