A recent survey showed that 73% of Canadian investors wanted to learn more about how their investments inside RRSPs, TFSAs or non-registered holdings can contribute to positive social change.
Sustainable investing, can be done individually through DIY platforms or through Mutual or Segregated Fund purchases, takes into consideration environmental, societal, and corporate governance (called ESG) issues.
This means that stock companies selected for an investor’s portfolio are not judged strictly on their performance. The decision is based on a broader view of what the company contributes to society through its environmental, political, and societal positions.
How are these companies selected?
Typically, there are two methodologies:
Screening for Negative Sectors/Industries
- This would involve eliminating companies that involve tobacco, alcohol, gambling, or other “vice” industry firms.
- Could also eliminate companies that are known to be environmentally harmful in certain industries like mining, forestry, or energy.
Screening for Positive Sectors
- This would capture companies and sectors defined for positive ESG business models. An example would be companies designing and selling “green” products like wind turbines, solar panels, and EV batteries.
In addition, the selection of each company would be based on these three ESG factors:
Environmental – What is the company’s environmental impact and what processes are in place that address water usage, waste products, and the impact on air quality.
Social – How do they treat their own employees, and do they support human rights and inclusiveness?
Governance – Does senior management and Board of Director’s operate with an anti-corruption mandate giving full disclosure and transparency to their employees and shareholders?
Is an ESG Investment the same as Ethical Funds?
While there may be similarities and overlaps in some sectors, there is a difference. Ethical Investing tends to implement a strategy that is based on an Ethical Code which reflects your own social, moral, or religious principles and is far more restrictive than ESG investing.
As an example, a “purist” Ethical Funds investor would never own bank shares like RBC. This bank is known for financing the oil sector and in particular pipelines, and a “purist” would never hold RBC shares for this reason. The criteria used to determine eligibility for an Ethical Fund is extremely strict, thus the pool of companies is much more limited than what an ESG fund would consider.
Are ESG and Ethical Funds for you?
They can be, but they are also not for everyone. Certain sectors like technology, pharmaceutical and bio-medical companies may not make the cut for ESG Funds and certainly not for Ethical Funds. Much of the growth over the last decade on major indexes like the Nasdaq, S&P500 and even our own Canadian TSX300 has been in these sectors. Having the industries listed above automatically excluded from investment could limit growth of the overall portfolio.
The best wat to determine if a product is suitable for you is to ask your advisor for a Fund Summary breakdown of its holdings.