The Covid-19 Pandemic and Social Justice Movements are Accelerating Growth in ESG Investment Globally
ESG investing, a catch-all term for investments that factor in environmental, social, and governance impact in addition to financial returns, is growing rapidly at a global scale in the wake of the Covid-19 pandemic and Black Lives Matter movement [1]. According to CNBC News, a record $45.6 billion USD flowed into the global sustainable fund space during the first quarter of 2020 [2], demonstrating a 90% increase over the same quarter the previous year [3]. This growth is being primarily driven in the United States, both at the retail and institutional level while in Canada, the market for responsible investing remains comparatively unchanged and untapped.
We believe that the lag in the Canadian marketplace can be attributed to two primary challenges:
Investors still feel that there is a negative trade-off between impact and returns.
Impact investing with a true triple-bottom-line (profit, people, and planet) for accredited investors, private capital such as high-net-worth individuals, is still an under-served market in Canada, with consistent and quality dealflow continuing to present the biggest challenge.
This notion is echoed by the 2018 Canadian Responsible Investment Trends Report, which found that 70% of Canadian investors in the responsible investment space feel that financial performance concerns are the principal road block to the growth of the industry on a national scale [4]. However, after BlackRock CEO Larry Fink in early 2020 published his open letter, “A Fundamental Re-shaping of Finance”, in which he calls purpose the engine of long-term profitability [5], other large money managers quickly followed suit and triple-bottom-line investing is becoming a tangible reality at scale.
“Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors. And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.”
- Larry Fink, Chairman & CEO, BlackRock
ESG Investing – An Opportunity for Accredited Investors in a Post-Covid World
At True North, we see significant potential for accredited investors in the impact investing space, with three key drivers accelerating this growth. Firstly, we are observing an increased interest in deploying private capital into impact-driven investments with particularly high interest among three key segments: millennials, women, and high-net-worth individuals. While interest from these segments has previously existed for some time, it has gained renewed momentum in light of Covid-19 and BLM protests as consumers and investors have shifted their attention to social issues in an unprecedented manner. With millennials set to receive the greatest transfer of wealth over the next few decades and high-net-worth individuals controlling the largest proportion of assets today [6], there is the prospect of significant industry growth in Canada and beyond.
Another trend that will supercharge the return-to-form of impact investing is the growing interest, among both investors and companies, in “active capital”, investors and money managers who are not only interested in contributing capital, but also expertise and strategic input, often through the form of a board seat. The benefits are clear: on the company side managers benefit from experienced strategic input, while for the investors confidence in the company to achieve business objectives is reinforced by being better read-in on the day-to-day and having a conduit to impact business decisions. Investors are happier, and companies are more likely to create shareholder value.
One last trend that we see shaping the impact investing space is the growth of investor interest in international opportunities. While historically the bulk of impact investments in Canada have focused on specific domestic regions or challenges, leading investors are starting to realize the opportunities that borders intrinsically create. As globalization continues to propagate ever farther, even the smallest money managers today need to be aware of, and ideally be able to capitalize on, global trends and cross-border opportunities. Beyond recognizing opportunities in distant geographies, realizing value, and repatriating returns, in a foreign context is an exercise in operating cost optimization. What are the additional costs that must be borne across borders? What team is right-sized, and right-skilled to take on these challenges? This is a topic that is at the core of what makes True North unique and competitive and one we’d like to explore further in future articles.
As the majority of the world is easing pandemic lockdown measures, funds with global teams are best equipped to help investors navigate opportunities emerging in a post-Covid globalization. With the pandemic and social justice movements acting as catalysts for the industry, and leaders like Bill Gates demonstrating the potential of private investments to do good, more and more investors in Canada are interested in making investments that matter. We look forward to contributing our part in doing good.
If you are interested in learning more about what True North is doing in the impact investing space, please contact Kai Chen, Fund Manager (kai@truenorthimpact.com).
[2] MorningStar - Investors Back ESG in the Crisis
[3] MorningStar - Sustainable Fund Flows Smashed Records in 2019: Morningstar
[4] RIA Canada - 2018 Canadian RI Trends Report
[5] BlackRock - A Fundamental Reshaping of Finance
[6] Savita Subramanian, Head of global ESG research at Bank of America, June 25th, 2020