Investing according to your values and/or with an eye to sustainability continues to grow in popularity. To help ensure you are selecting the right approach for you and your portfolio, here are some of the most important terms to know.
Investing according to one’s values or moral beliefs has been around for centuries. In the 18th century, the “Quakers” were the first known socially responsible investors with their decision not to invest in businesses involved in the slave trade. More recently, the rise in popularity of Responsible Investing (RI) has been remarkable, with 2021 seeing nearly US$700 billion pouring into RI funds globally – a record and a sharp increase over 2020’s US$542 billion and 2019’s US$285 billion.1 As of 2020, over US$35 trillion was invested in RI, with Canada having the highest proportion of sustainable investment assets globally.2
Green shoots are maturing
The integration of Environmental, Social and Governance (ESG) principles into the investment process in one form or another is growing rapidly. In a 2021 survey of investors (FR) conducted by the Responsible Investment Association, 73% of respondents reported an interest in RI, a significant increase over 2018 when 60% of respondents expressed the same.3
Importantly, RI was of particular significance to younger investors (18-35 years old), with 80% of this group expressing an interest in RI.4 This same age group covers a significant portion of the Millennial generation, a demographic that stands to inherit over US$30 trillion in the decades to come.5
Clearing the smog on RI
But while many investors wish to align their portfolio holdings in such a way as to reflect their concerns over specific or general ESG risks, their ethical or moral views, or because they believe companies that pursue strong ESG policies tend to provide better long-term returns, one of the biggest challenges is ensuring that investors understand the key terminology under the RI “canopy”.
What is Responsible Investing?
RI is an umbrella term encompassing several different approaches used to deliberately incorporate environmental, social and governance (ESG) considerations into an investment portfolio.
What are ESG factors?
What are the top three investment approaches for investors to incorporate ESG?
1. ESG integration
Environmental, social and governance (ESG) integration seeks companies with leading environmental, social and governance metrics compared to their peers to add to their portfolio.
2. Exclusion or screening (positive and negative), thematic and socially responsible investing (SRI)
Based on ESG criteria, investors screen specific companies or sectors in (positive screening) or out (exclusionary screening) of a portfolio. As forms of screening, thematic investing and SRI (also known as values-based or ethical investing) involve investors who are looking to make a positive change by aligning their personal values with their investment choices. This encompasses both negative and positive screening of companies, industries or sectors to make a financial influence that match their values.
3. Impact investing
Here an investor is hoping first and foremost to generate social or environmental impact. And, while an impact investor also wants to earn a return on their investment, they may be willing to take a capital loss as long as some tangible result for the investment can be seen. For example, an investor could invest 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.
No matter how you choose to manage your portfolio, the increasing popularity of doing so based on ESG principles is proving RI is here to stay. With an ever-growing number of investment options available to do so, investing in alignment with your values is easier than ever. Talk to us about how we can help.
| Please note that, like any type of investing, environmental, social and governance (ESG) and responsible investing involves risks, including possible loss of principal. This material has been prepared without regard to the individual financial circumstances, investment objectives, and ESG criteria or other personal preferences of persons who receive it. |
Sources
1Refinitiv Lipper, 2022.
2Global Sustainable Investment Review. Global Sustainable Investment Alliance (2020).
3,4Investor Opinion Survey, Responsible Investment Association (2020).
5The great generational wealth transfer is under way. The Globe and Mail (March 12, 2021).
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