Responsible Investing is a new and increasingly popular trend that has emerged in the past few years. I have had a number of clients who have asked me if their investments with us are responsibly invested and so I believe it’s important to define exactly what it is.
Retrieved from https://www.rbcgam.com/en/ca/about-us/responsible-investment/what-is-responsible-investment
Responsible investing is an umbrella term for three main investment approaches: Socially Responsible Investing (SRI); Environmental, Social and Governance Integration (ESG); and Impact Investing. You are probably most familiar with SRI as it is also known as values-based or ethical investing. Basically, you are voting with your dollars by aligning your personal values with your investment choices. For example, you may not want to invest in companies associated with tobacco products, weapons, alcohol or gambling, to name a few. Because SRI is personal, there is no “one size fits all” investment approach and we need to work with each client to ensure their needs are met.
ESG is definitely becoming more mainstream as it provides investors with another way to evaluate companies, in addition to the traditional way of analyzing their financial statements. ESG integration allows for a deeper understanding of companies based on their Environment, Social and Governance practices:
Retrieved from https://www.rbcgam.com/documents/en/articles/what-esg-is-and-isnt.pdf
Research indicates that companies with strong ESG related practices have lower risks, lower costs of capital, better operational performance, and generally better share price performance over the long term . So ESG integration can help you choose companies, however, unlike SRI, ESG is not about excluding companies. In fact, investment in companies with high ESG risks and/or poor ESG practices may help company management better identify and understand these risks and help those companies improve their ESG-related policies, thereby increasing their value.
Finally, Impact Investing ensures that, for the investor, the social or environmental impact of an investment is prioritized over investment return. An impact investor also wants to earn a return but they may be willing to take a capital loss as long as some tangible result for the investment can be seen. An example of impact investment is low-income housing loan assistance, where a tangible impact is measurable (i.e., the number of households able to afford housing) and the investor is likely to get their money back.
1. Does socially responsible investing hurt investment returns? RBC Global Asset Management. July 2019.