Responsible investing and ESG defined

Responsible investing (RI) is a rapidly growing segment of the global investment market. According to Canada’s Responsible Investment Association, assets being managed using one or more RI strategies in Canada grew 48% between 2017 and 2019, to a total of $3.2 trillion in 2019. RI assets now account for over 60% of Canadian assets under management.

What is responsible investing?

Principles for Responsible Investment (PRI) defines RI as “a strategy and practice to incorporate environmental, social and governance (ESG) factors in investment decisions and active ownership.” RI can be viewed as an umbrella term to cover a whole range of investment approaches that consider ESG factors, as well as other corporate engagement and policy work that focuses on driving measurable change in how companies are run. 

Corporate engagement refers to shareholders talking directly with companies to influence the way the company is run. In the case of Qtrade’s sister company, NEI Investments, corporate engagement is accomplished through:

• Dialogue can take the form of letters, emails, phone calls, and face-to-face meetings.
• Proxy voting is when a shareholder votes “by proxy,” instructing another party to vote on company matters on their behalf on a variety of topics.
• Shareholder proposals are non-binding proposals aimed at encouraging a company’s management to take specific action. 

Is responsible investing the same as ESG investing?

There is an ever-expanding number of investment approaches often grouped under the heading of RI, including: ethical investing, impact investing, thematic investing, community investing, sustainable or green investing, ESG investing, values-based investing, and socially responsible investing.

RI takes into consideration more than just a company’s financial health, asking questions of companies that reveal the bigger picture. Does a company treat its employees fairly and equally? Is it respectful of the community where it does business? How does the company treat the planet, use resources? Does the board of directors reflect the diversity of its workforce? Do its products hurt people?

What is ESG?

RI looks at the factors that can influence a company’s financial success, as well as its impact on the world. These are called ESG factors – environmental, social and governance factors – which are incorporated into the assessment of a company’s value.

• Environmental factors, such as climate change, resource use, waste, pollution and deforestation
• Social factors, such as working conditions, human rights, child labour and employee relations
• Governance factors, such as executive pay, bribery and corruption, board diversity and political lobbying

Responsible investing – by individual and institutional investors as well as asset managers – means putting money into companies with strong ESG commitments. Investors can avoid or remove investments in companies with weaker ESG performance, actively choose investments based on specific ESG criteria, or engage with a company to encourage it to do better.

What is an ESG score and why is it important?

An ESG score (or ESG rating) is a measurement of a company’s exposure to environmental, social and governance risks. All of these factors – for example, resource use, energy efficiency, working conditions, employee and executive compensation and the independence of a company’s board – very often have financial implications that are not as easily identified in a company’s traditional financial statements and reviews. An ESG score adds a new layer of analysis that can help investors evaluate a company’s longer-term potential.

How is an ESG score calculated?

There are several providers of ESG scores, including CDP, ISS, Sustainalytics, MSCI and Bloomberg, each with their own measurement criteria. But essentially, they select important issues specific to an industry sector and score companies in the same sector based on their exposures to risk on each issue. Issues are weighted according to the severity of their potential impact and time horizon. Weighted scores are combined to come up with a score for that company. Some scores are numerical, while others are transferred into a letter rating. The lower a company’s score, the higher their risk of being impacted by that issue.

Is responsible investing and ESG investing popular?

More and more investors are looking for ways to grow their money, while also making a positive impact on the world around them. The Responsible Investment Association reports that 77% of Canadian investors are interested in RI and 82% would like to dedicate a portion of their portfolios to RI. So, if you’re pursuing an interest in responsible investing, you’re in good company.

To learn more about RI, check out the Responsible Investment Association or the UN Principles for Responsible Investment. You can also read up on the 17 global Sustainable Development Goals, established by the United Nations, to which many of the world’s investment management companies align their RI activities.

Why invest responsibly?

Examining companies through an ESG lens allows investors to put their money in companies they believe will do the most good for society. But let’s face it; as an investor, you also want to grow your money.

Turns out, RI can be better for overall portfolio returns as well, particularly over the long term. Improving ESG factors tend to drive improved company performance, which generally leads to higher returns over the long term. Companies that meet and overcome their ESG challenges can be good investments.

How can I incorporate ESG investing into my portfolio?

For investors who want to incorporate ESG investing into their portfolios, Qtrade’s Portfolio Score tool has added functionality for portfolio analysis with an ESG lens. ESG Score shows how individual stocks or funds contribute to your portfolio’s overall ESG score, as well as a percentile ranking against the stock or fund’s peer group.

Read more about how you can incorporate RI and ESG strategies in your investment portfolio.

What else does Qtrade have for ESG investors?

• Qtrade’s sister company NEI offers a variety of RI mutual funds
• 100+ commission free ETFs, many of which are geared toward RI
• Qtrade Guided Portfolios offers investment portfolios constructed with RI funds