Sustainable investing is the evolution of what was previously referred to as "ethical" or "socially responsible investing." Sustainable investing incorporates environmental, social, and governance performance into the investment management process. These factors include:
Environmental
Sustainable land use
Climate change
Water scarcity
Social
Supply chain
Aboriginal & community relations
Conflict zones
Cybersecurity
Governance
Executive compensation
Corporate diversity
Accounting standards
Many individuals experience an internal moral conflict concerning investment decisions: their desire to make profitable investments to benefit themselves and their loved ones versus their desire to conduct their lives, including their investment decision-making process, in a manner consistent with their personal beliefs. Fortunately, time has shown we do not have to choose—we can do well and do good. As shown below, companies that qualified for the Canadian ESG Leaders index had a cumulative return of nearly double the broader Canadian market over a 15-year period from August 2008 to August 2023.
Source: RiA Canada
In hindsight, it should not be surprising that evaluating potential investments from a broader, long term and big picture view produces better results. Similarly, it is unsurprising that companies with higher gender parity in leadership roles produce better results.
There are two approaches to screening. Negative screening excludes investments in particular industries, such as the manufacturers of cluster munitions or tobacco producers. Positive screening might consider only those companies that have signed onto the UN Global Compact.
Integration builds ESG factors into the investment analysis process. The analysis may include, for example, the impact of potential carbon tax legislation on a firm's future profits, how training and safety programs enhance employee productivity, and a board that operates independently of the CEO can behave with increased objectivity.
An engagement approach to sustainable investing has investment managers interacting with company leadership to learn about their ESG records before making investment decisions. Once a decision is made to invest in a company, the investment management firm attends all shareholder meetings, votes on corporate resolutions, and proposes resolutions in areas where the investment manager feels that the corporate leadership is lacking.
Sustainable investing that takes a thematic approach focuses on sectors such as renewable energy, clean water, and cybersecurity. Impact investing is focused on issues such as women in leadership, healthcare, and affordable housing.
