More choice in ESG prompts competition

The banks — the most mainstream of players — sealed the deal.

The entry of RBC, Scotiabank and TD Bank into the green investing realm last year made the case that this style of investing was not just a passing trend.

For many industry observers, the launch of these bank-sponsored funds solidified the notion that investors were hungry for values-based investing. In fact, this groundswell of support in responsible investing prompted dramatic asset increases pushing environmental, social and governance (ESG) assets from $3.8 billion in 1999 to $500 billion in 2006, according to the Social Investment Organization (SIO), a national non-profit association.

“Increased choice is usually beneficial,” explains Bashir Ahmed, CFA and independent consultant based out of Toronto, Ont. “With more choices, there will be more competition within the ESG sector, and then costs [for these products] will be driven down.”

Ahmed suggests, however, that investors need to pay heed to the notion that with the increased awareness (and reporting) on environmental and social issues, and increases in the number and type of ESG investment products in the market, it will become harder and harder for “individuals to judge on their own whether or not a company is socially or environmentally responsible.”

Mark Regier agrees but wonders whether or not investors appreciate the difference between the release of ESG funds by general fund companies, like banks, and ESG funds released by fund companies that specialize in environmental, social and/or governance issues.

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“Experience and perspective gained through the involvement in various economic cycles, is invaluable,” explains Regier, stewardship investing services manager at MMA, a U.S.-based wealth management company with a wide range of investment and financial products and an investment philosophy based on the company’s roots with the Mennonite community.

“One of our strengths is that we can put the environmental problems into context — see them as they apply to a wider range of issues and then provide holistic choices to the investor. This [approach] can only come from a long-term history in this investment area.”

While RBC, TD and Scotiabank are household names, lesser known ESG funds have existed across North America since the 1980s. The fund companies dedicated to this investment philosophy “have context,” explains Regier, “context that helps investors who want to match performance with values.”

For example, MMA offers investors south of the border insurance, mutual funds, trusts, ETFs and a host of other passive and active investment options — all from a “stewardship angle,” says Regier.

“Our approach to investments has evolved over time, but always there was a primary concern about where the money goes and its impact on the people and the environment. That’s why we call our philosophy stewardship.”

Regier believes that history in the ESG space lends MMA — and other ESG-based fund companies — the perspective and context to make lasting, long-term investment decisions that benefit all stakeholders.

Greenwashing is a term you hear from a consumer perspective,” explains Regier, and it comes from a desire to pick the best environmental or social company. But as stewards of ESG values, MMA ignores the marketing and the chase for the best. “We use shareholder activism and believe that even greenwashing is an ideal opportunity to engage a business — to help them do what they say they are doing.”

It’s about helping corporations adopt ESG values and “choosing investment opportunities that are less about the claims of purity and more about the claims of engagement. It’s about long-term relationships and longer-term horizons. And it’s about offering holistic choice from an investment perspective — a choice that comes from a long history of engagement in this area.”

It’s an investment perspective Regier is confident not all generalist fund companies have adopted.

Ahmed agrees. He believes that the learning curve for companies now entering the ESG space may hinder the performance of new products — compared to the products offered by companies that have specialized in this investment sector.

“The banks won’t have the history, and their funds won’t have the 10-year or 5-year performance that investors want to see. These historical performances [although not a good way to determine future performance] do help sell the fund to the public.”

Yet Ahmed is unsure whether funds offered by companies like Meritas, MMA or Ethical Funds will have a “categorical advantage.”

ESG funds often carry a larger management-expense ratio (MER) due to the number and complexity of details that need to be examined in order to determine if the company fits the ESG investment mandate. Also, while specialization and history might give these companies an edge, Ahmed wonders if the banks’ distribution channels will become a competitive advantage.

Even as this healthy competition plays out between ESG-based investment houses, banks and generalist fund companies, reports continue to show rising interest — and assets — in the ESG space.

“There are more choices, compared to 15 or 20 years ago, but SRI investments still cost higher compared to regular investments,” said Ahmed. “Right now that’s the price you pay for your conviction.”

Originally published on Advisor.ca on August 7, 2008