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Millennials are demanding responsible investments

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When economist Tim Nash started preaching the benefits of responsible investing more than a decade ago, he was labelled a “tree hugger” for his seemingly extreme strategy of putting money in companies that do good things for people and the planet.

Today, Nash’s views are supported by some of the global finance industry’s top players, including Canadian-born Bank of England governor Mark Carney and Larry Fink, CEO of BlackRock Inc., the world’s largest asset manager. Carney first flagged the risks climate change posed to the financial system in 2015 and underscored it as a major issue at the recent World Economic Forum event in Davos, Switzerland, appearing to side with teenage activist Greta Thunberg in her ongoing war of words with U.S. President Donald Trump over the state of the planet.

Over at BlackRock, which manages about US$7 trillion in assets, Fink told CEOs in his annual letter that his firm would “place sustainability at the centre of [its] investment approach” and double the number to 150 of its exchange-traded funds (ETFs) covering environmental, social and governance (ESG) themes over the next few years, “so that clients have more choice for how to invest their money.”

Nash, an independent investment coach at Good Investing in Toronto, calls it “a win both ethically and financially” for investors and corporations—not to mention a validation of his long-held views.

BlackRock is among a growing list of investment firms boosting their ESG fund offerings as society appears to be waking up to the impacts of extreme weather events such the bush fires devastating Australia, plastics piling up in the oceans and repercussions of the #MeToo movement in workplaces worldwide. More companies are vowing to clean up their ESG acts, and the investment community is racing to package up their performance into a growing list of mutual fund products and ETFs (which are baskets of securities, like mutual funds, but trade like stocks and have lower costs), in part to meet demand from the socially conscious millennial generation as their net worth grows.

There are now dozens of ETFs and mutual funds on the market that give investors access to companies across a wide range of sectors working to improve their ESG performance, from banks and insurers to resource extraction companies, as well as those focused on specific themes such as water, clean technology and gender diversity. While the products are there, the investor interest has been slow to follow, until recently.

One of the oldest ETFs on the Toronto Stock Exchange is the iShares Jantzi Social Index ETF (ticker XEN), which launched in 2007. XEN’s assets under management hovered around $30 million for about a decade before nearly quintupling in assets over the past two years to more than $178 million, National Bank of Canada analysts noted in a recent report. “Despite the seasoned nature of the buzzword, ESG has yet to display broad grassroots interest, but sudden waves of development in this category became quite noticeable in 2019, potentially signalling shifts to come,” the report states.

A recent RBC Global Asset Management study shows about three-quarters of Canadians believe responsible investment portfolios “are the way of the future.” What’s more, 81 per cent of respondents believe these investments offer the same or better market returns than traditional investing. The results go against a perception that responsible investing means sacrificing returns. In fact, a growing body of research suggests the opposite, including an oft-cited 2015 report by Oxford University and Arabesque Partners that reviewed 200 studies in this area and concluded that 80 per cent show “prudent sustainability practices have a positive influence on investment performance.” That said, the market performance of ESG funds versus more traditional ones varies greatly depending on the time frame measured and the ESG product.

Companies with a stronger ESG performance are often more attractive because they’ve taken steps to reduce energy and waste, address diversity and inclusion, and do more in their communities, which makes them less risky in the eyes of investors. Millennials are also drawn to those proactive companies seen to be doing good for the environment and society. A recent study from the Morgan Stanley Institute for Sustainable Investing shows 67 per cent of millennials take part in at least one sustainable investing activity, such as investing in companies or funds that target specific ESG outcomes, versus 52 per cent of the general population. A global survey released by deVere Group, a global financial advisory firm headquartered in the United Arab Emirates, shows 77 per cent of millennials cite ESG investing as their top priority when investing, compared to 10 per cent who cited anticipated returns as most important and seven per cent who pointed to past performance.

Matthew Redding, 30, of Toronto switched his investments to ESG funds five years ago, after giving more thought to where his money was going. “I was looking to invest in a portfolio that more matched my moral and political values,” says Redding, who works at a non-profit that helps promote human rights. His money is in RBC Vision Funds, which are socially responsible mutual funds offered by RBC, Canada’s largest bank.

Redding says he’s more concerned about where his money goes than how much it grows. “For me, performance isn’t the most significant factor in making this decision [to be a responsible investor],” he says. “It’s more about sending a market signal that businesses that value profits over people and the environment, in the long run, are going to lose out,” adds Redding, who describes himself as a long-term investor. “I’m definitely aware that I could potentially be getting greater returns by having fewer scruples about where I place my money, but that’s less important to me than knowing I’m not actively perpetuating an unjust system.”

There’s intense debate around what should be labelled ESG. Some funds such as XEN, for example, include energy names so long as the companies seem to be improving their ESG performance. Others, such as the Horizons Global Sustainability Leaders Index ETF (ETHI), exclude fossil fuel companies as well as those involved in tobacco, guns and gambling.

(Lars Hagberg/CP)

“There are inclusionary and exclusionary approaches to responsible investing,” says Dustyn Lanz, CEO of the Toronto-based Responsible Investment Association. “Exclusionary strategies tend to be driven by personal values, while inclusionary strategies are all about pricing ESG risks and opportunities.”

The ETHI fund, which includes companies such as Apple and Visa, returned 32.7 per cent in 2019 versus 31.5 per cent for the S&P 500 Total Return Index, helping to prove the point that ESG investments can beat their benchmarks, says Horizons Canada CEO Steve Hawkins. Since it launched in November 2018, the ETHI has grown from $5 million in assets under management to around $21.2 million. That’s still a fraction of the $2.1 billion held in its flagship Horizons S&P/TSX 60 Index ETF.

“The amount of money we’ve raised to date is a reflection of a retail market still in the early days of ESG investing—and we see this as a long-term growth opportunity,” Hawkins says. “As we work to dispel the myth about responsible investing returns, over time, we expect retail investors will look to make better investment choices for their portfolio and the planet, including choosing ETHI.” It’s that confidence, Hawkins adds, that has Horizons planning to expand its lineup of responsible ETFs this year.

This confusion over what is considered a socially responsible investment has been holding the sector back, says Hawkins. “There’s no clear differentiation of what these terms mean, how people are interpreting them,” he says, and wants regulators to step in and provide some guidance for the financial industry and investors.

Toronto-based Evolve Funds Group Inc. has yet to launch a pure-play ETF, instead opting to sell thematic ETFs with an ESG bent. These include the Evolve Cyber Security Index Fund (CYBR), a play on good corporate governance as companies protect their data and privacy, and the Evolve Automobile Innovation Index Fund (CARS), a bet on electric vehicle (EV) makers and the EV supply chain in the low-carbon economy. CYBR is one of the more popular Evolve ETFs, with assets of more than $78 million, while CARS has had less traction, at about $11 million. In January, the company announced its plans to close its HERS ETF, which held North American companies that showed a commitment to gender diversity but had only amassed $4.3 million in assets under management.

Evolve CEO Raj Lala says he needs to see more growth in ESG fund assets before launching a broader fund. While investors have good intentions around responsible investing, there’s not enough pickup yet, in his view. “I know everybody believes in it. I know everybody believes we have environmental, social and governance challenges and they want to support it. . . and most big organizations [are taking action] but I still haven’t seen the string tied from that to people putting their money where their mouth is and opening their wallet to invest in it.”

Lala believes the shift will happen in the coming years as ESG-conscious millennials pour more into the markets, both from their rising income streams and wealth passed on from parents and grandparents. “As we go through the greatest wealth transfer in history over the next 10 to 15 years, then I think you’re going to see some strong growth and demand in ESG mandates,” Lala says. “The millennial generation is very different than their parents. They want their investments to say something for them . . . they want to take a stance with their portfolio.”

Meanwhile, the sector continues to heat up. At the end of January, BMO Asset Management launched seven new socially responsible ETFs with Wealthsimple, the Toronto-based robo-advisor and money manager, announcing days later it will follow suit with its first two ESG ETFs.

For millennials making the ESG investment play, Good Investing’s Nash recommends they start by thinking about what they want to invest in, based on their values and beliefs. “Think about where you draw the line from a sustainability perspective,” he says, “including which companies are a hard ‘no.’ ” Investors should also look at the complete list of companies in the fund to see if any companies they don’t agree with are included. Lastly, “ask tough questions,” Nash says.

Investors also shouldn’t worry about being called tree huggers. In today’s investment world, it’s a compliment.


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Vancouver investment firm bought under fraudulent circumstances: IIROC – Powell River Peak

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Vancouver-headquartered investment firm PI Financial Corporation was purchased under fraudulent pretences, according to allegations set out in a notice of hearing from Canada’s investment regulator.

The Investment Industry Regulatory Organization (IIROC) alleges Gary Man Kin Ng and Donald Warren Metcalfe duped their lenders, who assisted them in buying PI Financial in 2018 for $100 million.

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Ng personally guaranteed the loans used to buy the firm, however, “despite his representations, Ng did not actually own, control or have trading authority over the securities accounts pledged as collateral,” according to IIROC. “Instead, ownership and control of the collateral was falsified by Ng and Metcalfe.”

Before buying PI Financial, which is said to employ over 300 people across Canada, Ng, 36, was an Approved Person and a Registered Representative for selling securities. He owned a Winnipeg-based firm named Chippingham Financial Group Limited via various corporate structures referred to by IIROC as the Ng Group. In November 2018, Ng, through the Ng Group, acquired a 100% controlling interest in PI Financial, IIROC stated in a notice of hearing that has scheduled a preliminary appearance on January 6, 2021.

Ng is said to have borrowed $80 million from “Lender One” and $20 million from “Lender Two.”
As security for the loans, “Ng purportedly granted separate, unencumbered security interests to Lender One, and also to Lender Two, over collateral including certain Chippingham securities accounts (later PI Financial accounts) which were owned by him,” stated IIROC, adding such representations were fake.

Ng is accused of “vastly overstating” the value of assets in the accounts and altering securities account statements.

“Metcalfe also perpetrated a fraud as he directly and actively participated with Ng in the falsification and distribution of false and/or fictitious account documentation to lenders,” it said in the November 24 notice of hearing.

In addition to the $100 million to buy PI Financial, Ng and Metcalfe borrowed a further $40 million from Lender Two and then $32 million from a third lender – all based on falsified collateral.

Although PI Financial was 100% owned by Ng, company officials “became aware of the issues concerning Ng’s purported ownership of securities accounts at the end of January 2020, and immediately reported these matters to IIROC,” the notice states.

Both men failed to attend an interview with IIROC enforcement staff over the summer.

IIROC said, “Ng, who was born in 1984, represented himself to others as an extremely successful businessperson who created enormous personal wealth through highly successful technology, real estate and manufacturing investments in Canada and China.”

At the time of the PI Financial purchase, Ng spoke of the deal with BNN Bloomberg, whose hosts noted how unique the deal was, given most investment firms are bought by large corporate entities, not individuals.

Metcalfe, meanwhile, was someone who worked initially with Ng at Chippingham.

Some details of the alleged lies are outlined in the notice. For example, several accounts Ng purported to have a value of $91 million actually had a value of $1.9 million.

IIROC proceedings are civil and not criminal. Should the allegations be proven, Ng and Metcalfe face any of the following corrective measures: a reprimand; disgorgement of any losses; a maximum $5 million fine; suspension or prohibition of activities; and a permanent ban from the industry.

gwood@glaciermedia.ca
 

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Investment firms cautious on reopening plans, notification procedures – Investment Executive

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Financial sector could be a Covid-19 long hauler: Fitch

Banks in particular face future earnings, ratings challenges due to pandemic

Crisis coming in seniors’ care if governments don’t shift investments: report

Current spending levels of 1.3% of GDP could soar to 4.2% by 2041, says report

  • By: IE Staff
  • November 27, 2020
    November 27, 2020
  • 11:44

Global house prices rose in the face of Covid-19: BIS

Canada among the housing market leaders, both short and long term

Markets move past election uncertainty

With Biden’s transition underway, investors have shifted their focus to Covid vaccines and economic recovery

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Takeaways from our 2021 investment outlook: Legacy of the lockdowns – Investors' Corner BNP Paribas

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Here we summarise the big picture for investors at the end of 2020. This constitutes the starting point for our 2021 investment outlook.

  • Since the 2008 global financial crisis, the global economy has been mired in anaemic growth and weak demand, tempered by consistently rising asset prices.
  • In 2020 the global economy faced a crisis of unprecedented magnitude (see Exhibit 1 below) after the pandemic lockdowns. After a contraction of 4.4% in 2020 the IMF forecasts global growth of 5.4% in 2021. Overall, this would leave 2021 GDP some 6.5% lower than in the pre-COVID-19 projections of January 2020. The adverse impact on low-income households is particularly acute, imperilling the significant progress made in reducing extreme poverty over the last 30 years. Countering inequality is a key challenge to be met in 2021 and beyond.

Exhibit 1: Largest decline since WWII – graph shows change in world gross domestic product (inflation-adjusted, in %)

Source: BNP Paribas Asset Management, as of 26/11/2020

  • Under the best-case scenario, one or more vaccines for COVID-19 become widely available by the second half of 2021. Otherwise, the disease remains a longer-term threat requiring us to ‘live with’ the virus – repeated lockdowns will not be a sustainable long-term strategy.
  • In 2020, advanced economies loosened the monetary and fiscal reins most spectacularly. Debt-to-GDP ratios soared, rising for many countries by more than they did in the years after the Global Financial Crisis (GFC). Major central banks have largely financed the increase in budget deficits, monetising an expanding national debt, much as Japan has done.
  • One way to understand the weakness in aggregate economic demand is to study real interest rates (the ‘price’ of money in the economy). In 2006, the real yield of the 10-year inflation-protected US Treasury bond was between 2% and 3%. Since 2010, its yield has mostly been below 1%, including a spell in negative territory both in 2012 and again in 2020. Negative real yields are now common to the G3 economies (see Exhibit 2 below) and beyond. In 60% of the global economy — including 97% of advanced economies — central banks have pushed policy interest rates to below 1%. In one-fifth of the world, policy rates are negative.

Exhibit 2: Real yields are now negative for G3 sovereign debt – graph shows changes in real yields for US, Japanese and eurozone government debt between 1997 and 16/11/2020.

Source: BNP Paribas Asset Management, as of 26/11/2020

  • In 2020, these meagre interest rates, along with cheap, low-risk liquidity from central banks, led asset prices higher. Risk premia for risky assets shrank. Companies whose revenues have plummeted — cruise lines, airlines, cinemas — were able to borrow money in 2020 to survive. Investors had few higher-yield options. Will central banks continue to supply such liquidity in 2021?
  • And how is all this debt to be paid for? The appropriate historical parallel is perhaps the post-World War II period, when central banks capped bond yields at levels well below the trend GDP growth rate to gradually reduce the national debt as a proportion of GDP.
  • Alternatively, instead of financial repression and inflation (as post WW2), the extraordinarily low real interest rates we have seen over the past decade could help achieve fiscal sustainability. It would, however, be imprudent to count on it. No policymaker should expect real interest rates to remain persistently below the growth rate of real GDP. Indeed, forecast imbalances in planned global savings and investment could drive real interest rates higher (ageing societies save a lot, but old societies do not).
  • Another risk is that improved real trend growth does not come to the rescue. Lower global growth after the pandemic accompanied by inadequate fiscal stimulus would leave marginal sections of the economy vulnerable to collapse. Such an outcome would test the paradigm of modest growth, low inflation and supportive central bank policy that has supported asset prices since 2008.

Today we face three interconnected crises – health, economic and climate. The instability provoked by the pandemic presents a window of opportunity to pivot in a new direction. Long-term environmental viability, equality and inclusive growth are essential pre-conditions to a sustainable economy. By taking a holistic, systemic, long-term view, we are less likely to be surprised by crises and better able to manage them.

For in-depth insights into what’s next for the global economy and markets, read our 2021 investment outlook, ‘Legacy of the lockdowns’


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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