Responsible investing is growing in Canada. Which ESG factors matter most?

According to the 2023 Canadian Responsible Investment Trends Report, released on Oct. 26 by the Responsible Investment Association (RIA), the answer is yes: investors continue to prioritize responsible investing, and more growth is expected as local and international reporting standards improve. Survey responses are from Canadian institutional asset managers and asset owners who answered questions in mid-2023. The data shared paints a picture of the industry on Dec. 31, 2022. Here are some highlights from the report.

About half of assets under management are invested responsibly

With $2.9 trillion of assets under management in responsible investments (RI) in Canada, this is no small industry. And while this number is a slight decrease from the previous year, that’s a product of market conditions: it actually reflects a higher proportion of all Canadian professionally managed assets than in 2021, and RI’s market share has grown from 47% to 49%.

Responsible investing is a risk management strategy

You might think the main motivation for anyone choosing responsible investing is what’s in the ESG acronym: environmental, social and governance factors. And while those are definitely important—14% of survey respondents said their organization’s primary reason for choosing RI was to fulfill its mission, purpose or values—there are many other factors at play. One of the big ones? A common goal for any type of investment: minimizing risk and maximizing value.

In fact, 35% of organizations surveyed said that minimizing risk over time was their primary reason for choosing responsible investing, and a further 41% ranked it second or third. And 61% said that improving returns over time was one of the top three factors influencing their choice to prioritize ESG investments.

Another issue that mattered to many respondents was fiduciary duty—their obligation to maximize their clients’ returns—which 26% listed as their organization’s primary motivation.

Which ESG factors do organizations consider? All of them

The risks facing our society due to climate change are top of mind for Canadians, and the investors here are no exception. This year, 93% of respondents said that greenhouse gas emissions were a factor they considered in their investment decisions, an increase from 85% in 2022. Climate change mitigation and climate change adaptation were the other top environmental factors mentioned by respondents, at 84% and 76% respectively.

Top social factors mentioned by respondents include equity, diversity and inclusion (81%), human rights (76%), labour practices (76%), and health and safety (71%). The governance factors that respondents deemed significant included board diversity and inclusion (87%), executive pay (71%) and shareholder rights (70%).

Many strategies make for comprehensive decisions

Organizations surveyed use a number of tools to help themselves include ESG factors in their decision-making. These three topped the list:

• ESG integration (94%): The RIA defines this as “explicitly and systematically embedding ESG issues into traditional financial analysis.”
• Corporate engagement (82%): Using various means to influence corporate behaviour.
• Negative screening (80%): Excluding certain companies, behaviours, countries or sectors from an investment portfolio.

Thematic investing, positive screening and norms-based screening were other top strategies, as well as impact investing—undertaken by more than half of respondents—which is a tool designed to create positive change alongside financial returns.

ESG reporting matters

There has been a strong movement underway in the industry to improve and standardize ESG reporting so that investors can more easily compare their choices—and know what data to trust. According to survey results, these efforts are bearing fruit: 57% of respondents said they were much more or somewhat more confident in the overall quality of ESG reporting compared with last year, and 53% said they were much more or somewhat more confident in their own organization’s reporting around RI.

In fact, improving the information available about RI could be a key factor in its future growth, according to survey respondents. The top deterrents to growth they identified include concerns about greenwashing, lack of standardized frameworks and lack of reliable data.

Looking forward to a more responsible future

Will responsible investing continue to grow? Ninety-three percent of respondents said yes, though their answers varied as to how quick that growth would be. Climate change continues to be a top driver of growth in the next two years, with 63% of respondents naming it as significant, while other major factors include investor demand, regulatory requirements and greater public awareness of ESG issues.

The study’s conclusion: As better standards and increased regulatory guidance become mainstream—and as climate change continues to be a threat—RI is poised to keep growing.

More about responsible investing:

• 5 ways to invest sustainably for Canadian investors
• Why sustainable investing is important
• Greener days ahead: There’s a new global standard for climate-related disclosures
• What are climate action incentive payments?
• Home insurance: Are you covered for wildfires, floods and other climate-related disasters?

About Kat Tancock

Kat Tancock is a writer, editor, translator and content strategist based in B.C. She writes for publications including The Globe and Mail, Chatelaine and Asparagus.

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