Many investment options now available on the market feature a clear set of criteria to align with people’s values, financial goals and tolerance for risk. Among those continuing to rise in popularity are approaches relying on ESG (environmental, social and governance) factors that characterize a company’s commitment to responsible business practices. These are companies with a keen focus on sustainability – a term that captures the underlying philosophy and purpose of ESG.
Not so long ago, sustainable investing was recognized as a necessary but niche alternative to traditional, broad-based investments that were connected to industries some investors considered harmful to society and the environment. Oil, tobacco, gambling and weaponry are examples that immediately come to mind. But the tables have turned. Today, sustainable investing is mainstream, recognizing the fact that more investors are interested in knowing how their money can gain value while supporting helpful, rather than harmful, pursuits. It’s a way to deliver competitive financial results while driving sensible and constructive outcomes for people and the planet.
In a 2021 study, 77 per cent of investors surveyed said they wanted their advisor to inform them of sustainable investment options.
The appeal of sustainable investing, for both individuals and large-scale institutions, is that it offers a way to guide constructive change by supporting companies that act responsibly. It’s also a powerful strategy for generating long-term value along ethical lines. The concept is proving that it can affect corporate practices and generate investor interest and support on a global scale.
The range of ESG-integrated strategies and products available for investors to choose from continues to grow. Today, the total global market value of these types of investments has reached $3 trillion. Even during times of market upheaval and lower investment purchasing activity, many investors believe in the future of sustainability and are confident in its long-term financial performance. Recent evidence suggests companies that maintain a solid ESG record typically enjoy better financial performance than those with a worse record.
Companies that improve and maintain their ESG performance are generally considered to have more sustainable business models. This is because such companies devote considerable effort to aligning their operations with goals that can include reducing their carbon footprint, improving equitable access to essential services and improving governance and oversight of their management structure. The broad classifications “environmental, social and governance" embrace specific issues that can be targeted and monitored for improvement to drive measurable positive outcomes, as listed below.
For illustrative purposes only.
Although companies can incur higher costs by actively managing and reporting on ESG issues, they can also benefit from reduced risk, realizing new revenue opportunities and increased efficiencies, improved governance and management practices, a positive reputation, and enhanced relationships and communication with key stakeholders, including their employees, customers, investors and business partners.
Considering ESG factors within a sustainable investing framework provides a new platform of information that investors can use to their advantage. It can help them assess the strength and resilience of a company’s business model against potential ESG shocks, such as labour disputes or industrial accidents, as well as systemic risks, including climate change and data security, which may not be captured by traditional financial risk assessments.
Since sustainable investing has gained such extensive appreciation, it’s easier than ever to find and invest in a range of asset classes and products that align with ESG goals. But there’s another area where investors can influence business practices and culture to help minimize risk and maximize long-term value: stewardship.
While sustainable investing incorporates a combination of ESG factors in decision-making, investment stewardship influences the policies, practices and, most importantly, financial and sustainability outcomes of a company. As stewards, investors can actively engage and promote a company’s overall integration of sustainability. They can also vote to approve or disapprove management and shareholder proposals and resolutions on a variety of matters. In the last several years, for example, shareholder votes on environmental and social resolutions have become commonplace at annual general meetings. Stewardship and ESG integration are complementary strategies that draw from one another to enhance decision-making and long-term investment value.
Governments, businesses and people everywhere recognize the multi-tiered value that sustainable investing can offer. There’s also an awareness that investing must continue to evolve to successfully address the systemic issues that loom over the future of the planet and its people. Yet the options and opportunities to invest in creating a better future for yourself and the world at large are already within your grasp. Speaking with your advisor is a good way to learn more about how sustainable investing can help you achieve your financial goals in alignment with your personal values and beliefs.
While most sustainable investment strategies focus primarily on financial growth, impact investing looks beyond bottom-line results by seeking to produce a positive, measurable impact on social or environmental outcomes. For example, impact investing can be channelled to fund improved access to education, renewable energy, clean water, affordable health care and housing, gender diversity or microfinancing for small businesses.
There are two types of impact investing. Market rate investments are directed towards social and environmental impact and deliver a market rate of return. Concessionary rate investments deliver returns below market rate and attract philanthropic investors who are less concerned with the financial returns of the investment and place greater value on the social or environmental outcomes.
ESG thematic funds focus on specific themes that fit into one or more of the environmental, social or governance buckets. For example, a fund might focus on investing in companies with best-in-class environmental performance. The ESG theme is the primary criterion for security selection, along with traditional financial performance – and the theme must be clearly documented and measurable at the overall strategy level. ESG thematic funds typically exclude securities issued by companies or governments that collect revenue through the sale or production of prohibited materials, or that operate in controversial sectors or industries.