You may have heard about ESG Investing. The acronym applies to investment strategies that take environmental, social, and governance factors into account, and these days serves as a stand-in for all strategies marketed as sustainable investments. Sustainable investments are about using your money to build a more economically, socially, and environmentally sustainable world. These investments direct capital to companies that seek to combat negative environmental and social impacts while promoting corporate responsibility.
According to the 2022 Canadian Responsible Investment Trends Report, published by the Responsible Investment Association, responsible investments under management in Canada remain steady at $3 trillion, with ESG integration continuing to be the most prevalent responsible investment approach at 94%. Canadian responsible investments now account for over 60% of total Canadian assets under management.
So, what are ESG investments exactly?
ESG investments are investment products that promote sustainability. Funds are invested in companies that have been screened to either exclude certain undesirable factors, or to include more desirable factors. Environmental factors that may be considered include greenhouse gas emissions, climate change mitigation and adaptation, energy efficiency, and pollution. The most commonly considered social factors include human rights, labour practices, health and safety, and data protection and privacy. Governance factors that are considered are board diversity and inclusion, executive pay, and shareholder rights, among others.
What kinds of ESG investments are there?
- Socially Responsible Funds
Socially responsible investing (SRI) is often more about what the fund doesn’t own, than what it does. SRIs tend to be driven by a set of values, and screen out controversial industries such as tobacco, alcohol, or cannabis products.
- ESG Funds
ESG funds typically seek to invest in companies that score highly on environmental, social, and governance criteria.
- Impact Funds
Impact funds seek to create tangible progress toward sustainable goals, such as climate action, resource scarcity, and human development.
How do you decide which type of sustainable investment is for you?
Begin by deciding what your investment goal is. Of course, you are looking to grow your portfolio, and if you are also looking to align that portfolio with your values, an ESG fund might be best. If you want to ensure that you are not investing in particular industries, then an SRI fund should be considered. If you want to make a difference with your investments, perhaps you should look at impact funds.
Additionally, since the guidelines for ESG reporting are still a work in progress, the Morningstar Sustainability Rating helps investors better understand and manage the total ESG risk in their investments. Morningstar conducts investment research in 29 countries – including Canada. The risk is measured in globes, with the best funds receiving five globes.
Similarly, there’s the new Responsible Investment Identification Framework, published by the Canadian Investment Funds Standards Committee (CIFSC). The spreadsheet lists hundreds of investment funds, and identifies which responsible investing methods they align with.
Always remember that before choosing an investment on its sustainability criteria, you still need to make sure it’s a good fund that fits with your investment goals. Speak with a member of Kindred’s Wealth and Investment Team to see how Kindred’s socially-responsible investments might best complement your investment portfolio.