Written by: Kaleido
You might have heard of sustainable or responsible investing, green investments or even ESG factors (Environmental, Social and Governance).
At Kaleido, we chose to go down the sustainable investment route and, although this concept is gaining all sectors of the economy across the globe, most people still have a hard time navigating it.
What about this shift toward sustainable investing? Is it just a fleeting trend? Do these investment practices yield real positive impacts?
This trend might seem recent but has in fact been in motion for over 30 years. In the 80s, there were already timid talks of “socially responsible” investing, but it’s in the late 90s that the growing offer of mutual funds boosted the popularity of portfolios with “ethical” and “ecological” objectives.
At the time, investors had a fairly small range of possibilities, often having to compromise in terms of returns. But, thankfully, times have changed! There are now tons of options for savvy investors, thanks to the implementation of international norms and associations dedicated to the development of responsible investing.
People often mention these ESG criteria—Environmental, Social and Corporate Governance— but never really explain what they are. Here’s an overview.
Environmental criteria are the most well known. Whether via your RESP, TFSA or RRSP, you want your money to be invested in businesses or projects that have a positive impact on the environment. There’s a slew of examples: projects for reducing greenhouse gases or water pollution, innovative recycling technologies, companies working on biodiversity preservation. In addition to prioritizing certain sectors, ESG investors also want to reduce or cease their participation in industries that are a threat to the environment, like coal.
Social factors refer to people and communities. Fair treatment of workers, gender equality, and especially child labour are notorious issues. The relationships a company maintains with its clients, providers and community are also important when a portfolio manager chooses to invest thousands, if not millions of dollars in it.
Investors and fund managers who are sensitive to ESG factors also favour projects that improve access to education and avoid industries like weapons and tobacco because of their negative impacts on society.
Lastly, governance criteria aren’t as abstract as they may seem: they refer to how a company is managed and administered. For instance, norms factoring in the treatment of employees, management transparency and honesty as well as healthy relationships with the board of directors.
Nowadays, although adhering to the ESG criteria is mostly done on a voluntary basis, more and more organizations and associations implement mechanisms to monitor, measure and promote the best practices in sustainable investing.
As a result, actors of the financial world, from major institutional investors and pension funds to financial planners and “side-hustle” brokers, are becoming more sensitive to sustainable investing, and actively participate in it! When purchasing bonds, shares, exchange-traded funds or mutual funds, they’re increasingly preoccupied with contributing to the well-being of populations. This represents colossal sums.
The Responsible Investment Association (RIA), of which Kaleido is an associate member, currently has over 450 members whose assets under management amount to more than $2,100 billion! This shows the influence they can exert, together, to better take up our world’s important social and environmental challenges.
Pretty well! According to the RIA, investors seem to have realized that portfolio management taking into account ESG factors yields better risk-adjusted returns over the long-term. In other words, projects and companies that take part in the improvement of society and the environment seem to have better potential on the long-term and would be better equipped to face hard times.
A simulation conducted by the RIA and MSCI shows that $100 invested in 2007 would be worth in 2020 around 25% more if it had been invested in responsible ESG investments, i.e., over $171 instead of $137.35 in traditional investments. Of course, the past is never a guarantee of the future, but this simulation has highlighted the return potential of responsible investing.
In short, whether investors want to improve their risk-return ratio or contribute to making positive changes in the financial world with practices that are more respectful of the environment and people, all roads lead to responsible investing!