As pretty much everyone has heard, Canada’s performance through the 2008 global financial crisis has burnished our reputation for financial probity. The World Economic Forum has named Canada’s banks the world’s soundest for six consecutive years. In relative terms, we have had a very good crisis.
Our “good” crisis has not done much, however, to boost Canada’s standing in financial markets. The Banker magazine’s 2013 index of top international financial centres puts Toronto ninth globally – the only top-10 city to drop two rungs from 2012.
Similarly, Long Finance’s Global Financial Centres Index (GFCI) ranked Toronto 14th amongst international financial hubs, down from 11th in 2012. No Canadian city was mentioned in the survey’s list of financial centres likely to become more significant.
Instead, our stability has made us into a haven for emerging-market plutocrats looking to stash their cash in Canadian real estate. Sotheby’s found that foreigners accounted for about 40 per cent of Vancouver’s luxury-home purchases last year. Similarly, the Conference Board noted that Vancouver’s real estate market is tightly tied to Chinese economic fluctuations. When all of this gets detailed in The New Yorker, as it was last week, we’re vying with Manhattan for honours in the wrong game.
These foreign inflows are combining with domestic capital, pushed by generationally-low interest rates, to create one heck of an asset bubble in urban Canadian real estate. Rather than making Bay Street look like the new Wall Street, foreign capital is making Liberty Village look like pre-crash Phoenix or Las Vegas.
Instead of rewarding Canada for a good crisis, foreign capital is making us more vulnerable to future financial turmoil.
The relatively small size of Toronto’s securities industry puts Canada at a persistent disadvantage in attracting trading and corporate finance. But Canada needs to work at becoming more than the Avis of second-tier financial centres: it’s not enough to try harder. There’s no point trying to outdo New York at being New York.
We need to try differently. Thomas Friedman argues that “average is over” – when it’s so easy to find better people, companies and even countries to do a job, all of us have to find unique ways to add value.
Responsible investing offers Canada an opportunity to do things differently. It’s both an approach to allocating capital and an asset class in its own right. Responsible investing runs the gamut from efforts to avoid underwriting activities that damage society –tobacco, weapons, pollution – to the active search for investments that produce positive social and environmental effects – reducing poverty, crime, and empowering women – that produce a financial return.
About one in every $9 under professional management in the U.S., some $3.74-trillion (U.S.), is invested in responsible strategies – an area that has seen double-digit growth in recent years. That’s a little more than twice Canada’s annual GDP and roughly equal to the assets of Canada’s banks.
In surveys, at least a third of North American investors express a strong interest in “do-good” investing. European and younger investors tend to be even more engaged, which sets up responsible investing for further growth. As baby boomers age and begin redeeming their retirement savings, responsible investing is likely to become a greater part of investors’ portfolios.
Returns on responsible investments vary as much as in any other market segment. But what’s clear is that fears of a zero-sum tradeoff between financial returns and doing good are misplaced: the Jantzi Social Index of 60 Canadian equities has equalled the performance of the S&P/TSX 60 for over a decade.
Additionally, responsible investments are broadly uncorrelated with other assets. In a post-crisis world where nearly every market moves in lockstep with the actions of central bankers, responsible investment offers a natural hedge.
Responsible capital tends to be patient capital: dominated by pension funds and endowments, it’s invested for long-term returns, not speculative gains. It’s the capital Canada wants. An enhanced focus on responsible investing could complement the macroprudential measures being implemented in many countries, including Canada, to trim the distortions created by exceptional short-term monetary stimulus.
The U.S. and U.K. already have more flexible and supportive regulatory and taxation frameworks for responsible investing. Canada needs to play catch-up.
We need clearer and common structures to certify responsible investments and report on their social impact. Getting beyond publicly-traded equities and connecting interested investors with responsible private investment opportunities needs to be made easier, and due diligence needs to be made simpler. Ontario’s Social Venture Exchange (SVX) represents a nascent start at linking responsible investors with investable private placements. We need to take impact investing beyond sophisticated institutional and high-net-worth investors by supporting efforts to build retail products and distribution platforms that will enable more Canadians to invest responsibly. Finally, we need to ensure Canada Revenue Agency regulations are reformed to allow charities, foundations, and pension funds – truly patient capital – to participate more comprehensively in impact investing.
At the same time, efforts to create a single national securities regulator must not be allowed to undo the substantial regulatory experimentation and responsible investment product innovation that has been achieved in several provinces.
Getting this right matters for Canada, but even more so for Toronto, with 7.6 per cent of its workers employed directly in financial services, a higher share than in either New York or London.
The same report that lauded Canada for its sound banks also said that limited access to financing and insufficient capacity to innovate are the two biggest impediments to doing business in this country. Building Canada into a world leader in responsible investing would address both these challenges in one swift move.
Brett House is a Senior Fellow at the Centre for International Governance Innovation (CIGI) and the Jeanne Sauvé Foundation at McGill University, where Salomé Mirigay is a Social Economy Intern. Mr. House can be followed on Twitter at @BrettEHouse.