Climate change has been called a risk to the global economy. The disruption to people’s lives and businesses is evident with the recent wildfires sweeping through Canada and the Mediterranean. For some investors, this highlights a need to prioritize environmental stewardship and align their investments with sustainable practices. An increasing number of people are embracing “responsible investing,” a broad concept that integrates environmental, social, and governance (ESG) factors into their investment portfolios. In a recent announcement, the International Sustainability Standards Board (ISSB) published a new global standard for climate-related disclosures. This means that companies must provide standardized and comparable decision-useful data about their abilities to transition to a net-zero world. With this in mind, below are some ways to implement ESG considerations into your investing process.
Firstly...What is ESG Investing?
Environmental: This aspect examines how a company's actions impact the climate and the environment, including issues like greenhouse gas emissions. It also considers energy efficiency, pollution, water, waste management, site rehabilitation, biodiversity, and habitat protection.
Social: The social dimension evaluates various factors such as human rights, community consent, and impact, respect for indigenous peoples, employee relations, working conditions, discrimination, child and forced labor, health and safety, and consumer relations.
Governance: Governance factors revolve around aligning interests between the company and its shareholders. This includes executive compensation, board independence, board composition, board accountability, shareholder rights, transparency and disclosure practices, financial policies, and the protection of private property rights.
Although these factors have been informally considered in an investment process, having a more formal and proactive approach to responsible investing paves the way for longer and more sustainable portfolio performance. A company with strong ESG-related practices has tended to carry lower risk, lower costs of capital, better public perception, and better operational performance. These factors can correspond to stronger share price performance over the long run.
What are different strategies to employ?
ESG Screening and Exclusion
This approach involves applying positive or negative screens to include or exclude assets from the investment universe. ESG exclusions and screening encompass various strategies, such as socially responsible investing (SRI) inclusions and exclusions, norms-based investing (compliance with international standards), best-in-class selection (based on positive ESG performance), and seeking leaders’ strategies (targeting companies poised for long-term sustainability). For example, you could implement a “negative screen” to exclude companies involved with tobacco, alcohol, etc., and/or a positive screen to consider companies involved in renewable energy or other high-impact areas.
Thematic ESG investing
In this strategy, there is a focus on identifying and measuring a specific social or environmental impact or theme. Thematic investing involves purposefully allocating capital to a particular investment theme, such as climate change, gender equity, or sustainability-related categories. The aim is to align investments with specific themes to drive positive change and measure progress toward desired social and environmental outcomes. These can include companies that focus on tackling sustainability issues through clean energy, food technology, etc.
Impact investing
Impact investing aims to support social or environmental causes, seeking measurable outcomes beyond traditional profits. Impact has become a third dimension of performance, apart from traditional risk and return. While they expect a return on their investment, they are also willing to accept capital losses in the interim if tangible results align with the investment's mission. As a result, assessing and measuring the impact of such investments becomes crucial in ensuring they make a positive difference in the world.
Many investors feel that they have the power to drive positive change and shape a more sustainable future. With the implementation of the new ISSB climate and sustainability reporting standards, companies would need to disclose material information about all sustainability-related risks and opportunities to which it is exposed. This improves transparency and greatly improves the ESG data upon which we can make informed investing decisions. Reach out to your advisor for help regarding ESG investing and the options available to you.