Investors like the idea of putting their money to work with companies that have good environmental, social and governance (ESG) practices, but fear of not doing it just right prevents them from taking the first step.
Our advice? Don’t let perfect get in the way of good enough!
Where to start
In many cases, responsible investing is about aligning your individual values with your investments. Those values vary investor to investor.
Working with your financial advisor, you can dig into those values—whether it’s addressing climate change, closing the racial wealth gap by investing in BIPOC communities, or funding companies that exhibit good governance—and make targeted investments into companies that exhibit those same values or in funds that score companies based on those principles.
Even though there are ready-made funds to choose from, investors are wise to ask tough questions about the makeup of those funds.
One question we often hear from clients is “How do I know that the fund I own is truly integrating ESG into its decision-making process?”
In the third quarter of 2021, Morningstar reported that 270 new sustainable funds launched globally. During that same time period, asset managers also repurposed 346 funds to claim sustainability. That means there were 578 new “sustainable” funds in the third quarter alone.
We at RBC Wealth Management do think that there has been an increase in greenwashing over the past few years because the Morningstar report shows a significant increase in new products, while funds on the select list have not increased at the same rate. However, the notion that all portfolios claiming ESG integration are greenwashing is overly pessimistic and simply not true.
Our firm spends a lot of time vetting ESG solutions in every market around the globe and we continue to add new solutions that we deem true to ESG. Earlier this year, our manager due diligence team launched their ESG “Spectrum” ratings that classify asset managers as ESG or not. This process has allowed us to segment managers we believe are genuinely considering ESG factors and then make those managers available to our clients.
Investors who work with wealth managers with these kinds of resources can more easily sift through the noise.
There are also times when a single investor values things that create friction in their ESG portfolio. For example, an investor values both reducing fossil fuel emissions and social equity. They may want to invest in renewable energy technologies that promise to move society away from fossil fuels. However, the technology that is required to create fossil fuel-free power is expensive and therefore less available and less feasible in socio-economically disadvantaged areas of the world.
Depending on the views of the investor, a responsible investing portfolio may require some give and take. Utilizing ESG integration is an excellent way to have a diversified portfolio that can look at the vital ESG factors for each company owned in the portfolio.
Engagement can drive change
Yes, there are hurdles, such as avoiding greenwashing and confirming the vehicles you are investing in truly represent your vision and get a solid return on your investment. Investors need to review the actions of their asset managers to make sure their actions reflect the values they hope to integrate.
But also consider we are still in the early innings of ESG integration. Even with the considerable growth in assets lately, ESG assets are still small relative to the broader investable market.
Just because ESG investing may not be perfect doesn’t mean it isn’t worth starting your journey toward more sustainable investments.