Investing in funds that focus on environmental, social, and governance (ESG) issues is getting more and more popular. Instead of just focusing on profit, companies are focusing on more thoughtful practices for their business partners, their communities, and their planet. And everyday investors like you are focusing on how ESG integration can help reduce the risks they take to get the returns they want.

How ESG changes investment strategy

ESG investing is a focused approach to socially responsible investing (SRI). 

Like most investment strategies, ESG investing considers the financial performance of different companies. The thing that makes it special, is that it also considers the influence of three extra factors:

Environmental

The effect a company has on our environment, and the effect our environment might have on the company.

  • Think climate change, pollution, resources, biodiversity, waste management, stuff like that. 

Social

The relationship between a company and its employees, consumers, suppliers, and communities.

  • Think labor relations, diversity, human rights, political freedoms, wage disparity, respect for the community, etc.

Governance

The structures or systems a company uses to make sure there’s accountability, transparency, and trust.

  • Think accounting practices, ethics policies, the makeup and oversight of the board of directors, how they pay their executives, and more.

How ESG changes investing

Now you know the ESG factors and the issues they consider, but how are they integrated into investing?

Experts in the field score companies based on the three ESG factors. Others design funds based on those scores. And finally, you get to invest based on corporate practices you believe in.

ESG analysts create ESG scores

Investment analysts research and analyse companies and funds. ESG analysts do the same, but they take it a step further—identifying the most significant global ESG issues that could affect each company. They combine the knowledge and data they collect to create an ESG score for every company they’ve analysed. Companies get a high score if they are:

  • Less likely to be affected by ESG issues
  • More likely to bounce back when affected by ESG issues
  • Able to make the most of opportunities presented by ESG issues  

ESG portfolio managers design ESG funds

Portfolio managers create and manage funds. Portfolio managers of ESG funds create and manage funds that invest in companies with high ESG scores. Some take it further through active ownership—directly engaging with and encouraging companies they invest in to make changes to improve their ESG scores.

ESG investors learn and invest

Already an investor? Integrate ESG by learning all you can about the ESG-focused funds that are available to you. If you find they suit your values and your savings goals, think about investing—for your future and the future of your community and the planet.

How ESG changes investment returns

It’s exciting to think that you can invest according to your values. But you’re also investing for your yourself, your goals, and your retirement. Does integrating ESG make it harder to grow your savings?

Remember, as an investment strategy, ESG investing still considers the performance of different companies and the performance of funds that invest in those companies. And you’ll be pleased to know that generally …

Why? Because the true value of an investment isn’t just about returns any more. It’s also about the risk of being affected by ESG issues, and the ability to make the most of the opportunities presented by ESG issues.

Think about it: 

Environmental

Companies that are more efficient and less wasteful spend less time scrambling to meet sustainability regulations, and more time developing products and services that could be essential to a brighter future.

Social

Companies that honour social change and respect the people they work with often see greater employee commitment and higher productivity.

Governance

Companies that run their business ethically tend to be free from scandal, respected within the media, and trusted by their partners and potential customers. 

When the companies you invest in reduce risk and make the most of opportunities, you’re more likely to see consistent returns that resist short-term market dips. Which means ESG investing could mean positive change for the world’s future—and your financial future too.

How ESG changes your next step

So what next? How do you get involved?

If you’re confident about researching investments, you may feel comfortable finding ESG-focused funds on your own. Just remember, compared to more traditional investing:

  • It can be harder to compare  funds. This is because analysts and managers don’t always collect and analyse ESG data the same way.
  • You could be fooled by greenwashing. In the context of investing, greenwashing can include practices like using a misleading fund name or marketing campaign to exaggerate how ESG-focused a fund is.

If you’d like help, you can talk to a financial advisor to:

  • Learn more about how ESG works
  • Talk about ESG options
  • Invest sustainably without losing focus on your short- and long-term savings goals

How ESG changes … well … everything

ESG investing is getting attention. In the news, and amongst your fellow investors. According to a 2020 report, responsible investments accounted for almost 62% of all assets invested in Canada. Up from around 51% just 2 years before. 

And it’s no wonder. 

If you make the decision to invest responsibly on your own, it may   have a positive impact on reaching your long-term saving goals. 

If you make the decision to invest responsibly along with other investors around the world—it may motivate corporations to make decisions too. Decisions that transform their processes, their people, their products, their purpose, and ultimately, their impact on the world.

 

The commentary in this publication is for general information only and should not be considered legal, financial, or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.