Investing in a Better Future

by | Jul 25, 2019 | Blog, News, Perspectives from a Millennial

ESG Investing incorporates environmental, social, and governance (ESG) factors in the decision making process for what securities to include in a portfolio.  There are several organizations such as MSCI and Sustainalytics who rate companies based on how they perform, relative to their peers, in each of the three E, S, and G pillars.  In addition to traditional financial factors such as revenues, costs, and profitability, portfolio managers and investors can use these aforementioned criteria to construct portfolios that reflect their own values and beliefs. 

 

Some examples of key issues in each of the three ESG pillars are listed below (however the list is by no means exhaustive):

 

  1. Climate change and carbon emissions (greenhouse gas emissions)
  2. Green building, and use of renewable energy sources (wind, solar, geothermal etc.)
  3. Business ethics, corruption, and anti-competitive practices
  4. Labour management, employee health, safety, and wellness
  5. Data privacy
  6. Workforce diversity and support for human rights

 

ESG Investing can mean different things to different people, but can generally be summarized by three common objectives, according to MSCI:

 

 

Objective

Explanation

Integration

“I believe that incorporating ESG may improve my investment results.”

Emerging research suggests that ESG factors have contributed to long-term financial performance.

Personal Values

“My investments should reflect my values.”

Some investors consider ESG issues a means for aligning investments with their ethical, religious or political beliefs. They have typically used ESG research to screen for controversial activities such as tobacco, weapons, alcohol, gambling or fossil fuels, and to help exclude such activities from their portfolios.

Positive Impact

“I want my investments to make a difference in the world.”

A third group of investors focuses on the impact of their investments on the world around them. These investors may seek to direct their capital toward companies that provide solutions to environmental or social challenges.

 

At YouFirst Financial, we traditionally construct portfolios with the objective of minimizing portfolio volatility while maintaining a competitive rate of return, relative to passive benchmarks.  As part of a screen for what we consider great companies, we have always incorporated some of the ESG factors into selecting securities and investments for our clients, as we believe that companies with excellent management and governance processes, a focus on ensuring that their operations minimize harm to the environment, and those who look to generate a positive, long-term effect on society, will generally outperform their peers in the long run. 

ESG investing is experiencing rapid growth.

The idea of sustainable investing has been around for many years, but it wasn’t until lately that ESG and socially responsible investing has taken off.  As of December 31, 2017, there is currently $2.13 trillion in ESG in Canada, with a 42% growth in a two-year period.  ESG investing represents about 51% of the entire investment industry in Canada and investment professionals expect high levels of continued growth in the following years2.

If ESG Investing is something that is important to you or if you are interested in understanding how we could align your portfolio to your personal values, please reach out to us and we would be pleased to provide more information or additional resources.

1 “Introducing ESG Investing”, MSCI Inc., 2018.

2 Canadian Responsible Investment Trends Report, October 2018.