7 Key Questions on Responsible Investing

If you think about the consumer marketplace over the last decade or so, there have been increasing trends towards more green or environmentally conscious products, sustainable practices and companies with social impact values. In large part, these trends are closely connected to a growing focus on environmental and social issues around the world, from climate change and pollution to human rights and equality.

Within the investment industry, there’s also been increasing focus on these same issues and the potential impacts on the investment landscape, which has led to the rise of responsible investment, in all of its forms, at the institutional investor level and now more consciously among some individual investors as well.

Broadly, responsible investment (RI) is an umbrella term for a broad range of approaches that can be used to incorporate environmental, social and governance (known as ESG) factors into the overall investment process, including both the selection and management of investments.

Responsible investing umbrella

In investing, not everything that counts can be counted. With ESG integration, investors consider more than traditional financial measures. They consider the intangibles of a company’s environmental, social and governance (ESG) practices. This approach has the potential to add value by enhancing long-term performance for investors.

ESG chart in page

Socially responsible investing is also known as values-based or ethical investing. Investors are looking to make a positive change by aligning their personal values with their investment choices. This involves both negative and positive screening of companies, industries or sectors to make a financial influence that match their values.

This is often referred to as investing in line with your values. Investors screen companies in or out of a portfolio based on set criteria. Today, more than US$19 trillion in assets around the world include SRI strategies — more than 30 per cent since 2016.2

ESG factors in page on positive screening, sustainability, exclusionary screening

Negative and Positive Screening examples in page

Impact investing focuses on investing in companies and projects that seek to generate a measurable positive social or environmental impact — alongside a financial return. For example, an investor seeking returns could invest their capital in a project that assists underserved communities through support for low- and moderate-income home buyers, affordable rental housing units, small business administration loans and economic development.

Impact investing is not charity. It is an investment where an investor is hoping first and foremost to generate social or environmental impact. An impact investor also wants to earn a return on their investment. However, they may be willing to take a capital loss as long as some tangible result for the investment can be seen. In that way, it is essential to be able to measure the impact of this investment. An example includes investment in low-income housing loan assistance, where a tangible impact is measurable (i.e., number of households able to afford housing) and the investor is likely to get his or her money back.

impact investing chart in page explaining the financial risk

A growing number of investors today want their money to do more than just multiply; they want to invest in companies they believe are helping to make the world a better place.

Every portfolio has environmental and social risk. Investors who are increasingly concerned with what risks may be present in their investment portfolios should consider responsible investing.

RBC Wealth Management supports the merits of responsible investing. RBC is committed to community involvement, diversity and inclusion, and environmental responsibility to help the world become a better place—for both current and future generations. To help make good on our commitment to have a positive social and environment impact, we have pathways for you to invest capital in a more responsible manner.

While some investment fads come and go, the trends driving the need for sustainable business practices are here for the long-term. Embracing investments in these forthcoming trends is a way of readying your portfolio for the coming changes in the global economy. Obvious long-term themes include the move away from fossil fuels to renewable energy. But there's also an increased use of artificial intelligence and new technology to help care for an aging population and keep the environment clean.

Responsible investing assets have skyrocketed to $12 trillion as of 2018, a 38% increase in two years, according to the US SIF Foundation. This is projected to grow exponentially.

Of all the generations of investors, young people are at the forefront of RI, according to a 2019 report by the Responsible Investment Association.3 This trend might signal a bright future for responsible investment. Millennials’ incomes are rising, and they are poised to inherit US$30 trillion in the decades ahead. As they begin to invest that wealth, they might also fuel the growth of RI.

Clients have previously put off making ESG investments because they believed the performance of their portfolio would suffer. But in truth, the opposite is the case. Portfolio managers that embrace sustainability investment factors have significantly outperformed their peers.

Many major studies reviewed by RBC found a clear correlation between strong sustainability business practices and company performance. Key findings include:

  1. Stock price performance often goes hand in hand with strong governance practices, strong environmental performance and high employee satisfaction.

  2. Companies with high Environmental, Social and Governance (ESG) ratings tend to outperform the market in the medium term (three to five years), as well as in the long term (five to 10 years).

  3. Companies with high ESG ratings have a lower cost of debt and equity.

  4. Strong ESG practices improve operational performance of firms.

  5. Considerations around corporate social responsibility (CSR) in stock market portfolios do not result in financial weakness.

  6. Companies that prioritize sustainability also manage environmental, financial and reputational risks better. This helps smoothen out their cash flows.