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Canadian RI Assets Surpass $1.5 Trillion: Canadian RI Trends Report

Executive Summary

The 2016 Canadian Responsible Investment Trends Report reveals that Canada’s responsible investment (RI) market is continuing to experience rapid growth. Responsible investment refers to the incorporation of environmental, social, and corporate governance (ESG) factors into the selection and management of investments. This report provides a detailed overview of recent trends in Canada’s responsible investment marketplace.

Major Trends

  • $1.5 trillion in RI assets under management
  • 49% increase in two years
  • Responsible investing represents 38% of Canadian investment industry
  • ESG integration surpasses engagement as leading RI strategy
  • Individual investors’ RI assets up 91% in two years
  • Pension fund assets make up 75% of RI industry’s growth, increasing by $374 billion, or 45%, in two years
  • 80% of respondents expect moderate to high levels of growth in RI over next two years
  • Asset managers and owners ranked the following as their top motivations for incorporating ESG factors into investment decisions: (1) to minimize risk over time; (2) to improve returns over time; (3) to fulfill fiduciary duty

According to survey responses and secondary research undertaken by the RIA, assets in Canada being managed using one or more RI strategies increased from $1.01 trillion at the end of 2013 to $1.5 trillion as of December 31, 2015. This robust growth represents a 49% increase in RI assets under management over a two-year period. Canadian RI assets now account for 38% of total Canadian AUM (estimated at $3.986 trillion1), up from 31% two years earlier.

While most of the RI industry’s growth is attributable to institutional investors, individual investor assets have almost doubled over the past two years to reach $118 billion, reflecting a growth rate of 91%.

Whereas shareholder engagement was the most prominent RI strategy in Canada two years ago, ESG integration is now the leading RI strategy in Canada with $1.46 trillion AUM. ESG integration refers to the explicit inclusion of environmental, social and governance factors into financial analysis. The third most prominent RI strategy in Canada is norms-based screening, a strategy that aligns investment policies with international norms and standards such as the OECD Guidelines for Multinational Enterprises.

Survey respondents are very optimistic about the RI industry’s outlook for 2017 and 2018, with 80% of respondents expecting either moderate or high levels of growth over the next two years. This is a significant increase from our last survey, in which 59% of respondents expected moderate or high growth.

Drivers of Growth

Investment managers and asset owners collectively identified the following reasons as their top motivations for choosing responsible investment: (1) to minimize risk over time; (2) to improve returns over time; and (3) to fulfill fiduciary duty. In addition, the rapid growth of responsible investing in Canada can be attributed to the following four factors:

  1. The increased engagement of the investment management with RI.
    A recent study by the CFA Institute found almost three-quarters of investment professionals take ESG issues into account when making investment decisions.2 At the end of 2015, 38 Canadian investment managers had become signatories to the United Nations-supported Principles for Responsible Investment (PRI), signaling their commitment to incorporating ESG factors into their investment decision-making. This number is up from 29 Canadian PRI signatories two years earlier. The growing spectrum of RI products and services is another indicator of the investment management industry’s increased engagement with RI.

  2. Growing awareness of the significance of ESG opportunities and risks.
    Myriad studies have demonstrated the link between RI and enhanced long term returns. For example, studies commissioned by OceanRock Investments and the Morgan Stanley Institute for Sustainable Investing found that RI equity funds outperformed their benchmarks more than 60% of the time at lower levels of risk in both Canada and the United States.3 4 Climate risk awareness is on the rise in the investment community, as reflected by our survey participants’ interest in seeing more decarbonized investment opportunities in the coming year. Recent high profile ESG risk cases such as those involving Volkswagen, BP and Wells Fargo have also contributed to the growing awareness of the materiality of ESG factors.

  3. The growth of pension fund assets under RI guidelines.
    Pension fund assets account for 75% of the Canadian RI industry’s growth over the past two years, having grown by $374 billion, or 45%, over that time. Pension funds reported that their top two reasons for considering ESG criteria are to manage risk and to fulfill their fiduciary duty. The growing recognition that considering ESG factors is an element of fiduciary duty runs parallel to Ontario’s new regulations that require a pension plan’s statement of investment policies and procedures to disclose whether, and to what extent, ESG factors are considered.

  4. Demographic shifts.
    Millennials, the generation born in the last two decades of the twentieth century, are 65% more likely than Baby Boomers to consider ESG factors when investing, and more than twice as likely to seek investments dedicated to solving environmental and social challenges.5 Although younger investors typically do not have significant wealth, they are having a growing influence over household investment decisions. This younger generation of investors will be an increasingly important demographic for the investment industry going forward, as they are set to inherit billions over the next few decades.

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[1] Investment industry data provided by the Canadian Institutional Investment Network (CIIN). 
[2] CFA Institute, “Environmental, Social and Governance (ESG) Survey,” June 2015. Viewed December 1, 2016.  https://www.cfainstitute.org/ethics/Documents/esg_survey_report.pdf.
[3] Tessa Hebb, “Canadian Responsible Investment Mutual Funds: Risk/Return Characteristics Study Findings,” Carleton Centre for Community Innovation, May 1, 2015. Viewed December 1, 2016. https://www.qtrade.ca/_pdfs/oceanrock/3CI_ORII_RI_Fund_Risk_Return_Analysis.pdf
[4] Morgan Stanley Institute for Sustainable Investing, “Sustainable Reality,” March 2015. Viewed December 1, 2016. http://www.morganstanley.com/sustainableinvesting/pdf/sustainable-reality.pdf.
[5] Responsible Investment Association, “Millennials, Women, and the Future of Responsible Investing,” April 2016. Viewed December 1, 2016. https://www.riacanada.ca/wp-content/uploads/2016/04/Millennials-Women-and-the-Future-of-RI-Final-1.pdf


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