If social media feeds are anything to go by, ethical consumption, once considered a fringe idea years ago, is now very much mainstream. Many of us lead lives where reducing waste, giving to charity, and acting with kindness is part of our routine. Our buying habits have followed suit, where daily purchase decisions are often guided by how a company aligns with our values – socially, ethically or philosophically.
A good product with a low-price is no longer enough to win over buyers. Instead shoppers seek out products and brands that align with their personal values. These choices are made every day when you buy ethically tested cosmetics, change your soap for a greener brand, purchase organic foods, or choose to drive an electric vehicle.
If you’re using your purchasing power to do good, you can also be using your investing power to make a difference too. You can do this through responsible investing.
Responsible investing (RI) — occasionally known as ethical investing or sustainable investing — is an increasingly popular way to approach investing. But what does it mean? What are the benefits? How does it work? And more importantly, how do you know you're investing in organizations that share your values?
Responsible investing is an approach that aims to incorporate environmental, social and governance (ESG) factors into your investment portfolio. These portfolios include stocks and bonds with brands that value sustainability, human rights, good working conditions, employee diversity and more. In other words, it’s a type of investing that allows investors to make money while also making a difference.
Approaches to responsible investing can vary, but often include positive and negative screening. Negative screening helps rule out investments in companies in controversial industries, such as tobacco, firearms, alcohol or gambling. Positive screening, on the other hand, helps include companies within a portfolio which have policies and practices relating to ESG factors within their businesses.
This goes back to ESG, or environmental, social and governmental factors. These are the three primary factors that help qualify a company as responsible, or not. It is also the way companies are singled out in positive or negative screening and benchmarked during evaluation.
Additionally, the fund manager is an investor and participates in discussions with companies on important issues while providing feedback and constructive criticism to enhance ESG ratings. If more action is needed, fund management firms can file a shareholder resolution to be voted on at the company's annual general meeting. They can also use proxy voting to engage in voting on your behalf.
Fund management firms are continuously looking at industry trends, potential risks and media attention to offer valuable insight into shareholder views and ethical actions of a company. Keenly observed are reputational risks as a corporation’s reputation can have a direct impact on its share price, such as the crash of Boeing’s new 737 airplane in 2019. Ultimately, if a company fails to adhere to the ethical standards that are in place, fund management firms can remove companies from ethical funds investment lists.
Responsible investing can help investors achieve their long-term investment goals while ensuring that their investment portfolio is aligned with their personal values. This can be important for individuals, public figures or business owners where these values are part of their reputation or brand.
It’s also a great investing strategy for long-term investors. In a study conducted by the Responsible Investment Association, 77% of participants agreed that companies with good ESG practices are better long-term investments. Why? Because when companies take stakeholder-centric approaches to value creation, especially by incorporating ESG factors, they can attract better talent, build loyal customer bases and prosper through strong corporate governance oversight. Consumers generally like to support sustainable innovative companies that positively impact the world, and they are more inclined to invest and hold investments with these companies.
This also means that investors are less likely to redeem their investments in RI companies during periods of market ups and downs. Instead, they remain focused on the alignment with their personal philosophies and connected to the companies that hold true to them. So, these investments tend to be much stickier and not experience the investor turnover seen in traditional mutual funds.
While many investors like the idea of supporting businesses with their social, ethical and philosophical values, some still buy in to the misconception that responsible investing might not achieve as much as other portfolios. This is a myth.
Responsible investing portfolios have performed in line or similar with other portfolios. In fact, companies that show higher scores in ESG factors demonstrate higher returns and do so with lower risk. This means investors can generate long-term competitive financial returns whilst making a positive difference.
Responsible investing has also boomed over the past decade, as investors have realized the opportunity for better returns. This is especially true within Canada. According to the Responsible Investment Association, responsible investing accounts for more than 50.6% of total Canadian assets under management, a 37.8% increase from two years before. And, in the global market, the Global Sustainable Investment Review shows that global responsible investment assets have increased by 25% in the past 6 years.
Investors no longer have to pick between their conscience and their pocketbook when choosing how to invest. There are more options now than in the previous two decades when responsible investing first came onto the scene.
Numerous socially responsible exchange-traded funds (ETFs) have popped onto the market, and they continue to do so. Within the last five years, investors have become increasingly interested in ESG issues. And more corporate leaders are being held accountable by shareholders for their social, ethical or philosophical performance.
For both consumers and companies in today’s world, it’s not just about product prices and company revenues - it’s about being a good global citizen.
As an investor you have a say into what goes into your investment portfolio. Speak with an advisor about any investments that might raise red flags with your personal values or find out how you can incorporate your values into your investment portfolio.
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