Socially Responsible Investing or SRI has been growing in popularity in recent years and it’s easy to see why. You get to invest your money, build wealth, and do good by aligning your investments with your personal values. But what exactly is Socially Responsible Investing and how can you be sure that you’re investing in an ethical way?
Socially Responsible Investing is any investment strategy that considers both financial return and social good to bring about a social change. We all know about financial return but you’re probably thinking, ‘what is a social good?’ That varies depending on each person’s own values, but is most commonly categorized in the investment industry by Environmental, Social and Governance or ESG.
Environmental factors consider companies’ impact on air quality, land, water and human health.
Social factors consider companies’ human rights records and support for the communities in which they operate, and finally Governance factors consider executive compensation practices, board diversity and corporate risk management.
So let’s look at the numbers. As I said, SRI is growing in popularity and a lot of growth is being driven by Millennial investors, who are more likely than Baby Boomers to consider ESG factors when investing. They look for companies dedicated to solving environmental and social challenges.
According to the Responsible Investment Association’s 2016 trend report, there is approximately $1.5 trillion dollars in assets that are part of a responsible investing strategy in Canada. The report also says that responsible investing represents 38 per cent of the Canadian investment industry and I expect that to increase, particularly since the Ontario Pension Benefits Act now requires pension plans to have a statement on Socially Responsible Investing as part of their Investment Policies. So how can you implement a socially responsible portfolio for your investments? Well, there are a few ways to approach this.
The first is what’s known as negative screening. That’s where you exclude companies and industries involved in practices and behaviours that go against your values. Some may avoid investing in tobacco, alcohol or cannabis products while others may avoid investing in companies that are considered environmentally and socially unfriendly. For instance, the recent movement in the US around gun control, or the lack thereof, has many investors asking about the exposure to gun manufacturers in their portfolio, and how to eliminate that exposure.
Another approach takes ESG ratings into consideration. Several indexes screen and rank companies on their ESG practices. This determines the weight of each company in the index as a function of the company’s ranking.
Now there isn’t one overall ESG report that scores all public companies, but there are multiple indexes provided by third-party providers. As you would expect, the methodologies can differ so the best way to find investments that work for you is to work with an advisor you trust. I like to use ETFs based on the MSCI ESG rating system, for which I’ll provide a link below.
The growing popularity of indexes like these sends a message to public companies that if they want to raise funds in public markets, good ESG behaviour will make it easier for them to attract more investor dollars.
The last way to express your views that I’ll discuss, is by Impact Investing, where returns aren’t the main goal. Instead you invest in projects that might earn below market financial return, but that complement your Environmental or Social objectives. Financing clean water projects, or lending funds to micro-financing small businesses in poor African countries are good examples.
It’s important to understand that socially responsible or ESG investing won’t necessarily mean higher returns on your portfolio. I’m not aware of any conclusive academic research that says as much. If you know of any, please let me know! That said, if it’s important to you to express your views and values through your investments, you may be willing to give up a little on the financial return in exchange for a clear conscience and the knowledge that you’re doing good for the planet and for others.
As always, I’ll put some links below if you want to read more about SRI, ESG and Impact Investing. Leave a comment below if you have any questions about this episode or want to get in touch with me.