The non-profit association that champions responsible investing in Canada is considering developing a certification program for investment products due to what it describes as “(mis)perceived and actual” concerns about “greenwashing” in the sector.
In a survey circulated on Wednesday, a copy of which was obtained by the Financial Post, the Responsible Investment Association gauged its members’ thoughts on the possibility of creating such a “public-friendly label” or certification.
The RIA asked its members whether they agree or disagree that greenwashing poses a reputational risk to the RIA, that the Canadian marketplace needs a label or certification to combat it and that the RIA should hire a third-party to audit whatever products it certifies. Members — who include individual financial planners, funds providers and even the country’s biggest banks — were then asked how important they think certification is for each individual responsible investing strategy.
Responsible investing, a broad term that includes environmental social and governance (ESG) approaches, has gained in popularity around the world in recent years, but concerns that some funds are not as stringent as their investors believe them to be — a practice dubbed “greenwashing” when it involves environmental claims — have been raised repeatedly.
“What it shows is that the RIA recognizes that the waters are a bit muddy right now,” said Tim Nash, the founder of financial planning firm Good Investing and an RIA member, of this week’s survey. “To me, having certification would … provide a lot of clarity for investors.”
When asked to comment, RIA CEO Dustyn Lanz said the organization was still gathering information. “The RIA is considering developing a certification for responsible investment products. We are currently polling our members to solicit their views on this topic before taking any further action,” he said.
Aaving certification would … provide a lot of clarity for investors
Within the survey, the RIA says the responsible investing industry has faced a “growing number of negative media headlines and allegations of greenwashing” and it is looking to “promote confidence” as a result.
In November, the Financial Post published an investigation into the responsible investment space in Canada that found funds belonging to Desjardins, CIBC Wood Gundy, Russell Investments and AGF were not accurately represented on the RIA’s website. Each of the funds were listed as negatively screening for fossil fuels, meaning that they bar them from being included, when, in actuality, each held at least one company that primarily works in the oil and gas sector.
The Post also found that 45 per cent of the active responsible investing funds listed on the RIA’s website at the time contained at least one oil and gas stock. Several others still held alcohol and tobacco stocks. And while many of them used strong language in their prospectuses against fossil fuels, in some cases it was vague enough or qualified in such a way as to still allow fund managers to hold certain oil and gas stocks.
Lanz told the Post in November that the RIA’s job isn’t to certify or rate investment products. Currently, its members pay yearly fees as high as $10,000 and the RIA then highlights their investment products — ETFs, mutual funds, segregated funds, pooled funds and more — on its website.
Because there is no certification process, managers have significant room to define their own terms and can then self-identify as operating responsible funds, leaving investors to pour over hundreds of pages of filings to glean a fund’s actual contents.
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The job of ensuring the funds are not being misleading falls to the OSC, which at the time told the Post that it reviews funds on a “risk-based approach and assesses how they are fulfilling their stated investments objectives and strategies.”
In the U.S., the responsible investing sector has reportedly come under scrutiny from the Securities and Exchange Commission. This week, the Wall Street Journal reported that the SEC is actively sending examination letters to investment firms offering responsible investing products, asking them to submit lists of stocks they’ve recommended to clients, their methodology for determining if a company is a responsible investment and proxy voting records. (Voting one’s shares in accordance with ESG principles is one of the ways a fund can fall under the ESG umbrella).
The SEC’s apparent concerns with the American responsible investing industry seem to echo those that have been voiced in the past by critics of the Canadian space.
Responsible investing has evolved over the years and no longer simply focuses on negative screening as it did in its early years. Now, there are multiple strategies that fall under the broader umbrella, many of which do not explicitly bar fund managers from holding stocks in sectors such as weapons manufacturing, alcohol and oil and gas.
Some of the RIA’s members told the Financial Post they support certification and want the RIA to lead the charge.
“Product certification is a step in the right direction for the rapidly growing responsible investment sector,” said Tammy Cash, Horizons ETFs executive vice-president of marketing. “Not only will product certification push providers to do better but it will also empower investors by letting them know whether their investment measures up to an ethical standard that is in accordance with their values.”
David Rutherford, the vice president of ESG services at NEI Investments, said certification will help advisors and investors to better navigate responsible investing. There are multiple views on what responsible investing is, he said. The definition may differ with each firm offering a product. But understanding “what’s under the hood” of a fund would be a first step — and certification can allow that.
“The challenge is there’s a lot more going on than meets the eyes with responsible funds,” Rutherford said. “This is not something we as a group are going to solve overnight.”