by Salman Ahmed
As we mentioned in a previous blog, we’re embracing responsible investing as part of Sustainable Steadyhand.
Responsible investing is a bit of a catchall term. Any investment strategy that considers environmental, social and governance (ESG) issues in any way is considered a responsible investing strategy. Of course, the approach to assessing those issues can vary greatly from one investment manager to another. In general, however, the differing methods are grouped into three buckets.*
ESG integration is the most widely used approach to responsible investing and all Steadyhand funds follow ESG integration.
It involves focusing on those ESG issues that can have an impact on the financial performance of a company. Not all ESG issues will be relevant to a business. For example, a bank’s finances can be impacted more by a data security breach than how it disposes of waste. The opposite is true for a restaurant.
As I’ll explain further in an upcoming blog, managers following integration can invest in any company, regardless of what industry it operates in. It is up to the manager to decide if the return potential more than compensates for all risks inherent in the company – including the opportunities and threats stemming from ESG. No company is off-limits under integration.
SRI, short for socially responsible investing, has evolved over the years. Today it refers to strategies that start the investment process by limiting their investment universe based on predetermined criteria. For example, some SRI funds exclude companies involved in extracting fossil fuels. Others limit holdings to those companies with female and minority representation on corporate boards.
Impact funds invest only in those businesses that are trying to solve tomorrow’s problems. These strategies often use the UN Sustainable Development Goals as a framework for the types of issues they focus on. Most impact funds invest in private businesses and tend to be out of reach for the average Canadian. But there are a growing number of impact funds that invest in public companies.
Some funds might offer a combination. For example, an SRI fund that excludes arms manufacturers may also follow ESG-integration for those companies it does invest in.
The approach you select for your portfolio will be a personal choice because the distinctions result in a vastly different investor experience. Investors that prioritize returns, but want to make sure investment managers are assessing ESG issues will gravitate toward ESG integration. SRI funds tend to be best suited for investors wanting to limit their portfolio to certain areas because of strong personal beliefs. Those that only want to invest their money toward addressing global ESG issues might look at impact funds, if they have the means. Ultimately, deciding which approach to follow isn’t always easy and that’s why we’re here to help. Even if we don’t offer exactly what you’re looking for, our Investor Specialists can guide you toward which one of the three approaches (or combination) might be best suited for you.
*We invited responsible investing expert Judy Cotte to speak at a virtual townhall in October 2020 (view the recording here) to help explain these concepts to our clients.
We're not a bank.
Which means we don't have to communicate like one (phew!). Sign up for our blog to get the straight goods on investing.