You know the phrase, “Money doesn’t grow on trees?” Let’s put a different spin on it. Something like: “Consider trees when you want to grow your money.”
Turning this common phrase on its head is a way to keep the ideas behind socially responsible investing in mind when you’re considering new investment opportunities.
But what exactly is socially responsible investing all about? Read on to find out.
What is socially responsible investing?
Socially responsible investing (SRI), is a straightforward concept: it’s about investing in companies whose business conduct reflects socially conscious values or ethics. Despite there being more social consciousness in western society in recent years, responsible investing is actually not a new concept.
Way back in the early 1900s, Methodist investors preferred to avoid companies that supported gambling and alcohol. By the 1960s, investors began contributing to the civil rights and anti-war movements. In 1999, the Dow Jones Sustainability Index was created, which was followed by the rise of the green economy in the early 2000s.
Today, socially responsible investing is a global movement and Canada is one of the fastest-growing regions, with $1.7 trillion in responsible investment assets.
In recent years, Socially Responsible Investments (SRIs) have become more popular as clients look to invest in companies that reflect their personal values. For some, this involves avoiding companies that produce or sell addictive substances like alcohol or tobacco, or companies that promote gambling. Some may also want to invest in “green” technology, or in funds that redirect money back to local communities in some way.
What is ESG, and what does it stand for?
ESG stands for the environmental, social and governance factors around a company’s operations. These factors move beyond traditional financial factors like earnings, balance sheets and cash flow to deliver more value for investors and deliver a positive impact for all stakeholders — for investors and shareholders, but also for employees, communities and the planet itself.
Let’s take a quick look at each of these ESG factors:
Environmental
When looking at a company to invest in, consider its environmental impact. This includes the energy the company takes in, the waste it discharges, the resources it needs to conduct its business, and the consequences of all these factors for people, animals and plant life. These factors can have a serious impact on the carbon emissions a company produces, which affects climate change. While it’s impossible to run a company without some sort of environmental impact, consider the extent of its impact.
Social
When you’re investing responsibly, consider the reputation it has for fostering positive relationships with people and other institutions in the community where it does business. These days, it’s more important than ever for companies to have a good reputation for diversity and inclusion in their hiring practices, employee promotions, leadership visibility, marketing, sponsorship, and every other aspect of their day-to-day business.
Governance
Somewhat related to social criteria is how a company governs itself. What internal practices, controls and procedures does the company have in place in order to make effective decisions, comply with the law, and meet the needs of external shareholders?
These ESG factors aren’t solely responsibility and ethics concerns. They are also legitimate financial concerns. After all, if a company doesn’t address each one of these factors properly, it can present risk factors you may not find with traditional financial analysis.
Simply put, including ESG in your analysis alongside a traditional financial analysis gives you a more complete financial picture of any company.
What about companies that aren’t ESG-friendly?
Should you avoid companies that are lacking in these best practices? The quick answer might be yes. But there is something to be said about your ability to influence a company as an investor.
With “a seat at the table,” you may be able to convince a company’s leadership that it’s in their best interest to keep ESG in mind.
For example, Dollarama was convinced to develop a more diverse board after investors voted against the all-male nominations to the board. They were convinced by the simple fact that companies with two or more female board members earned 4% higher annual returns than companies with all-male boards.
What role does “impact investing” play?
Impact investing is the latest progression in socially responsible investing, building on the original concept of ESG. It’s comprised of three components:
- Intention: Investments that are intended to make a positive social and/or environmental impact.
- Measurement: Investments where you can measure those social and/or environmental impacts.
- Financial Return: Investments that are intended to generate profit.
Understanding the environmental, social and ethical impact of your investments can put a fulfilling and profitable new spin on your investment strategy. Ask us how we can help you bring these strategies into your portfolio.