Responsible Investing in 2019

Understandably, perhaps one of the first things investors want to know when they consider Responsible Investing (RI) is whether or not investing in accordance with environmental, social, and governance (ESG) principals—the very crux of RI—is actually financially sound.

It’s all well and good to want to invest in ethical organizations that are committed to solving social and environmental problems because their values reflect your own, but is aligning your investing with your personal beliefs actually a prudent financial strategy? And is RI even a trend that’s going to continue?

In a word, yes. According to the Harvard Business Reviews’, “The Investor Revolution,” the notion that ESG hasn’t yet gone mainstream isn’t the case at all. After interviewing 70 senior executives at 43 global institutional investing firms, they determined that ESG is in fact very much top of mind. But more importantly, evidence suggests that companies with the highest ESG ratings outperform lower-rated firms, produce higher returns, are more likely to become high-quality stocks, and are less likely to go bankrupt.

Responsible investing improves returns. But of course, the fact that you can reap the financial benefits that RI offers while also helping to make the world a better place certainly sweetens the pot. It’s a strategy that simply makes sense, given the global challenges we are currently facing. Take climate change, which is something that’s very much on the minds of Canadians. It was a key issue in the 2019 federal election—one that ultimately may have been the deciding factor for many voters—largely because its impacts are becoming harder and harder to ignore. The federal government estimates that the cost of climate change to the Canadian economy will reach between $21 billion and $43 billion by 2050 (Responsible Investment Association Magazine, May 2019).

More and more investors want to know that the organizations in which they invest share the same values they do when it comes to climate change and the urgent need to transition to a low-carbon economy. It’s not simply enough to hope for change; investors are seeking out companies that are already doing the hard work and making change happen. To that end, there has been a move to include climate-related disclosures in mainstream financial filings. This will help investors make better-informed decisions about where they want to allocate their capitol, because it makes comparison between companies so much easier for investors.

Established in 2015, the Task Force on Climate-Related Financial Disclosures (TCFD) was created to develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders. The TCFD released its recommendations in 2017, and in 2018, the Principles for Responsible Investment (PRI), the world’s leading proponent of responsible investment, incorporated pilot climate reporting indicators into its reporting framework. Signing allows organizations to publicly demonstrate their commitment to responsible investment. Twenty-eight of the 480 global signatories who completed the PRI indicators in the 2018 Reporting Framework were Canadian (Harvard Business Review, 2019).

There is more work to be done, of course, but in 2019, Canada achieved a telling milestone with more than half of total assets under management now invested in accordance with ESG principals (Harvard Business Review, 2019). This clearly indicates that the number of Canadian corporate leaders who understand the key role they can and must play in making positive societal and environmental differences is growing—and that’s a good thing for investors and the world we all share.