How corporations can amplify the 'S' in ESG
CALGARY -- Growing numbers of Canadian investors are putting their money where their hearts are and finding that investing in companies that share their convictions can also deliver respectable returns.
But while options for socially responsible investing (SRI) or investing in companies based on their environmental, social and governance (ESG) ratings are growing, so too are challenges in finding the right investment that also provides growth to meet personal financial goals.
"For an investor, it's a wonderful time to help make the change you want to see in the world with your money," said Rajan Bansi, head of RBC InvestEase, the bank's online investment management service.
He said InvestEase's ESG portfolios have outperformed its standard portfolios by about 100 basis points over the past two years and are expected to do just as well over a five-to-seven-year market cycle.
"When you look at ESG investing, right now more than ever, it's important for Canadians that their investments are reflective of their personal values," agreed Joe Reid, vice-president of wealth management and impact investing for Vancouver City Savings Credit Union (Vancity).
He said Vancity's SRI global equity fund outperformed the MSCI World Index, a global equity performance measure, by more than 20 per cent last year, and its Canadian SRI equity fund beat the TSX composite index by over 10 per cent.
The total value of assets under management in Canadian responsible investment funds jumped to $3.2 trillion in 2019, a gain of 48 per cent over two years, according to a trends report from the Responsible Investment Association published in November.
The report found that such funds represented about 62 per cent of Canada's investment industry, up from 51 per cent two years earlier. It counted no less than seven different categories or types of funds in its survey.
Willis Langford of Langford Financial Inc., a retirement income adviser in Calgary, says he's hearing the buzz but hasn't had many clients ask about switching to responsible investing as yet.
He says when they do, he tends to rely on third-party independent rating agencies to figure out which funds have the best ESG or SRI records -- and still make money.
"You invest to earn money in a responsible way but it still has to do both," he said.
At RBC InvestEase, its ESG fund is made up of investments in companies based on how they score in 37 risk areas, Bansi said.
It won't make any investments in names involved with civilian firearms, conventional weapons, tobacco or "severe controversies," but it rates the rest and invests more heavily in those with higher scores.
"I consider ESG to be a risk management approach," he said, noting that "bad actors" tend to have higher costs of business than responsible companies and are therefore under-represented in the ESG fund.
He said the bank is looking at expanding its offerings to give customers more choices in terms of differing shades of responsible investing.
Vancity, which recently set a goal to achieve net-zero carbon emissions from its entire lending portfolio by 2040, has six no-go industries for its SRI investments: fossil fuels, pornography, gambling, military weapons, nuclear power and tobacco.
It also gets involved in corporate activism by urging the companies it supports to make needed changes, said Reid, adding investors need to beware of "greenwashing," where companies try to disguise or hide their poor habits.
Both Bansi and Reid said it's important to consult financial advisers and tax experts when making extensive changes to your existing investment portfolio.
There are fewer tax implications when transferring investments inside a registered fund like an RRSP or TFSA but selling a non-registered investment can trigger capital gains and losses that can affect your tax bill and should be done carefully, possibly over several years, they said.
In the past, Reid said, responsible investing was thought to be a high-cost, high-risk, low-reward way to manage your financial future.
"The reality is that investing responsibly no longer means that. Nowadays, investing responsibly is just good business."