Putting your money where your value are!
Responsible investing (RI) is about incorporating environmental, social and governance factors (ESG) into investment decision making with the goal of generating sustainable value for investors, shareholders, stakeholders and for society in general.
Making Money while Making a Difference
Responsible investing (RI) is an umbrella term that includes a few different investment approaches that for consumers really means aligning ones' values with their investments or "MAKING MONEY WHILE MAKING A DIFFERENCE" RI is not really a new concept, a good example of RI was in the 1970's when in response to South African apartheid, faith based groups and concerned investors campaigned for others to divest their holdings in South African companies. Many of the companies affected by the divestment then lobbied the South African government to end apartheid. That's an example of ethical or "negative screening" where investors avoid companies based on moral or ethical considerations. However, other practices have joined the RI mix more recently.
Here are 6 different strategies available for investors to incorporate ESG/responsible investing into their portfolios:
Negative screening: An exclusionary approach, negative screening exludes (from a fund or portfolio) certain sectors, companies or projects based on ESG criteria e.g. divestment from certain industries (example-weapons, pornography, tobacco, fossil fuels etc)
Positive screening; As opposed to Negative screening, looks to include certain sectors, companies or projects based on positive ESG performance relative to industry peers e.g. impact investing, best of sector, green investing.
ESG Integration: Explicitly embeds ESG issues into traditional financial analysis. Integration is different from screening in that integration combines ESG data, research and analysis together with traditional financial analytics in making investment decisions.
Corporate engagement / shareholder action: Uses shareholder power to influence corporate behaviour directly. Examples: Engaging in dialogue with company management or boards of directors. Filing or co-filing shareholder resolutions Voting proxies based on ESG criteria
Impact investments: Involves targeted investments, typically made in private markets, with the explicit purpose of solving social /environmental problems. Impact investing includes: community investing financing for green business, social entrepreneurs, and other companies with clear ESG objectives enterprising (i.e. revenue-generating) non-profits. Impact investing seeks to make measurable positive impact. The impact industry represents a small portion of RI but it is growing quickly
Sustainability themed investing: Actively integrates ESG analysis into Investments in themes or assets specifically related to sustainability, such as: energy efficiency clean energy green infrastructure adaptive solutions
The term "ESG" is heard a lot lately. That's because Environmental, Social and Governance (ESG) factors are the 3 pillars of responsible investing. Here are some examples of these factors at play:
Environmental issues relate to a lot of what we are hearing alot about today: Are companies being good stewards of the environment as it relates to greenhouse gas emissions, climate change, water scarcity, energy efficiency, water and waste management.
Socially responsible factors relate to how a company manages their relationships with staff, clients and their communities as it relates to issues like human rights, safety, human capital management, corporate diversity, and stakeholder engagement
Governance is about how a company leads itself in being responsible and accountable and transparent to shareholders in areas like risk oversight and incentives (like executive compensation) as well as shareholder/stakeholder rights. The chart attached is how Fidelity breaks down ESG factors.
But Responsible investing is not just about values; it makes good sense ($)
Giving ample consideration to ESG factors when evaluating a company and investing makes good business sense because a company is more than just numbers. A company that practices good governance and manages their environmental footprint and takes social responsibility can lead to benefits for those who invest in such companies. Here are 6 good reasons to invest responsibly:
- Better risk management (Less risk to shareholders and investors over time)
- Good Long term investment performance (Improved investment returns over time). A recent Harvard study reported that 80% of asset managers agreed taht "ESG Information is material to Investment Performance"
- Better alignment of investments with your personal values (automatic exclusion of undesirable industries or rules based company exclusions)
- Contribution to positive societal change (new investment opportunities can come from looking at the world differently)
- Empowerment and control-Responsible investing often includes a direct influence on the behaviour of companies you invest in by way of shareholder engagement (corporate dialogue and proxy voting)
- Fast growing investment category-Responsible investing is Canada's (and the world's) fastest growing investment category-employed broadly by pension funds and millennials in particular (CPP Investment board/Ontario Teachers Pension Plan etc.) Between 2013 and 2017 Canadian pension funds increased their investment in RI assets by $563 BILLION !
No wonder almost eight in 10 Canadian investors (79%) say they would like their financial services provider to inform them about responsible investments that match their values.
Unfortunately, only 23% of respondents had been asked by their advisor if they were interested in RI, and 72% said they knew little to nothing about RI. That's why I joined the Responsible Investment Association (RIA) and became a certified Responsible Investment Specialist. The RIA is a non profit membership based organization dedicated to the advancement of responsible investment in Canada. RIA membership is composed of some 300+ institutional investors and investment professionals across Canada who practice and support responsible investing. Learn more here or reach out and connect with me anytime.