December 8, 2021
Many people today are concerned with the impact their life and choices have on the world around them. This can influence decisions such as the type of career they pursue or whether they ride a bike or drive a car to work. We’re even seeing it in how people invest. Yes, investors want returns that help them achieve their financial goals, but they also want to know their money isn’t negatively affecting the environment or communities and is enabling positive change—investors care about how they make money.
That’s where ESG investing comes in.
As its name indicates, ESG investing incorporates environmental, social and governance factors into the decision-making process (see examples below). This can help identify risks and opportunities within a company that may not be captured using traditional financial analysis. The process still takes a company’s financial situation into consideration, yet the inclusion of ESG factors often results in better risk-adjusted returns than their traditional counterparts.
Initially, ESG started as an exercise to avoid certain industries, say tobacco companies. But with rising concerns around climate change, corporate responsibility and other global challenges, the strategy has evolved into a more active approach seeking both positive risk-adjusted returns and positive environmental and societal outcomes. Nowadays, ESG investing has become a sort of catchall phrase for a spectrum of approaches, from socially responsible investing to impact investing.
To understand how ESG investing can align your investments with your values, let’s analyze the types of ESG strategies across the spectrum, from avoiding negative impacts, to targeting positive outcomes.
Socially responsible investing
What it is: Socially responsible investing (SRI) uses exclusionary screening to avoid industries or companies that don’t align with your values.
Some examples: Avoiding gun, tobacco or oil companies.
The advantages: SRI can be easily implemented so you know you’re not investing against your conscience.
What it is: ESG integration involves the incorporation of ESG factors alongside financial factors when making investment decisions.
Some examples: Considering a company’s diversity, its commitment to health and safety or its commitment to reducing carbon emissions, alongside traditional financial information when making investment decisions.
The advantages: ESG factors have been proven to have positive effects on long-term financial performance
What it is: Deliberately seeking environmental and social impact alongside financial returns when selecting investments.
Some examples: Investing in green energy companies or those that are actively helping people, corporations and governments reduce carbon emissions.
Advantages: Impact funds can have a measurable benefit on issues that mean most to you, while giving you exposure to growing market segments.
Why is ESG investing important?
There’s a rising trend for sustainability in the choices people make on a day-to-day basis and for organizations to be accountable for the impact they have on society. This has led to a shift in investor priorities, regulatory action, and cooperation from governments and corporations to be more transparent in their practices.
A perfect example is the race to zero-carbon emissions. Governments and corporations around the world have set aggressive targets to reduce carbon emissions by 2050. To get there, significant investment in technology and infrastructure will be needed to produce clean energy, clean transport and more, that could run as high as US$30 trillion. That’s a huge opportunity for your investments and to ensure we create a better world for generations to come.
The drivers and benefits of ESG investing can be felt on an individual level, globally, as well as your portfolio. CI Global Asset Management has the expertise and solutions that can help your investment portfolio do well, while doing good.