Across Canada, investors are looking to use the power of their portfolios by choosing investments that not only provide strong returns, but also help make a positive difference to society.
Responsible investing is a form of financial investment that incorporates environmental, social and governance (ESG) factors, without, of course, neglecting desired financial returns. Over halfOpens a new website in a new window | PDF 2.19mb the professionally managed money in Canada is now in responsible investments, and a recent reportOpens a new website in a new window has also shown that the amount of money being managed using RI strategies has risen from $2.1 trillion in December 2017 to $3.2 trillion in December 2019 – a 48% increase.
So what’s causing all the interest in RI? As it turns out there are a number of great reasons why long-term investors are looking to incorporate ESG into their responsible investing decision-making.
Balancing purpose with performance
As investors become more conscious of the impact companies have on our environment and society, there’s an increasing demand to use investments to drive change. If you’re passionate about issues such as climate change, women in leadership and gender equity, water scarcity or executive compensation for example, RI gives you the opportunity to invest in funds and companies whose values align with yours.
ESG can help manage risk
Events like BP’s Deepwater Horizon disaster, Volkswagen ‘Emissions-gate’ and various other corporate scandals have shown what lack of ESG integration can have on performance and company reputation. Additionally, they’ve also demonstrated how good ESG practices could’ve not only prevented tragedy, but helped protect shareholder profits.
When integrating ESG, fund managers and investors dig deeper than a company’s financial reports. They look for things like board structure or environmental footprint to create a more complete view of a company’s long-term outlook for success, as well as identifying any inherent or future risks.
Let’s take Deepwater Horizon as an example; in the 3 years leading up to the explosion, regulators had cited BP for 760 “egregious and willful” safety violationsOpens a new website in a new window | PDF 219kb, indicating that a disaster was not only preventable, but likely. To an asset manager or investor who’d only been looking at the financials, these violations could have been easy to miss. Those who’d been looking at things like BP’s health and safety track record - or in other words, had been applying ESG - could have seen that these warning signs signaled a high-risk investment.
ESG can help provide stronger returns
In addition to mitigating risk, ESG may also help to improve returns. In 2020, a report from MorningstarOpens a new website in a new window revealed that 3 out of 4 sustainable equity funds beat the Morningstar Category average, and that 25 of 26 ESG equity index funds beat the most common traditional benchmarks in their categories.
Your investments can help build a better future
Responsible investing provides you with the opportunity to enjoy financial gains, and can also help make positive change in the world. One key aspect of sustainable investing is shareholder engagement. This is when fund managers use their leverage to influence companies into changing behaviors, through methods like voting at annual general meetings (AGMs), privately engaging through letters, phone calls and meetings, or publicly lobbying via the press and social media. If engagement isn’t possible or isn’t proving effective, fund managers may decide to limit investments in these companies.
RI may be the future of investing
Responsible investment is by no means a passing fad. In fact, studies have shown that ESG is expected to see continued growth in years to come. It’s gathered huge momentum in Europe (Morningstar reportsOpens a new website in a new window that sustainable fund flows reached record highs in 2020 in spite of the COVID-19 pandemic), and investor attitudes are expected to drive continual growth in North America. A surveyOpens a new website in a new window from the Responsible Investment Association (RIA) revealed that 77% of respondents agreed that companies with strong ESG practices make better long-term investments, and 82% said they’d like to allocate a portion of their portfolio to RI.