Responsible investing is a hot topic. Most Canadians care about sustainability or environmental, social and corporate governance (ESG) factors when considering investment purchases. Almost two thirds say ESG factors play an important role in helping them decide on investment strategies and what to purchase, according to a recent study conducted by Ipsos.
At the same time, a proliferation of mutual funds and other ESG-related investment products appearing on the market tout benefits that may be harder to gauge.
They carry names that cite sustainability, ethics, climate solutions, low CO2, and other causes that appeal to socially conscious Canadians and DIY investors. Canadian securities regulators have begun to demand consistency between a fund’s name and its investment objectives but it's important to consider what's really inside the box. Is it a good fit for both your values and your financial goals?
Sustainable investing is... well, what is it, exactly?
Just as you shop for anything else, it's good to understand what goes into any product you choose, including your investments.
Sustainable investing, ESG, and responsible investing are broad terms that may cover many strategies. Common approaches include:
Negative screening. Some portfolios aim to exclude stocks or sectors. For example, they may choose not to support specific industries, such as fossil fuels, or not to invest in companies that have been found to violate human rights.
Best in class. Others seek companies that lead peers in business practices supportive of the environment, human rights, diversity or other concerns.
Thematic investing. This may seek or single out sectors, industries or companies that may potentially benefit from ESG-related trends.
Stewardship. The rights of ownership as a shareholder may be used to influence behaviour of companies in ESG matters.
ESG integration. ESG factors are considered in the risk and return analysis of investments, alongside traditional financials.
Canadian regulators recently released guidance for better disclosure for ESG-related funds to more consistently explain their objectives and investment strategies.
The aim is to hold fund managers accountable for how they market their mutual funds and protect investors from “greenwashing” or misleading claims in marketing materials.
Look beyond marketing slogans for a better view of the process
One way to gain a clearer picture as an investor is to think in terms of ESG analysis rather than ESG investing, suggests a CFA Institute report on ESG integration in Canada's investment industry.
ESG investing is often used as a marketing slogan, it says, whereas ESG analysis is a fundamental part of investment decision making, in a well-defined process.
At Sun Life Global Investment we regard ESG and sustainability factors as increasingly important to build investment strategies that last.
As forces driving ESG issues converge, valuations will increasingly be affected. This applies to all investments, corporations and governments alike. This concept is brought to life, in general terms, via ESG integration, or embedding ESG issues across all aspects of investment decisions.
“To me, ESG is simply a part of every investment decision,” says Jenifer Rush, Head of Responsible Investing and Manager Research, Sun Life Global Investments.
“My role is to learn how the external managers we hire to sub-advise certain of our mandates integrate each of the E, S and G factors in their process,” says Rush.
Each sub-advisor must clearly show us how ESG considerations factor into their decision-making in choosing companies to invest in.
Drawing from more than 20 years industry experience as an analyst, portfolio manager and leader of global manager research, Rush says the use of ESG metrics has gone mainstream, but it needs to measure far more than just a desire to "do good."
These environmental, social and governance considerations really matter in considering the value of a company, she says. It allows for a more complete analysis of a company’s future potential prospects and viability.
“ESG considerations help our managers gain a better understanding of a company’s ability to mitigate risks or navigate new opportunities in light of social trends, climate change, biodiversity and other local and global concerns.”
Can my investments “do well” by doing good?
Is it possible to invest in line with personal values and beliefs, without sacrificing potential return?
It's a fair question, says Rush, who cites some early research that documents reduced portfolio risk and competitive investment returns for portfolios that have integrated ESG factors with their financial analysis.
Environmental, social and governance (ESG) factors may impact an entity’s financial performance, so ESG analysis is an important component of security selection.
“There are studies that show how companies with better ESG practices have outperformed those with poor ESG practices over the long term. But a bigger question might be, can we really afford to think only in those terms?” asks Rush.
“When applied suitably, there's no reason for ESG considerations to sacrifice returns. The cost of inaction to address society's challenges may be far greater in the long term, to all of us."
Dig deeper than face value
One challenge for investors who want to “be the change” is how to evaluate our managers and their ESG practices. We have the ability to see across all our managers and understand the different approaches and different stages each of our managers is at.
The approach Sun Life Global Investment takes is to keep a view across all our external managers to understand their different approaches, the stage they are at, and how they integrate ESG factors into the companies they are investing in.
As an investment fund manager, SLGI Asset Management Inc. became a signatory to the United Nations (UN) supported Principles for Responsible Investment (PRI) in October 2021, the world's leading proponent of responsible investing.
We've been affiliated with PRI since December 2014, when parent company Sun Life Financial, was the first major Canadian insurance company to sign on.
SLGI Asset Management Inc. also joined the Net Zero Asset Managers initiative in November 2021, an international group of asset managers supporting the goal of net-zero greenhouse gas emissions by 2050 or sooner.
“These bring extra responsibility to us as an investment fund manager, and we embrace that,” says Rush.
"We do not take any ESG related claims at face value: We test them. We ask lots of questions and hold managers to high standards.
“This is one way investors may benefit from having someone like us working on their behalf,” says Rush.
It has become much more important for advisors to know and understand an investor's investment objectives relating to environmental, social and governance criteria and other personal beliefs.
As a financial advisor, you can guide your clients to investments that align both with their values, investment goals and risk tolerance. Learn more about our approach and reasons to consider sustainable investing.
This article, published by SLGI Asset Management Inc., contains information in summary form. This article is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Information contained in this article has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy.