Canadian institutional investors banking on impact funds related to climate-change solutions

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Four in 10 large Canadian institutional investors plan to launch impact funds this year, according to a survey that suggests money managers are again banking on financial rewards from climate-change solutions.

The positive outlook from the environmental, social and governance field is among findings in a report by the sustainability consultancy Millani that show many pension funds and asset managers believe they can meet their financial obligations while also prioritizing environmental or societal results.

The trick for investors and regulators will be keeping up with increasingly sophisticated disclosure standards that are taking their place alongside financial reporting.

Impact funds emphasize outcomes in specific areas, such as renewable energy, sustainable agriculture or microfinance, along with long-term returns. Millani found that of 32 large institutions it surveyed, 43 per cent plan to launch impact products in 2024. That statistic, its chief executive officer Milla Craig said, is a “shocker.”

“I was like, Whoa, I did not expect that at all. I thought it was more of a move from ESG towards impact, that sort of thing. What I realized as we went through the interview process was the degree to which it’s moving and moving fast,” Ms. Craig said.

Some of the organizations surveyed included AGF Management, Addenda Capital, AlphaFixe Capital, CIBC Asset Management, Jarislowsky Fraser Global Investment Management and University Pension Plan Ontario. Responses were presented anonymously.

Impact funds are not new, and some of the industry’s largest players have raised tens of billions of dollars for such vehicles. Brookfield Asset Management BAM-T said early this month it had raised US$10-billion for its second Global Transition Fund, which concentrates on the shift to a net-zero economy. Its first transition fund amassed US$15-billion, from investors that included Ontario Teachers’ Pension Plan, PSP Investments and Investment Management Corp. of Ontario.

The interest follows a difficult year in ESG as stubbornly high interest rates sent investors to safe, short-term returns rather than long-duration holdings in fields such as green technology that require large sums of cash early in their development. There has also been a backlash against ESG, notably in the United States, where some Republican politicians have imposed restrictions on its use as a risk management tool.

Another problem has been greenwashing, and high-profile cases in which investors did not get the environmental benefits they were promised.

This puts the emphasis on bolstering measurement and disclosure to prevent similar deceptions as impact funds proliferate, as well as language that clearly spells out a manager’s strategy, Ms. Craig said. Investors can expect regulators to watch for evidence of false environmental claims more closely than they have previously.

“There is definitely a recognition about this need to measure the outcomes,” she said. “When we think about that, it’s measuring the impact and it takes time. These are not changes that can happen in the typical timeline of a portfolio manager.”

Climate is the top focus for the new funds, as many of their investors have their own emissions targets they are committed to, she said. Biodiversity is emerging as a top theme as well.

The results align with those of a recent poll of institutions by the Toronto-based Responsible Investment Association, which found demand among investors for impact is the second-biggest driver to growth in sustainable investing after climate change itself, said Patricia Fletcher, CEO of the RIA, whose members collectively manage more than $3-trillion of assets.

In addition, the intentional aspect of impact investing is seen as a guard against greenwashing, Ms. Fletcher said.

With regard to financial performance, 85 per cent of the group’s members that engage in impact investing report targeting returns at market or above-market rates, showing that such investments are not viewed as “concessionary,” she said.

Among other findings in Millani’s survey, 63 per cent of managers said they were disappointed that Ottawa has not moved quicker to formalize a taxonomy that certifies investments as green or transitionary, with some of them warning further delay could put Canada at a competitive disadvantage in the race for capital.

Even so, seven out of 10 respondents said they were putting their money into green technologies regardless, both in direct investments and in companies that invest in such opportunities.