Socially responsible investing (SRI) – choices that reflect corporate practices in areas like the environment – has long been dogged by the perception that going good is not profitable. But with multiple studies and reviews now soundly debunking those claims, this may be the time to start introducing these ideas to clients more often. Doing so could benefit your practice in ways you may not have fully considered.

That’s because public awareness of key concepts in this area – known collectively as environmental, social and governance (ESG) – is growing rapidly. And heightened concerns at the individual level are translating into change at the corporate level.

For example, corporate policies regarding compliance with defined sustainability guidelines have become known as “best practices” in many industries. These new practices can range from basics such as office recycling programs to fully considering the wishes of remote communities when mines are developed nearby.

But, while adherence to ESG principles may be both beneficial in general and consistent with client preferences, it also creates new challenges for investment advisors who are responsible for assembling client portfolios that are consistent with ESG principles.

In this area, SRI is leading the way. Ten years ago, commitment to corporate responsibility was deemed philanthropic – a choice that companies could or could not make. Today, more and more companies are setting up departments and hiring staff to deal with ESG initiatives and reporting. Over the past decade, what used to be two pages in an annual report devoted to ESG principles are now separate, multi-page documents filled with accounts of corporate responsibility and accountability and specific ESG-related activities.

For example, initiatives such as carbon footprint-reduction strategies, supply-chain policies, more independent directors on boards and transparency on executive pay are the direct result of the growing attentiveness to how a company operates in the world. We also see the inclusion of corporate accountability and responsibility in the curricula of a large percentage of university-level business programs.

Overall, the shift is huge. No longer is the traditional screening for financial viability of a particular investment enough. Investors need and deserve more information about the ESG aspects of the activities in which they are investing.

More information of this kind can have other advantages. Investing in businesses you don’t know can be like going on a blind date – uncomfortable and disappointing. Companies such as Europe-based Sustainalytics (which merged with Canada’s Jantzi Research Inc. in 2009) or MSCI Inc. try to ease that discomfort with research and ratings of a corporation’s performance along ESG matrices.

Companies that ignore ESG factors also run the risks of the high costs of litigation, fines, reputation loss and cleanup costs often associated with environmental problems. Those risks translate directly into investment risk. The readily available second screening for a company’s commitment to sustainability is what SRI is all about. Like dating, more information about a company’s moral compass makes investing more comfortable and less likely to disappoint.

At the same time, many companies are moving from shareholder supremacy to stakeholder oversight as an accepted practice. That is necessary for full promotion of ESG measures – because money talks. For example, with increasing demands for more independent directors, we are seeing increased initiatives to implement ESG-related changes at the board level.

Concerned shareholders also can use their influence to call for more responsible practices. This is where gatekeepers – you – come into play.

The gatekeepers include money managers and pension funds – the dating service, so to speak. These gatekeepers can suggest portfolios with ESG matrices built in to manage risk. Indeed, the Social Investment Organization of Canada (SIO) is campaigning to institute regulations that would require all clients be offered the option of sustainable investing.

Currently, SRI accounts for 20% of Canadian equity investments on the Toronto Stock Exchange. The return on investment is predominantly comparable or better than traditional products. There is also evidence that suggests that 60%-70% more investors would be comfortable with considering ESG concerns as a basis for good investing for their retirement and long-term investment portfolios.

All this brings mainstream possibilities for SRI. The challenge is there; whether gatekeeper or investor, will you take it?

Gail Taylor is an investment advisor with CIBC Wood Gundy in Edmonton. The views of Gail Taylor do not necessarily reflect those of CIBC World Markets Inc.

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