While the investment community is increasingly focused on an analytical methodology for selecting responsible investments, the investing public remains more accustomed to judging how responsible their portfolios truly are based on the screened investments they hold.
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With responsible investing now accounting for more than half of assets under management in Canada, financial advisors need to be mindful of what investments can truly be defined as responsible. But to do that, they need to be aware that there are at least two investment approaches aggregated under the big tent definition of responsible investment – and they don’t always align.
The United Nations-backed Principles for Responsible Investment (PRI) guide investment professionals on the first approach: the integration of environmental, social and governance (ESG) factors into the analysis and selection of securities as well as consideration of those same factors when engaging with a company’s management or in proxy voting. The PRI’s approach doesn’t include the morals-based or ethical screening of securities that underpins the second, more traditional approach: socially responsible investing (SRI).
While the investment community is aligned increasingly with the PRI’s amoral, analytical methodology, the investing public remains more accustomed to judging how responsible their portfolios truly are based on the screened investments they hold.
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These two approaches can overlap and be synergistic, but they can also be mutually exclusive and even act in opposition. Despite their common goal of improving ESG outcomes, it’s not surprising that their differences can lead to an appearance of greenwashing – or giving a false impression that an investment is more responsible than it truly is. That could then lead to an unfortunate outcome that muddies the identification of genuine cases of greenwashing.
The differences between these two big tent responsible investment approaches can be traced to the analytical roots of security analysis (ESG integration) and the behavioural roots of investor psychology (SRI). Advisors who understand that will serve their clients better by ensuring alignment between the responsible investment strategies they choose to use and their clients’ goals.
Let’s consider the differences. An advisor using a bottom-up ESG integration strategy to choose holdings for a client’s portfolio may determine that carbon risk is material to a company, but not reflected in its stock price adequately. The advisors might avoid the stock due to its poor risk/reward trade-off. If many stocks exhibit carbon mispricing, the portfolio might have a decidedly low-carbon tilt. In contrast, an advisor who is putting together a portfolio for an investor concerned about the climate crisis might want to avoid companies with a high-carbon footprint for more moral reasons.
The financial analysis used in the first, analytical approach produces a portfolio similar to the second, behavioural approach. The strategies co-exist nicely. But what would happen if a high-carbon stock became drastically underpriced? The analytical and behavioural approaches wouldn’t line up. The analytical approach would shift to include the undervalued stocks. That would result in a higher-carbon portfolio and a conflict with the behavioural approach; the stock valuations changed, but the personal values didn’t. The different outcomes could lead to accusations of greenwashing from clients.
But is it greenwashing? These two approaches fit under an expansive responsible investment banner, but they use different lenses to view a portfolio’s holdings. How can advisors help reconcile this appearance of greenwashing for clients?
Ian Robertson, vice-president, director and portfolio manager at Odlum Brown Ltd. in Vancouver.
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Noted behavioural economist Meir Statman, Glenn Klimek professor of finance at Santa Clara University, explains that the context in which we examine investor behaviour is shifting to a third framework.
The analytical framework presumes that investors are rational and that they would seek out the best risk-adjusted returns for their investments. This rational behaviour assumption was foundational to modern portfolio theory and underpins strategies such as the ESG integration espoused by the PRI and used in the first example above.
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Behavioural finance, the second framework, focused on investors’ demonstrably irrational actions, including overconfidence, risk aversion, recency bias and anchoring, among others. To these subconscious behaviours we now add values, morals, or norms – which are explicit rather than subconscious behaviours that steer us away from purely rational actions.
The third framework incorporates both the analytical framework and behavioural finance. Mr. Statman says investors seek to maximize their overall utility, including both financial and non-financial returns. The utility derived from non-financial considerations – for example, values-based screening – will vary among investors, but they are important to all successful strategies.
Thus, according to Mr. Statman’s new framework, once advisors understand their clients’ financial and non-financial goals, they should be clear about how particular investment approaches align with those goals. A poorly articulated investment strategy may produce unexpected results. For example, a strategy using ESG integration may not always align with some investors’ strongly held values, so a strategy that also employs screening may be more appropriate.
Advisors who understand and distinguish the differences among these responsible investment strategies will be able to set their clients up for success in both their financial and non-financial goals. They will also be able to call out genuine cases of greenwashing when they occur.
Ian Robertson is vice-president, director and portfolio manager at Odlum Brown Ltd. in Vancouver. He also serves as chair of the Responsible Investment Association’s board of directors.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
