Investments that factor in environmental, social and governance (ESG) rose to a new high of $4.5 trillion in assets under management, a Canada-wide survey by the Responsible Investment Association (RIA) has found.

Responsible investing, which incorporates ESG factors into selection and management of investments, made up 71 per cent of the assets covered in the 2024 survey of 56 asset managers, 33 asset owners and four organizations that identified as both.

The dollar figure rose from $3 trillion (47 per cent) and $3.7 trillion (61 per cent) in 2021 and 2022, indicating a “steady upward trend”, the report states.

The number of organizations tracking greenhouse gas emissions increased over time, as did the amount setting reduction targets.

“Investors have increasingly recognized the need to align with net-zero goals to mitigate climate change,” RIA CEO Patricia Fletcher told Sustainable Biz Canada in an email exchange.

Toronto-based RIA is an industry association that promotes responsible investment in Canada’s financial sector. Members include some of Canada’s largest banks, pension funds, investment firms and asset managers.

Responsible investing on steady incline

Responsible investing assets are expected to maintain growth, albeit at a moderated rate, as they mature and capture more of the market. Greater investor interest, regulatory changes and a deeper embedding of responsible investment strategies by pension funds and institutional investors are the main driving factors, Fletcher explained.

Investor demand for ESG or impact and the risks associated with a changing climate were the most commonly named factors pushing investors toward responsible investing, despite having double-digit declines compared to last year.

ESG or impact investment demand, for example, tumbled from 57 per cent in 2022 to 45 per cent in 2023; risks with a changing climate plummeted from 63 per cent to 40 per cent.

But young investors or plan members shot up as a key force of growth from the previous survey – from eight per cent to 34 per cent. Fletcher said younger investors and members may have been responsible for the decreases among the two largest factors.

Retail investors and regulators were the top two groups seen as the likeliest to drive growth in responsible investing over the next two to five years at 70 and 61 per cent, respectively. Their demand for credible, transparent and financially sound investments based on a variety of ESG factors were noted by RIA.

Institutional investors sat in the middle of the pack at 58 per cent. Investment manufacturers and advisors rounded out the list at 35 per cent and 29 per cent.

Half of those surveyed said they expect a moderate growth rate for responsible investments, while 12 per cent forecast high growth, 21 per cent low growth, and 15 per cent flat growth. The remaining two per cent anticipate a downturn.

Investors focused on climate 

Of the 10 ESG-related factors influencing an investment, the climate was a dominating reason.

Greenhouse gas emissions topped the list at 88 per cent, ahead of board diversity and inclusion which tied for second place at 83 per cent with climate change mitigation.

An increasing awareness of climate risk as a material risk for businesses and investment portfolios may be responsible, Fletcher said, and extreme weather events that are grabbing headlines plus the worry of the scientific community.

Organizations inched forward on measuring the carbon intensity of their portfolios and setting greenhouse gas emission reduction targets as well.

Just under three-fourths of those surveyed responded they are measuring carbon intensity, the highest out of the last three years.

Fifteen per cent in 2024 have set greenhouse gas reduction targets covering Scope 1, 2 and 3, a new high. The proportion of organizations that have targets for Scope 1 and 2 emissions or plan to set targets stayed relatively stagnant from 2023 in the mid-20-per-cent range. But the number of organizations in process of setting targets increased by 16 per cent from 2022 to 2024.

Confidence in responsible investing ticks up

The impact of a globally recognized definition of responsible investing had a key role in elevating confidence in the sector, Fletcher said. Adopted by the organization, the update “allowed us to be comfortable allocating to the ESG integration bucket,” one member of RIA was quoted as saying.

Over half of members in the survey indicated somewhat more confidence in the overall quality of ESG reporting than last year. For their own organization, 18 per cent expressed much more confidence and 27 per cent had somewhat more confidence.

Released around the same time as RIA's report was KPMG's survey of Canadian CEOs, which found 29 per cent of respondents named ESG as their primary operational focus because of a strengthened regulatory environment that aims to clamp down on greenwashing. Over half of the CEOs said they believe their company's sustainability claims can withstand scrutiny, up from 29 per cent a year ago.

But there can be more done to address the sector’s uncertainty, RIA members said. Mistrust or concerns about greenwashing and the lack of standardized ESG disclosure frameworks were the top two deterrents to responsible investing tied at 44 per cent, ahead of performance concerns.

To boost confidence in reporting, survey respondents frequently asked for more universally accepted frameworks, standardization and auditing of reporting.

Engagement with portfolio companies and advocacy with regulators and industry stakeholders for disclosure standards are steps being taken by the industry to answer such concerns, Fletcher said.