In speaking with investors, I often encounter those who have been disappointed by past responsible investing experiences. After the initial satisfaction of moving money into a socially responsible fund offered by their bank, they later discover that the fund still contains companies that make them cringe.
For an investor whose primary impact objective is fighting climate change, a fund that excludes Exxon but keeps Suncor might not cut it.
The good news is, the rapidly expanding universe of responsible investment products offers something for everyone. But these investments exist along a spectrum from a little less bad, to a lot more good.
When you start your responsible investment journey, it’s helpful to understand the terminology and acronyms you’ll encounter. Luckily it’s pretty simple if you understand the three major categories that most responsible investments fall into.
Socially Responsible Investing (SRI)
SRI uses a screen to filter certain companies or even entire industries out of a portfolio using a specific set of criteria.
Typically, SRI is used to align a portfolio with a set of values. One common SRI filter removes “sin stocks” -- companies with exposure to tobacco, gambling, alcohol and weapons. Another common filter may remove fossil fuels.
What investors should understand is that an SRI screen may remove an entire industry, in the case of a ‘fossil-free fund,’ or it may simply remove the worst-in-class companies.
What investors should understand is that the screen may remove an entire industry, in the case of a ‘fossil-free fund,’ or it may simply remove the worst-in-class companies, eg. the fossil fuel companies with the worst environmental track records, leaving in the ones that are theoretically “better” or more responsible.
Make sure you look at the companies in the portfolio to make sure the screen used is one that aligns with your own investment objectives and beliefs. These screens can change every few months and are subjective.
Environmental Social, & Governance Investing (ESG)
ESG investing is one step further along the spectrum. By considering environmental, social and governance factors, portfolio managers aim to invest only in the companies that meet the highest industry standards. ESG is not about excluding the worst-in-class, it’s about creating a portfolio from the highest rated ESG stocks, or best in class.
ESG is not about excluding the worst-in-class, it’s about creating a portfolio that includes the best.
The rationale behind ESG investing is that companies with good business practices will outperform others over longer periods. MSCI’s most recent study backs this up, demonstrating that companies with higher ESG ratings show higher profitability, higher dividend yields and lower risk.
ESG investing brings another opportunity for positive impact: shareholder engagement. If you invest in shares of a company directly, you have the right to vote at their annual general meeting. If you own shares of a company indirectly through a mutual fund, an active portfolio manager will vote on your behalf and will advocate for improvements that align with the ESG goals of the investment.
Influencing a fossil fuel company to shift its business model toward renewables can be powerful, especially when you consider the size of these companies.
Last but certainly not least, on the “do most good” end of the spectrum we find impact investing.
Often mistaken for philanthropy, impact investments are anything but. To be an impact investment, it must offer real financial returns in addition to positive social and environmental impact.
These clever investment opportunities tackle large social problems and can focus on gender diversity, climate change, sustainable agriculture, aboriginal business, social housing, international development, you name it.
Choice is still limited for the majority of smaller investors, but the industry is growing as individuals catch on to the idea that they can do good and do well and demand options from their financial institutions.
This is where CoPower exists on the spectrum, and it is the best part of my day talking to investors about the tangible emissions reduction impact they can have by investing in clean energy and energy efficiency projects.
When you invest in a clean energy-backed Green Bond like CoPower’s, you’re essentially investing in loans to clean energy projects like solar panels, LED retrofits and geo-exchange heating and cooling projects. Those projects generate steady revenues from the sale of clean energy or energy savings and as clean energy developers repay their loans, that money flows through to investors as interest payments.
This model, supported by the excellent economics of clean energy, allows us to offer an attractive 5% annual return on our 6-year Green Bond while providing catalytic financing to help grow the clean energy industry.
Everyone defines impact differently, and the fact is we need all of it. There’s a place for investors who want to influence oil companies or push for gender equity on the boards of large corporations, just as there is a place for investors who want to focus on building new clean energy projects or helping female-led businesses get off the ground.
How will you take the next step?
1. Talk to your advisor.
Start a conversation with your investment advisor about making investments that align with your values. Equipped with the definitions above, you’ll be able to communicate your goals clearly.
Find an advisor. If you’re looking for an advisor who specializes in responsible investing check out the Responsible Investment Association (RIA)’s advisor directory (for Canada).
If you prefer to manage your own investments you may wish to work with a financial planner. Goodinvesting.ca is a financial planning service that teaches investors how to evaluate, choose and manage investments that align with their values.
2. Do your research.
The RIA also provides a directory of responsible mutual fund and ETF providers that you may wish to explore. Institutions like Desjardins or Vancity for example will also provide extensive information about their own responsible investment products on their websites.
You may be interested to check out the UN Principles of Responsible Investing, a set of six investment principles that major institutions, including 1750 signatories from over 50 countries use to integrate ESG into investment decisions.
To explore impact investment opportunities, OpenImpact.ca is an excellent resource for Canadians. You can indicate your impact goals (eg. fighting climate change, supporting social housing, education), your location and what type of investor you are to be provided with a list of investment options.
Similarly, the SVX.ca (Social Venture Exchange) is an online platform through which you can make impact investments and track performance.
3. Consider your rights as a shareholder.
Share.ca brings together institutional investors to speak with a common voice. While they focus on work with foundations, churches, pension funds and financial institutions, you check out a list of shareholder resolutions they’ve brought forward and how companies have responded and/or implemented positive changes.