Investors are becoming increasingly aware of what environmental and social risks may be present in their investment portfolios. Many individuals are choosing responsible investing because of its unique ability to combine the goals of financial success and social impact.
Responsible investing is an umbrella term that encompasses a broad range of investing approaches, including socially responsible investing (SRI); environmental, social, and governance investing (ESG); and impact investing.
Growing awareness about environmental concerns and socioeconomic inequalities have fueled popularity in responsible investing approaches amongst investors. More and more studies are showing you don’t have to sacrifice performance when aligning your personal values with your investment choices.
Socially Responsible Investing (SRI)
Also referred to as values-based or ethical investing, SRI strategies use both negative and positive screening of companies, industries or sectors that align with the investor’s values. A negative screen is used to remove sectors or companies that do not meet one’s responsibility standards. Common exclusions include companies that produce alcohol, tobacco, weapons or fossil fuels. Using a positive screen, an investor may choose to initiate exposure in sectors that align with their values, such a renewable energy.
Environment, Social, & Governance (ESG) Investing
ESG investors are seeking companies with leading environment, social and governance metrics compared to their peers. Such metrics could include climate change, pollution and waste management, community relations, corporate philanthropy, and board accountability. The goal is to improve performance while limiting exposure to companies that don’t meet ESG standards. ESG approaches do not employ negative screens as SRI approaches do.
Impact investing strategies seek to generate a measureable, positive social, or environmental impact and are often done in private markets. Financial returns on this type of investment are often considered secondary to the primary goal of tangible impact. In this regard, it is important to be able to measure the impact of this investment. Examples might include investments in low-income housing loan assistance or micro-loan initiatives to women-owned small businesses. In both of these examples, a tangible impact can be measured (i.e., number of households able to afford housing or number of businesses started).
This article is supplied by Elizabeth de Groot, CFP, FCSI, CIWM, FMA, Vice-President, Investment & Wealth Advisor with RBC Dominion Securities Inc. Member–Canadian Investor Protection Fund. This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy