But the international rendezvous of government and industry leaders has also become a catalyst for criticism about so-called “greenwashing” in the financial industry.
“Sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community,” Tariq Fancy, the former chief investment officer of sustainable investing at financial giant BlackRock wrote in an opinion piece for USA Today in March.
Sustainable investing has ballooned into a US$35 trillion (CAD$44 trillion) industry, according to the Global Sustainable Investment Alliance. At the start of 2020, more than a third of investment assets managed globally were classified as sustainable, the organization estimates.
Driving that growth is demand from both small and large investors for more focus on ESG factors in addition to financial returns, says Jan Mahrt-Smith, an associate professor of finance at the University of Toronto.
The hype about ESG investing, though, doesn’t always live up to reality, he cautions. Making sure your financial portfolio is in line with your values usually requires some legwork, he adds.
COP26 summit: Draft deal lacks details as countries urged to strengthen targets
What exactly is ESG investing?
ESG metrics help evaluate firm performance based on sustainability priorities. The “E” stands for “environment,” reflecting a focus on aspects like resource use and pollution. The “S” stands for “social,” which looks at issues like a company’s treatment of its own employees or labour practices within its supply chain. The “G” stands for “governance,” which draws attention to questions such as gender diversity within the board of directors.
The idea is to rate companies based on how they’re doing on those dimensions, in addition to traditional ratings based on information about financial returns and risk, Mahrt-Smith explains.
Applying ESG weightings to a financial portfolio or fund is just one way to incorporate a sustainability lens in investment portfolios. Another one is so-called negative screening, which outright excludes industries considered undesirable and has traditionally targeted sectors like gambling, tobacco and arms manufacturers. Yet another approach is impact investing, which puts the emphasis on investing with the goal of generating positive impacts on the environment and society, along with generating returns.
But sustainable investment claims these days are a bit like the organic labels of yore, says Tim Nash, founder of Good Investing, a financial planning company that helps small investors put their money where their heart is.
At the dawn of ethical consumerism, there was no standardized certification for organic products, Nash says. Companies could make improbable organic, green or eco-friendly claims without much repercussion, he adds.
As Nash sees it, that’s the stage sustainable investing is currently at.
“It is a bit of a Wild West,” he says. “It is a bit of a ‘buyer beware’ (environment): you kind of have to do your homework.”
One problem is that there are no globally accepted standards for ESG metrics, Nash says.
Another issue is that there are no strict parameters forcing firms to disclose crucial information about their performance on sustainability goals, according to Mahrt-Smith.
When it comes to financial disclosures, “firms can get in real trouble if they are not disclosing something or they’re disclosing something (incorrectly),” he says.
But when speaking about environmental or social impacts, companies have plenty of latitude to cherry-pick information to paint the best possible picture without outright lying, he adds.
Yet another stumbling block for ethical investors is that ESG ratings are mostly focused on “how well your money is protected from environmental risks, social risks or governance risks,” Mahrt-Smith says. “What they are not really capturing yet is the impact that the firms are having on the world, be it positive or negative.”
Regulators around the world are increasingly pledging to bring order to the sustainable investing chaos.
In March, the European Union implemented rules that spell out how asset managers should disclose information both about how ESG risks could impact the value of their investments and how the conduct of the companies they invest in affects the environment and society.
During the same month, the U.S. Securities and Exchange Commission (SEC) announced it was creating a Climate and ESG Task Force to “identify ESG-related misconduct.”
And one of the outcomes of COP26 was the creation of an International Sustainability Standards Board, with offices in Montreal and Frankfurt, Germany, in charge of establishing transparent and globally consistent ESG reporting standards.
COP26 agreement draft a good start but not enough, delegates say
How to avoid greenwashing when investing
Despite the recent regulatory push, if you want to invest sustainably, you should do your own research, both Nash and Mahrt-Smith say.
Whether you’re looking at mutual funds or exchange-traded funds (ETFs) that carry the ESG label, keep in mind there is often a gap between the claims you’ll see in a fund’s brochure and what you’ll find in the fund’s prospectus, Nash says. The first is a marketing document. The latter is where you’ll find the nitty-gritty investment details.
If you have an investment advisor or a financial planner, you can ask them to help you wade through the prospectus and walk you through the approach the fund is taking to sustainable investing, Nash says.
But if you’re fending for yourself and unfamiliar with financial jargon, Nash says, a simpler approach is to just look at the list of companies the fund is investing in, which you’ll also find in the prospectus.
“It’s not enough just to see the top 10. You really should see the full list of holdings,” he says.
You may be surprised to find your ESG fund invests in oil and gas companies, for example.
Few funds exclude the oil and gas sector from their holdings, Nash says. Instead, many use ESG metrics to select energy companies considered most responsible within the industry, he adds.
Still, Nash says he’s constantly seeing clients who are shocked to discover their ESG portfolio includes shares of major oil and gas producers.
If there are certain industries you don’t want to invest a single penny in, make sure they are listed in a fund’s exclusions or negative screens, he says.
“What’s great is that there are now so many different ESG ETFs that hopefully we can find one that’s a little bit more aligned with your values.”
© 2021 Global News, a division of Corus Entertainment Inc.
Toronto market hits 7-week low on Omicron uncertainty
Canada‘s main stock index fell on Wednesday to its lowest level in over seven weeks as the United States reported its first case of the Omicron variant that investors fear could impede economic recovery, with the index giving back its earlier gains.
The Toronto Stock Exchange’s S&P/TSX composite index ended down 195.39 points, or 0.95%, at 20,464.60, its lowest closing level since Oct. 12.
Wall Street also closed lower as the U.S. Centers for Disease Control and Prevention said the country had detected its first case of the new COVID-19 variant, which is rapidly becoming dominant in South Africa less than four weeks after being detected there and has spread to other countries.
It might take longer than expected for supply chain disruptions to abate, “especially if we have renewed shutdowns in Asia,” said Kevin Headland, senior investment strategist, Manulife Investment Management.
Still, Headland does not expect the new variant to lead to an economic recession or a bear market for stocks in 2022, saying: “Reaction to headline news provides opportunities for those that have a longer-term timeframe to add in the equity markets.”
The TSX will add to its recent record high over the coming year as the domestic economic recovery helps underpin corporate earnings, but gains are expected to slow from 2020’s breakneck pace, a Reuters poll found.
The technology sector fell 2.7%, while energy ended 1.9% lower as oil was unable to sustain an earlier rally. U.S. crude oil futures settled 0.9% lower at $65.57 a barrel
The materials group, which includes precious and base metals miners and fertilizer companies, lost 2.2%.
Financials were a bright spot, advancing 0.4%, helped by gains for Bank of Nova Scotia as some analysts raised their target price on the stock.
Bombardier Inc was among the biggest decliners. Its shares sank 10.4%.
(Reporting by Fergal Smith; Additional reporting by Amal S in Bengaluru; Editing by Peter Cooney)
Canada’s TSX to extend record-setting rally; pace of gains to slow: Reuters poll
Canada‘s main stock index will add to its recent record high over the coming year as the domestic economic recovery helps underpin corporate earnings, but gains are expected to slow from 2020’s breakneck pace, a Reuters poll found.
The median prediction of 26 portfolio managers and strategists was for the S&P/TSX Composite index to rise 9.1% to 22,540 by the end of 2022.
That’s a move that would eclipse last month’s record high of 21,796.16 and compares with an August forecast of 22,000. It was then expected to edge up to 23,150 by the middle of 2023.
The index had advanced 18.5% since the start of the year, putting it on track for its second biggest gain since 2009.
“We think the economy and markets will continue to progress further into the mid-cycle phase next year,” said Angelo Kourkafas, investment strategist at Edward Jones. “We are past the strongest point of the cycle, but there is plenty of runway ahead, especially from an economic standpoint.”
Canada‘s economy https://www.reuters.com/world/americas/canadian-economy-posts-annualized-gain-54-q3-october-gdp-seen-up-08-2021-11-30 grew at an annualized rate of 5.4% in the third quarter, beating analyst expectations, and growth most likely accelerated in October on a manufacturing rebound.
“Banks can continue to benefit from an improving economy and reducing loan loss provisions and resource companies can benefit from higher commodity prices,” said Colin Cieszynski, chief market strategist at SIA Wealth Management.
Combined, the financial services and resource sectors account for 55% of the Toronto market’s valuation.
Nearly all participants that answered a separate question on the outlook for corporate earnings expected earnings to improve. But the pace of growth could slow.
“We expect a decelerating pace of (earnings) growth,” said Chhad Aul, chief investment officer & head of multi-asset solutions at SLGI Asset Management Inc. “In particular, we expect the recent strong earnings growth in the energy sector to begin to moderate.”
The price of oil, a key driver of energy sector earnings, has tumbled 24% since October, pressured by rising coronavirus cases in Europe and the detection of the possibly vaccine-resistant Omicron variant.
Another risk to the outlook could be a reduction in policy support, say investors.
With inflation climbing, the Bank of Canada https://www.reuters.com/world/americas/bank-canada-signals-it-could-hike-rates-sooner-than-expected-2021-10-27 has signaled it could begin hiking interest rates as soon as April and the Federal Reserve https://www.reuters.com/markets/us/powell-yellen-head-congress-inflation-variant-risks-rise-2021-11-30 is mulling whether to wrap up tapering of bond purchases a few months sooner.
“The key is the pace of both fiscal and monetary policy normalization,” said Ben Jang, a portfolio manager at Nicola Wealth. “This process will likely lead to more volatility in markets, potentially returning to an environment where we will see drawdowns of more than 10%.”
Asked if a correction was likely over the coming six months, nearly all respondents said yes.
(Reporting by Fergal Smith; polling by Mumal Rathore and Milounee Purohit; editing by David Evans)
Toronto index up on energy boost, easing Omicron fears
Canada‘s main stock index rose on Wednesday mirroring global mood, as energy stocks gained on stronger oil prices and as concerns around the new coronavirus variant Omicron eased.
At 9:41 a.m. ET (14:41 GMT), the Toronto Stock Exchange’s S&P/TSX composite index was up 224.87 points, or 1.09%, at 20,884.86, a day after posting its biggest decline since October 2020.
The energy sector climbed 1.9% with oil prices rising more than 3% as major producers prepared to assess the threat posed by the new Omicron variant of the coronavirus to energy demand. [O/R]
“Canadian markets rebounded with the markets around the world and at least we’re off to a bit of a relief rally to start December. The price of oil is bouncing back as well, which also helped the Canadian market today,” said Colin Cieszynski, chief market strategist at SIA Wealth Management.
Global equities rose, reversing much of the previous session’s losses, as investors used the dip in prices to bet the latest COVID-19 variant would not derail the economic recovery. [MKTS/GLOB]
Toronto-listed technology stocks rose 0.9% tracking gains in U.S. tech-heavy Nasdaq index.
The financials sector, which account for about 30% of the Toronto market’s value, gained 1.3%.
However, further gains in the sub-index were limited by National Bank of Canada, down 2.1%, as its earnings fell short of analysts’ estimates, despite fourth-quarter profit rising and the lender raising dividend payouts.
The materials sector, which includes precious and base metals miners and fertilizer companies, added 0.7% as gold futures rose 0.7% to $1,785.6 an ounce. [GOL/]
On the economic front, domestic manufacturing activity expanded at a slightly slower but still robust pace in November as production accelerated in spite of severe supply bottlenecks, data showed.
The TSX posted no new 52-week high or low.
Across Canadian issues, there were six new 52-week highs and 11 new lows, with total volume of 47.22 million shares.
(Reporting by Amal S in Bengaluru; Editing by Vinay Dwivedi)
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