Responsible investing and ESG defined
Responsible investing (RI) is a rapidly growing segment of the global investment market. According to Canada’s Responsible Investment Association, assets being managed using one or more RI strategies in Canada grew 48 per cent between 2017 and 2019, to a total of $3.2 trillion in 2019. RI assets now account for over 60 per cent of Canadian assets under management.1
But RI is a broad and evolving category, with a number of different labels – from “socially responsible investing” to “values-based investing” – and its own terminology, such as “ESG”. Let’s take a closer look at what those terms mean.
What is responsible investing?
Principles for Responsible Investment (PRI) defines RI as “a strategy and practice to incorporate environmental, social and governance (ESG) factors in investment decisions and active ownership.”2 RI can be viewed as an umbrella term to cover a whole range of investment approaches that consider ESG factors, as well as other corporate engagement and policy work that focuses on driving measurable change in how companies are run.
Corporate engagement refers to shareholders talking directly with companies to influence the way the company is run. In the case of Qtrade’s sister company, NEI Investments, corporate engagement is accomplished through:
- Dialogue can take the form of letters, emails, phone calls, and face-to-face meetings.
- Proxy voting is when a shareholder votes “by proxy,” instructing another party to vote on company matters on their behalf on a variety of topics.
- Shareholder proposals are non-binding proposals aimed at encouraging a company’s management to take specific action.
There is an ever-expanding number of investment approaches often grouped under the heading of RI, including: ethical investing, impact investing, thematic investing, community investing, sustainable or green investing, values-based investing, socially responsible investing.
RI takes into consideration more than just a company’s financial health, asking questions of companies that reveal the bigger picture. Does a company treat its employees fairly and equally? Is it respectful of the community where it does business? How does the company treat the planet, use resources? Does the board of directors reflect the diversity of its workforce? Do its products hurt people?
What is ESG?
RI looks at the factors that can influence a company’s financial success, as well as its impact on the world. These are called ESG factors – environmental, social and governance factors – which are incorporated into the assessment of a company’s value.
- Environmental factors, such as climate change, resource use, waste, pollution and deforestation
- Social factors, such as working conditions, human rights, child labour and employee relations
- Governance factors, such as executive pay, bribery and corruption, board diversity and political lobbying
Responsible investing – by individual and institutional investors as well as asset managers – means putting money into companies with strong ESG commitments. Investors can avoid or remove investments in companies with weaker ESG performance, actively choose investments based on specific ESG criteria, or engage with a company to encourage it to do better.
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Why invest responsibly?
Examining companies through an ESG lens allows investors to put their money in companies they believe will do the most good for society. But let’s face it; as an investor, you also want to grow your money.
Turns out, RI can be better for overall portfolio returns as well, particularly over the long term. 3 Improving ESG factors tend to drive improved company performance, which generally leads to higher returns over the long term. Companies that meet and overcome their ESG challenges can be good investments.
Not only can ESG factors lead to better performance, but companies with higher ESG ratings tend to come with lower risk. Consider an oil and gas producer that faces environmental challenges. Or a tech giant under fire for its lack of gender diversity. A consumer goods company facing criticism for its overseas labour practices. ESG factors can pose significant risks to the value of a company, and these factors can hurt its performance, potentially leading to a lower share price and weaker returns for investors.
The growing popularity of RI
More and more investors are looking for ways to grow their money, while also making a positive impact on the world around them. The Responsible Investment Association reports that 77 per cent of Canadian investors are interested in RI and 82 per cent would like to dedicate a portion of their portfolios to RI.4 So, if you’re pursuing an interest in responsible investing, you’re in good company.
When you invest responsibly, your money is not just working for you and your family; it’s working for everyone. It can help align your investments with your values and contributes to positive social and environmental outcomes. But RI may also help manage risk in your portfolio, while providing the opportunity for higher returns.
To dig a little deeper into the world of RI, check out the Responsible Investment Association or the UN Principles for Responsible Investment. You can also read up on the 17 global Sustainable Development Goals, established by the United Nations, to which many of the world’s investment management companies align their RI activities.
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1 Responsible Investment Association website, https://www.riacanada.ca/.
2 Principles for Responsible Investment website, “What is responsible investment?” https://www.unpri.org/an-introduction-to-responsible-investment/what-is-responsible-investment/4780.article.
3 Responsible Investment Association website, https://www.riacanada.ca/responsible-investment/#benefits-of-ri.
4 Responsible Investment Association website, https://www.riacanada.ca/responsible-investment/#what-is-ri.
The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters.
NEI Investments is a registered trademark of Northwest & Ethical Investments L.P. (“NEI LP”). Northwest & Ethical Investments Inc. is the general partner of NEI LP and a wholly‐owned subsidiary of Aviso Wealth Inc. (“Aviso”).Aviso is the sole limited partner of the NEI LP. Aviso is a wholly‐owned subsidiary of Aviso Wealth LP, which in turn is owned 50% by Desjardins Financial Holding Inc. and 50% by a limited partnership owned by the five Provincial Credit Union Centrals and the CUMIS Group Limited. Credential Qtrade Securities Inc. and Northwest & EthicalInvestments L.P. are all wholly owned subsidiaries of Aviso Wealth Inc.