This blog post is adapted from my French column with the newspaper Les Affaires.

Growing demand from our clients spurred PWL to carry out an in-depth study of a portfolio management approach revolving around environmental, social and governance (ESG) objectives. I pooled my strengths with my colleague Marc Brodeur-Béliveau’s research talent and portfolio manager Peter Guay’s enlightened input, and together we learned a lot about the subject, to be covered in a soon-to-be-published research report.1 Here are some of the highlights.

What is ESG investing?

ESG investing is a specific type of socially responsible investing (SRI). SRI comprises any investment based on criteria aimed at improving society. It goes without saying that these criteria are in addition to financial return. The challenge with SRI is that it can be defined in a number of ways, depending on the individual. For example, my goal may be to save the woodland caribou (an endangered species), whereas my neighbour wants to fight poverty in Montreal. Ultimately, two individuals can have diametrically opposite values. In cases like this, the effects of their investments can tend to cancel each other out. You get the picture.

ESG investing is a way of solving this problem through a set of standardized objectives backed by a certain consensus. An ESG portfolio targets measurable goals — for example, reducing CO2 emissions by companies included in the portfolio, or not investing in companies directly or indirectly linked with child exploitation.

Three ESG investing approaches

ESG investing is a compromise: ESG investors give up a bit of their individuality in order to group together their savings and pursue shared social objectives. The first example that comes to mind is the Desjardins movement, founded over a century ago to provide access to affordable credit for small savers in Quebec. But even within ESG investing, there are approaches with varying degrees of intensity. It’s a bit like beer: there’s light, regular and strong.

The “light” version of ESG involves “passive” management, that is, investing with a management firm that actually votes at shareholder meetings, or at least when it comes to promoting good corporate governance. But ESG investing ends there. At the other end of the spectrum, there’s “active” ESG investing, which proposes more draconian measures, such as impact investing (for example, investing directly in projects with a positive environmental impact, such as a wind farm) and pure and simple exclusion of shares in companies deemed inappropriate.

The middle way, which is the one I prefer, is the integration approach. It is based on work by research firms like MSCI and Sustainalytics, which systematically analyze securities and assign them an ESG rating, a bit like the credit ratings that Moody’s and Standard and Poor’s give to companies and governments. These ESG ratings are used to overweight or underweight companies depending on their environmental, social and governance performance. The rating considers each company’s field of activity, performance compared with its peers and recent progress. For example, the weighting of a company involved in fossil fuels — an extremely high-pollution sector — will probably be reduced less if the company devotes remarkable efforts to reducing its emissions.

Investment results

Our upcoming report discusses the research findings for ESG strategy returns. Research in this area began many years ago, when, paradoxically, certain economists wanted to test whether it would be profitable to invest in companies in controversial industries like cigarettes, alcohol and weapons. Although the preliminary findings of their research were remarkable (investing in “evil” companies turned out to be profitable), they were subsequently contradicted by a number of researchers.

At the end of the day, when you look at the dozens of studies on the subject, it appears that a well-diversified ESG portfolio backed by an integration approach is likely to generate a return similar to that of the market. Our report proposes an exchange-traded fund (ETF) portfolio of globally diversified stocks with returns close to the corresponding total market index (neutral index without an ESG approach).

Social impact

Now it’s time for the killer question. Some of our clients ask us whether ESG investing has a measurable impact on society’s wellbeing. You won’t be surprised to hear that no, we found no research showing that ESG investing is changing the world in a quantifiable way. In its documents, the firm Dimensional Fund Advisors estimates that its “sustainability” fund (available for the past 10 years, only in the United States) has a carbon footprint 65% smaller than a portfolio mirroring the global market index. But that doesn’t prove that ESG investing convinces companies to adopt more responsible behaviours.

If you want my opinion, we have to accept that ESG investing is an act of faith. We have to start somewhere to make society better. Those of us who are old enough will recall how cigarettes were everywhere 30 years ago. Today, even smokers accept without grumbling that tobacco is banned in public places. We’re copycats, so maybe widespread adoption of ESG investing will help fight the greenhouse gas effect, racism, sexism and the other evils that plague our world. A final positive note: If you’re thinking of switching to ESG investing, you’re not alone. Major institutional investors like Quebec’s Caisse de dépôt et placement (CDPQ) and the Canada Pension Plan have hired ESG portfolio management teams.


1 Brodeur-Béliveau, M., and Kerzérho, R. a Guide to ESG Investing – Doing Well by Doing Good. PWL Capital, To be released.