How to incorporate responsible investing into your portfolio

Responsible investing (RI) incorporates a company’s environmental, social and governance (ESG) performance in the assessment of a company’s value. And while RI is a great way to align your investments to your values, according to a study from Deutsche Bank Climate Change Advisors, it’s also been shown to help reduce portfolio risk and volatility and provide potential opportunities for higher long-term returns.

How do I evaluate ESG in my existing investments?

ESG Score from Qtrade Direct Investing® is the easiest way to check the ESG ratings on your investments. ESG Score has been added to Portfolio Score™ and Portfolio Simulator™, giving Qtraders an ESG evaluation of their investment portfolio.

The tool shows you how individual stocks or funds are contributing to your portfolio’s overall ESG score, as well as a ranking against the stock or fund’s peer group. A higher ESG score indicates stocks or funds that are better at managing the risks and opportunities associated with ESG factors including pollution prevention, human rights, disclosure practices and more.

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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

What is an ESG score and why is it important?

An ESG score (or ESG rating) is a measurement of a company’s exposure to environmental, social and governance risks. All of these factors – for example, resource use, energy efficiency, working conditions, employee and executive compensation and the independence of a company’s board – very often have financial implications that are not as easily identified in a company’s traditional financial statements and reviews. An ESG score adds a new layer of analysis that can help investors evaluate a company’s longer-term potential.

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How do I evaluate stocks with an ESG lens?

Any time you’re buying any stock, you’ve got some research to do. You’d normally do some due diligence, likely looking at the company’s financial performance, balance sheet, history and management team. You might read recent news on the company and its industry, or review its financial performance against its peers.

To invest responsibly, you need to add ESG performance to your research and choose investments in companies with higher or improving ESG ratings/scores. Below are a few places to begin your research:

  • Many companies publish information related to their ESG targets and performance (ESG Reports, Sustainability Reports, Corporate Social Responsibility Report or similar).
  • There are few organizations that conduct ESG risk analysis and sustainability assessments, and “score” companies on their ESG performance. Two that make some of the data publicly available are MSCI and Sustainalytics.
  • Various organizations publish lists of companies that score well on sustainability, and there are indices that only include stocks considered to be good RI investments. A few of these are:
    • Corporate Knights publishes an annual Global 100 ranking of the most sustainable companies.
    • The CDP (formerly known as the Carbon Disclosure Project) scores the sustainability of companies, cities and governments, and publishes its A-List.
    • MCSI provides a search tool that lets you explore their ESG assessments and the key ESG issues of over 2,800 companies.
    • Corporate Sustainability Index, from S&P Global, is an annual evaluation of companies’ sustainability practices.

What is a good ESG score?

Some ESG rating providers use number-based scores while other providers use letter grades. This makes it difficult to definitively determine what ESG rating or score is good or bad. However, all companies’ ESG ratings are scored along with their industry or peer group, so you can tell which companies in that group are doing better on their ESG commitments than the average.

For instance, according to MSCI, one of the most well-known ESG rating systems, a company with an ESG rating of AA or AAA is a leader in managing ESG risks, while a BB, BBB or A rating would be an average score. Any rating lower than that puts the company in the laggard category, meaning it has greater exposure to ESG risks. If you’re trying to raise the ESG ratings of your investments, you may want to focus on companies with higher ESG scores, or on those companies that have shown greater ESG rating improvement.

Do ESG investments outperform?

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. 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.

What is shareholder engagement?

If a review of the companies you’re already invested in turns up ESG concerns, what can you do? As an owner of a company’s shares, you can engage with that company to encourage more transparency and try to influence it to do better on its ESG performance. You can use your “proxy votes” to engage with a company on its practices. You can review a company’s management proxy circulars and vote on shareholder resolutions. These are proposals submitted by shareholders on a variety of issues that are voted on at a company’s annual meeting. Voting topics could include board member elections, pay packages or company mergers.

What’s the easiest way to incorporate ESG in my portfolio?

The simplest way to incorporate responsible investing is by adding a mutual fund or ETF that is constructed and managed using an RI or ESG lens. That way, it’s the fund manager who invests, monitors the ESG factors of all the underlying holdings, and does any proxy voting for you. Qtrade gives you a number of ways to easily add an ESG-oriented product to your portfolio:

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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. Information, figures, and charts are summarized for illustrative purposes only and are subject to change without notice. All investments are subject to risk, including the possible loss of principal.