Passion finds purpose
December 10, 2021
|
Wealth Management
December 10, 2021
|
Wealth Management
The last few years has seen a drastic shift towards making responsible investing strategies more mainstream. And as we move out of the grips of the pandemic, the demand for investment products that incorporate responsible investing (RI) has surged. Specifically, incorporation of non-financial environmental, social and governance (ESG) factors has been beneficial to investment portfolios as a risk mitigation tactic and can be viewed as the new baseline for modern investing. As you put yourself in the driver’s seat, you’ll be able to invest using criteria that resonates with your values.
But what exactly do these responsible investments entail? We’ll give you an overview of the five categories of responsible investing. It’s important to keep in mind that while a number of corporations are setting ambitious goals for the future, there remains some misconceptions about the impact of incorporating ESG criteria and products into an investment portfolio.
RESPONSIBLE INVESTING – Key Categories
1. ESG Integration
This is the most widely known category of responsible investment. At its core, it is a non-financial risk mitigation strategy and financial performance remains the priority. Examples of environmental, social and governance factors that are considered include:
Environmental – Climate change, water management, pollution, renewable energy
Social – Labour standards, human rights, health and safety, privacy and data
Governance – Board and leadership structure and diversity, ownership, ethics, taxation, executive compensation
It can be argued that ESG integration can be viewed as one of the new baselines for modern investing. In fact, in a recent survey conducted by Ernst and Young (EY), 72% of institutional buy-side investors now say they conduct a structured approach to non-financial disclosures, up from 27% in 2016. Additionally, it should be noted that ESG-related disclosures in company reports are currently in their infancy and these risks can be at times difficult to evaluate. While there is currently not a standardized, accepted way of reporting ESG-related issues, advances have been made by investment managers, many of whom now have analysts exclusively dedicated to focus on how these factors affect companies.
2. Ethical Investing
Also known as Socially Responsible Investing (SRI), ethical investing takes the integration of ESG factors one step further and actively inserts an overlay of social consciousness. The key component of ethical investing involves the active removal of specific sectors and investments according to specific ethical guidelines. You will commonly see sectors such as tobacco, weapons manufacturing and oil and gas removed from ethical investments. While the priority is still focused towards making a profit, investing must be balanced against social principles. Ethical investments are not actively contributing to sustainability efforts; rather they attempt to do no harm by screening out industries that are deemed unethical. The overall goal is to generate a return without violating an investor’s individual social conscience.
3. Sustainable Investing
Where ethical investing applied a ‘negative-screen’ to the investable universe, sustainable investing applies a ‘positive-screen’ in order to identify companies that are leaders in sustainable and progressive technologies. One thing to note is that this type of investing will also look to apply ESG integration and ethical screens, in addition to investments in companies that are deemed to be enhancing global sustainability efforts. Sustainable investing includes companies who are devoted to transitioning to a low carbon economy such as those that produce electric vehicles, or reduce waste that potentially fills landfills.
4. Thematic Investing
Thematic investment strategies focus on the enhancement of predicted long-term positive trends, rather than targeting specific industries or companies. Some examples include climate change, resource scarcity and societal change. This type of investing attempts to influence positive change, while focusing on enhancing returns. Some examples include artificial intelligence, healthcare and environmental technology.
5. Impact Investing
Impact investments attempt to actively support companies that are solving large scale environmental and societal challenges. It is by far the most rigorous of the responsible investing strategies and attempts to make the greatest positive change. The key component of impact investing is that the true ‘impact’ of an investment is just as measurable as the overall financial performance. Both overall impact and financial performance are important, however the priority remains the overall measurable impact on society. Examples include enterprises that benefit the community such as renewable energy and agriculture.
CONCLUSION
All categories of responsible investing have seen a surge in interest over the past few years. The pandemic did not slow down this interest as portfolios of all sizes continued to invest in companies at the forefront of addressing environmental, social and governance challenges. Every individual investor has a unique risk profile and set of values. The various categories of responsible investing provide a large array of opportunities for investors to align with their values, and their comfort level. Investors should take the time and really think about what they personally care about, and then do some extensive research into the best fit for you.
It’s expected that there will be growing pressure on companies to consider these factors as a key component of their overall corporate strategy. Going forward, businesses will need to take a prudent approach to all three factors to adequately attract new capital. ESG and sustainability efforts are expected to experience significant growth, driven by both government policies and resources as well as private capital.
BMO Private Wealth provides this publication for informational purposes only and it is not and should not be construed as professional advice to any individual. The information contained in this publication is based on material believed to be reliable at the time of publication, but BMO Private Wealth cannot guarantee the information is accurate or complete. Individuals should contact their BMO representative for professional advice regarding their personal circumstances and/or financial position. The comments included in this publication are not intended to be a definitive analysis of tax applicability or trust and estates law. The comments are general in nature and professional advice regarding an individual’s particular tax position should be obtained in respect of any person’s specific circumstances.
All rights are reserved. No part of this publication may be reproduced in any form, or referred to in any other publication, without the express written permission of BMO Private Wealth.
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The last few years has seen a drastic shift towards making responsible investing strategies more mainstream. And as we move out of the grips of the pandemic, the demand for investment products that incorporate responsible investing (RI) has surged. Specifically, incorporation of non-financial environmental, social and governance (ESG) factors has been beneficial to investment portfolios as a risk mitigation tactic and can be viewed as the new baseline for modern investing. As you put yourself in the driver’s seat, you’ll be able to invest using criteria that resonates with your values.
But what exactly do these responsible investments entail? We’ll give you an overview of the five categories of responsible investing. It’s important to keep in mind that while a number of corporations are setting ambitious goals for the future, there remains some misconceptions about the impact of incorporating ESG criteria and products into an investment portfolio.
RESPONSIBLE INVESTING – Key Categories
1. ESG Integration
This is the most widely known category of responsible investment. At its core, it is a non-financial risk mitigation strategy and financial performance remains the priority. Examples of environmental, social and governance factors that are considered include:
Environmental – Climate change, water management, pollution, renewable energy
Social – Labour standards, human rights, health and safety, privacy and data
Governance – Board and leadership structure and diversity, ownership, ethics, taxation, executive compensation
It can be argued that ESG integration can be viewed as one of the new baselines for modern investing. In fact, in a recent survey conducted by Ernst and Young (EY), 72% of institutional buy-side investors now say they conduct a structured approach to non-financial disclosures, up from 27% in 2016. Additionally, it should be noted that ESG-related disclosures in company reports are currently in their infancy and these risks can be at times difficult to evaluate. While there is currently not a standardized, accepted way of reporting ESG-related issues, advances have been made by investment managers, many of whom now have analysts exclusively dedicated to focus on how these factors affect companies.
2. Ethical Investing
Also known as Socially Responsible Investing (SRI), ethical investing takes the integration of ESG factors one step further and actively inserts an overlay of social consciousness. The key component of ethical investing involves the active removal of specific sectors and investments according to specific ethical guidelines. You will commonly see sectors such as tobacco, weapons manufacturing and oil and gas removed from ethical investments. While the priority is still focused towards making a profit, investing must be balanced against social principles. Ethical investments are not actively contributing to sustainability efforts; rather they attempt to do no harm by screening out industries that are deemed unethical. The overall goal is to generate a return without violating an investor’s individual social conscience.
3. Sustainable Investing
Where ethical investing applied a ‘negative-screen’ to the investable universe, sustainable investing applies a ‘positive-screen’ in order to identify companies that are leaders in sustainable and progressive technologies. One thing to note is that this type of investing will also look to apply ESG integration and ethical screens, in addition to investments in companies that are deemed to be enhancing global sustainability efforts. Sustainable investing includes companies who are devoted to transitioning to a low carbon economy such as those that produce electric vehicles, or reduce waste that potentially fills landfills.
4. Thematic Investing
Thematic investment strategies focus on the enhancement of predicted long-term positive trends, rather than targeting specific industries or companies. Some examples include climate change, resource scarcity and societal change. This type of investing attempts to influence positive change, while focusing on enhancing returns. Some examples include artificial intelligence, healthcare and environmental technology.
5. Impact Investing
Impact investments attempt to actively support companies that are solving large scale environmental and societal challenges. It is by far the most rigorous of the responsible investing strategies and attempts to make the greatest positive change. The key component of impact investing is that the true ‘impact’ of an investment is just as measurable as the overall financial performance. Both overall impact and financial performance are important, however the priority remains the overall measurable impact on society. Examples include enterprises that benefit the community such as renewable energy and agriculture.
CONCLUSION
All categories of responsible investing have seen a surge in interest over the past few years. The pandemic did not slow down this interest as portfolios of all sizes continued to invest in companies at the forefront of addressing environmental, social and governance challenges. Every individual investor has a unique risk profile and set of values. The various categories of responsible investing provide a large array of opportunities for investors to align with their values, and their comfort level. Investors should take the time and really think about what they personally care about, and then do some extensive research into the best fit for you.
It’s expected that there will be growing pressure on companies to consider these factors as a key component of their overall corporate strategy. Going forward, businesses will need to take a prudent approach to all three factors to adequately attract new capital. ESG and sustainability efforts are expected to experience significant growth, driven by both government policies and resources as well as private capital.
BMO Private Wealth provides this publication for informational purposes only and it is not and should not be construed as professional advice to any individual. The information contained in this publication is based on material believed to be reliable at the time of publication, but BMO Private Wealth cannot guarantee the information is accurate or complete. Individuals should contact their BMO representative for professional advice regarding their personal circumstances and/or financial position. The comments included in this publication are not intended to be a definitive analysis of tax applicability or trust and estates law. The comments are general in nature and professional advice regarding an individual’s particular tax position should be obtained in respect of any person’s specific circumstances.
All rights are reserved. No part of this publication may be reproduced in any form, or referred to in any other publication, without the express written permission of BMO Private Wealth.
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