The Case For Responsible Investing
Finance Tips With over $1.5 trillion in assets under management, responsible investing has made a positive impact on investors looking to better their wallets and society.
Many of us like to think we have a moral compass, but when it comes to our money — how can we be sure we’re investing it responsibly? With the help of the Responsible Investment Association’s Dustyn Lanz, we explore the growing world of responsible investing to determine how to invest for the good of society and our wallets.
1. What is responsible investing?
Responsible investing (RI) means choosing investments that incorporate environmental, social, and corporate governance (ESG) factors. There are a number of ways to invest responsibly. The classic strategy is to exclude companies or industries based on ethical concerns. Another more active approach is to use shareholder influence to improve a company’s ESG performance. As shareholders, RI mutual funds actively engage with companies to support positive outcomes, such as improved corporate diversity and fairer pay. There are many other RI strategies, including sustainability investing, which focuses on themes such as clean technology and renewables. You’ll find more on our website (riacanada.ca/ri-basics) under the RI strategies tab.
2. Many believe investing responsibly reduces returns. Is this true?
Evidence shows that responsible investments perform just as well, if not better, than traditional investments. For instance, a 2015 Carleton University study found that responsible Canadian equity mutual funds outperformed traditional equity funds 63 percent of the time, and with lower levels of risk and volatility. A study by the Morgan Stanley Institute for Sustainable Investing found similar results for the U.S. market.
3. Can responsible investing reduce risk?
Absolutely. Incorporating ESG factors into investment decisions can reduce risk. For example, after Volkswagen admitted to falsifying its emissions results, its shares dropped 35 percent in less than a week. Choosing RI funds reduces exposure to these types of risks.
4. Which industries are excluded when investing responsibly?
Most RI funds exclude companies involved in tobacco and weapons production. A growing number of RI funds are excluding fossil fuel producers. But responsible investing is so much more than just exclusions. If the environment is your main concern, you can choose a sustainability-themed fund. There are also funds that invest in companies with strong representation of women in leadership positions. And the list goes on. With such a wide range of options, you can build an RI portfolio that’s tailored to your personal values and goals.
5. What are some of the ways companies can become candidates for RI funds?
There are many steps a company can take to be more responsible. One measure of a responsible company is the extent to which it manages its global supply chain to promote transparency and the protection of human and workers’ rights. An important governance factor is whether shareholders are allowed to vote on executive compensation, which would enable them to reject egregiously high CEO pay. On the environmental side, retrofitting office buildings with energy efficient technologies — such as smart lighting — is another of the many ways companies can become more responsible.
6. Where can an investor to go find responsible investments?
Investors can speak with their advisor or financial institution, or check if their self-directed online investment platform offers responsible investments. The Responsible Investment Association website (riacanada.ca) has a wealth of resources on RI, including a list of RI funds and a national directory of responsible investment advisors.