The criteria for defining responsible, or sustainable, investing is still fluctuating. Which is typical for an emerging trend of this complexity. You might find the dizzying selection of acronyms confusing. However, the data indicates that this sector is enjoying explosive growth for very good reasons.
The rapid expansion of Responsible Investing (RI) was captured in the 2018 Canadian Responsible Investment Trends Report from the Responsible Investing Association (RIA). Canadian investors contributed over $2 trillion to funds with a RI approach.
This data represents over 50% of all funds under management. It’s a significant milestone, reflecting 41.6% growth in assets under management for this class over a two-year period. RI has emerged as an established sector worthy of your notice.
Canadian investors are seeking investments which reflect their personal values. This isn’t just a financial matter. It includes the desire to create positive social and environmental change.
So, how do RI funds work from an investing perspective? An older, Carleton University study from 2015 indicated that RI equity mutual funds in Canada financially outperformed their respective benchmarks 63% of the time, with less risk. The story was similar in other asset classes, and this high performance is also being reported internationally.
Here’s another trending term that you can use to understand this sector: ESG, or environmental, social and governance. These factors offer a foundation for responsible investing. Both for the management of RI funds as well as guidance for your investing choices.
Earlier models used negative screening and ethical or moral value judgements to identify which companies met or failed RI criteria. While these are still valued, ESG analysis offers positive screening. For example, including a fund in your portfolio due to positive performance relative to industry peers.
Data collection is the trickiest part of evaluating a potential ESG fund. As a relatively new metric, there is no standardization for companies to report, or be rated on, ESG factors. Often, you must reply on self reporting through annual reports or sustainability reports.
There is a lot of work going on internationally to change this. Until criteria are fully defined, however, good research is the only way to unearth the true value of a fund.
RI can prove personally satisfying while producing good returns. Work with your Financial Advisor to include RI investments as valued components in your portfolio.
*Mutual funds provided through Carte Wealth Management Inc.
** Segregated funds, GICs and insurance provided through Carte Risk Management Inc.