Contrary to what some of you may be thinking right now, responsible investing (RI) is not choosing to put money into your TFSA instead of buying a new sweater. Responsible investing refers to the incorporation of environmental, social and governance factors (ESG) into the selection and management of investments. It’s an added layer to the selection process that certain individuals/companies use when deciding which companies to give their investment money to. It’s currently one of the world’s fastest growing investment categories and for good reason. It adds an extra layer of risk protection to investments as it is a forward-focused way to invest.
RI STRATEGIES
Different financial institutions use different strategies to engage in responsible investing but here are some of the examples.
- Shareholder Engagement
This is using the power of owing part of the company in an effort to influence corporate behaviour. - Thematic Investing
This is investing in forward-thinking themes such as women in leadership, alternative energy. - ESG Integration
This is explicitly embedding environmental, social and governance factors with traditional financial metrics to determine a company’s long-term value. - Negative Screening
This is excluding certain industries or companies from a portfolio based on moral or ethical reasons. Many RI investments exclude weapons manufacturers and tobacco companies. - Positive Screening
This is the inclusion of certain companies based on positive ESG performance compared to their peers. This is often used with negative screening to include the “good” companies and exclude the “bad” companies. - Impact Investing
This is investing in a company with the intention of generating social and/or environmental impact in addition to generating a financial return for the investors. Some examples of this are healthcare, education affordable housing, renewable energy.
Make Money While Making the World a Better Place
Responsible Investing can lead to better long-term performance for a few reasons. The first reason is that it reduces risk as when a financial institution investigates a companies environmental, social and governance factors, it can uncover risks that would not be found with only a traditional financial analysis. The second reason is that the thought process of younger generations is changing. They are starting to realize the importance of supporting companies that care about the long-term health of our world. Adding ESG factors into choosing investments takes these thoughts into effect and these are the types of companies that are more likely to continue to grow into the future.
Responsible Investment Association
The Responsible Investment Association (RIA) is Canada’s industry association for responsible investment. This organization has been around since 1990 in one shape or another. Their mandate is to increase the awareness and demand for responsible investments.
Recently, I completed RIA’s course and became a Responsible Investment Specialist. The reasons I did this are I love learning and, more importantly, because I believe that responsible investing is an integral and growing part of the future of investment. I am taking steps to make my practice and my life more conscious of the impact it has on those around us and of the future.
