Responsible investment (RI) is the integration of environmental, social and governance (ESG) criteria into the investment selection and management process. It’s fast becoming a mainstream function of good investment practice, resulting in better, more informed investment decisions.
In fact, investment managers around the world are incorporating ESG analysis as a means of reducing risk, recognizing opportunity and generating superior long-term financial returns. Thus, as financial advisors, you have a responsibility to understand the risks inherent in the products you recommend to your clients.
In a world in which climate change, water scarcity and global supply chain issues dominate the business pages, that job has become a lot more challenging. There’s a growing consensus that accurate valuations and proper risk management are only possible with adequate disclosure of how companies are addressing these issues.
The United Nation’s sustainable stock exchanges initiative has brought together eight exchanges to explore how they can work with investors, regulators and companies to increase transparency on ESG issues. The world’s largest stock exchange, NYSE Euronext, recently joined the initiative.
The goal of this initiative is to encourage responsible, long-term approaches to investment. Stock exchanges are beginning to understand the link between profitability and responsibility. And recent research has shown that analysts are giving more positive recommendations to companies that address ESG risk.
With a growing body of evidence that ESG considerations have an impact on the financial performance of securities, the U.K., Australia, France and Germany now require that investment decision-makers disclose the extent to which they take these factors into account.
Who can ignore the impact of climate change on weather events and food safety and, ultimately, the ability of any of the companies in an investment portfolio to conduct business? Who can ignore the supply chain management vulnerability and reputation risk exposed by events such as the horrific factory collapse in Bangladesh? Who can ignore the opportunities presented by the $5 trillion of investment in clean energy that’s needed worldwide by 2020?
RI isn’t new. Socially responsible investment, ethical investment, sustainable investment, community investment, mission-based investment and, more recently, impact investment are all components of RI.
In Canada, managers of RI mutual funds and investment funds have long known that traditional risk-management tools aren’t enough. They’ve been leaders in integrating ESG factors into the investment process for decades.
Many RI fund managers incorporate ESG factors to reduce risk and add value to active management strategies. Others use a best of sector approach. They identify the companies that are the best in their sector or class in terms of environmental protection, supply chain management, alternative energy, executive compensation, consultation with aboriginal communities, and so on.
And still others take a thematic approach and invest in sustainable businesses. Companies involved in energy efficiency, green infrastructure, clean fuels and companies providing adaptive solutions to some of the most challenging issues of our time.
A number of RI fund managers in Canada are active shareholders and engage in dialogue with the companies in their portfolios to encourage them to adopt more sustainable business policies and practices. They’ve had many successes; it’s a long list and we’re proud of the work they’ve done. But best of all, they’ve elevated the conversation that many Canadian companies have with their shareholders and stakeholders.
In an era when access to information about external events is instantaneous, RI funds invest in companies that are managing the future. The ones positioned to minimize risks and maximize opportunities — both internally in their operations and externally for the broader community.