While representing barely 1% of mutual fund assets in Canada, responsible investment funds have been gaining in popularity in recent years. As of March 31, 2021, sales of RI funds accounted for 12% of all mutual fund sales nationwide, and their assets were up by 160% compared to the first quarter of 2020.
However, according to a recent survey by Desjardins, it is not always for performance reasons that investors are drawn to this type of fund: in fact, almost 30% of respondents believed that responsible investments would generate lower returns than “traditional” ones. A Mackenzie Investments survey found that the number of investors who consider responsible investing to be less profitable could be as high as 40%.
Are they right?
Mutual funds that seem to stand out
According to several studies, the reality is that responsible investing would offer returns at least equal to and usually higher than those of other investments.
On the Canadian market, for example, the Responsible Investment Association (RIA) calculated that Canadian equity funds managed with a responsible investing policy would outperform Canadian equity funds as a whole regardless of whether the reference period is three, five or ten years.
According to the RIA, responsible investment funds would also outperform the overall market in the bond, U.S. equity and global equity categories.
The indices would suggest the same thing
Another way to evaluate the performance of responsible investing is to compare RI indices with general market indices. For Canadian equities, for instance, one of these would be the MSCI ESG Focus Index, a sub-index of the MSCI Canada Index. On April 30, 2021, the ESG Index posted an annual average return over five years of 6.64%, versus 6.20% for the MSCI Canada Index.
In the United States, the MSCI KLD 400 Social Index includes 400 companies that meet strict responsible investing criteria. As we can see here, the performance of this index tends to keep pace with that of the MSCI USA IMI, which does not apply such criteria. This similarity could be explained by the fact that, regardless of its selection criteria, the Social Index’s sector allocation would overweight the same categories, notably information technology.
At the global level, the differences seem more clear-cut. Since its inception in 2015, the MSCI ACWI Sustainable Impact Index has outperformed the MSCI ACWI World Index by more than 4% in average annual returns. Here’s proof, by the way, that short-term figures can be misleading: the Sustainable Impact Index’s year-to-date return has been 3.58% (to April 30), while that of the MSCI ACWI has been 9.14%.
Create value by investing according to your values?
As with everything, the conclusions that can be drawn from this type of comparison depend on which specific criteria you choose to look at. But an increasing number of studies tend to show that, far from generating lower returns and higher risk, responsible investments could in fact have a place in informed investment risk management and contribute to superior returns.
The following sources were used to prepare this article.
Desjardins, “Earth Day: 28% of Canadians and 30% of Ontarians mistakenly believe responsible investments would be less profitable than traditional investments.”
Finance et investissement, “L’investissement durable boosté par la pandémie.”
Le Devoir, “L’investissement responsable a la cote.”
MSCI, “MSCI Canada ESG Focus Index (USD)”; “MSCI KLD 400 Social Index (USD)”; “MSCI ACWI Sustainable Impact Index (USD).”