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You had your best-laid plans and then COVID-19 came along and hammered the entire economy. But you’ve got this – if you have the right information. Join Rob Carrick and Roma Luciw on Stress Test, a podcast guiding you through one of the biggest challenges your finances will ever face.

ROMA: The under 40 crowd is worried about climate change and social issues. And like everyone else, they’re also worried about their finances.

ROB: It’s no wonder they’re attracted to the idea that you can make money and improve the world at the same time. Green investing is an increasingly popular way to try to do just that.

ROMA: Welcome to Stress Test, a personal finance podcast for Millennials and Gen Z.

ROB: I’m Rob Carrick, personal finance columnist at the Globe and Mail.

ROMA: And I’m Roma Luciw, personal finance editor at The Globe.

ROMA: Today we’re talking about how people can balance their values with their financial goals. Green or ethical or socially responsible investing is not a new concept, but it’s now known as ESG investing. Rob, what does that stand for?

ROB: ESG stands for environmental, social and governance. Those are the factors that are used to screen all the companies out there and find the best players in each category. The best environmental policy, the best social policy and the best governance policy, which means basically how they run themselves as a corporation, how ethically do they do that. ESG is sort of the latest phrasing for a kind of investing that has been around for decades. I recall it being called ethical investing then socially responsible investing, or SRI. So ESG is the latest name for this trend and it’s probably the most accurate in terms of what it’s all about. Roma I’m curious, do you get a sense that ESG investing is getting more popular?

ROMA: Oh there’s no doubt. As you mentioned, ESG investing has been around for a long time. But it hasn’t really gained a tonne of traction and that’s changing now by leaps and bounds. There’s a massive amount of money moving into ESG funds. In Canada, assets doubled in 2021. Now part of that is that it was generally a banner year for pandemic-driven investing. But ESG investing is growing fast. Rob, one of the things we have to talk about today is, is this a legitimate way for today’s young adults to do the investing they need to reach all of their financial goals? So to be able to save for a house, take some trips, have kids, retire. Can they do that through ESG investing?

ROB: 100%. There’s no question they can. And the proof I’m going to offer is the fact that a lot of pension funds are paying a lot attention to ESG factors in how they build their investing. If they can do it, you can too.

ROMA: After the break, we’ll hear from a Millennial who’s getting started in ESG investing – both for environmental reasons, and because she wants to make money.

SONJA: My name is Sonja, I just turned 30 years old and I live in Ottawa, Ontario.

So my background is in chemical engineering, and I’ve been working in the clean energy sector for about six years now.

ROMA: Like many young people, Sonja is concerned about climate change. She made her first ESG investment about six months ago when she bought an exchange-traded fund, an ETF. To be included in the fund, companies need to meet certain ESG standards.

SONJA: It’s actually very similar to like just a regular investment like a regular ETF, the only difference is that there’s a few screens that they apply. So like one of the screens that they apply is they don’t invest in companies that have more than 5% revenue coming from thermal coal or coal generation. They also have a screen saying they don’t invest in companies that have more than 5% of their revenue from like oil sands production. So yeah, in a lot of ways, it’s really similar to a regular investment. And I’d say the screens for this one are very soft, like, it’s not wildly different from like a standard investment.

ROMA: Everyone has a different definition of what counts as an ESG investment. That inspired Sonja to do a lot of research before choosing where to put her money.

SONJA: And that’s kind of fundamentally one of the issues, I think, with ESG. Investing is like, everybody has a different set of ethics. And so it’s really hard for a company to offer a ESG fund that works for everybody, because some people will have a really strong environmental focus. Some people will have like a focus on more of the social issues. There’s not really a one-size fits all option right now. I personally don’t have a single industry that I would want to divest from completely. I still am invested in fossil fuel companies, I’m still invested in like, like I said, this one fund that I’m invested in it’s a pretty soft screen. And I don’t think any industry is 100%, black and white. I think an example is the adult entertainment industry. So some funds completely screen out any adult entertainment. And I think that can be an industry that can be very exploitative. But to me, it’s not inherently bad. It doesn’t have to be that way. Like there could be a way of having companies that are an adult entertainment that are empowering to women, and I wouldn’t necessarily want to completely remove that from my portfolio.

ROMA: The fund Sonja chose wasn’t perfectly aligned with her values, but it was close. Plus it had low management fees.

SONJA: I still feel confident that it’s gonna perform well financially, like I feel confident that the returns are not going to be super different than, like the standard version of that ETF. And so for me, like, I still want my investments to do well, it’s a reputable company. And I don’t think their screens are perfect. I don’t think anything is perfect, but it was the best choice for me at the time. Yeah.

ROMA: She bought the ESG fund through an online brokerage. Right now, only about 5% of her investments are in ESG funds. She may raise that if the fund does well. But she emphasized that she didn’t buy into ESG for environmental reasons only.

SONJA: So like, I would say, that’s true, like I am an environmentalist, and I am partially doing it because I want to be a good person and like, reduce my carbon footprint. But I think the other really important thing to consider is that investing in ESG funds can also be a way of incorporating climate risk into your portfolio. And choosing to exclude certain companies can not just be something you’re doing because you’re a good person. But it can also be a way of protecting yourself and making sure that you’re not investing in companies that haven’t diversified or haven’t put any thought into the energy transition. I don’t actually think it would be a good financial choice to invest in a company that was deriving all of its revenue from coal or oil sands.

ROMA: Making good financial choices is very important to Sonja, who’s been investing and studying up on personal finance since she finished university. She recognizes that many people are still skeptical of ESG investing.

SONJA: I think I am still skeptical of ESG. Historically, they have not been good historically, they have had higher fees and not performed as well. I think part of the reason I decided to start doing it is because some of these newer funds that are coming out, actually are quite good. But I think some people are against it. They don’t think they’re going to do well or perform well. They think, and like accurately, our oil and gas probably is going to increase in the coming years. I think long term, it’ll go down. But like for the next few years, it’s going to be a part of our life. So I think they’re worried that if you cut that out, you’re going to be missing out on returns. And I think some of that skepticism is well founded. And the other concern is that there’s greenwashing like, and I think that is a valid concern as well, because I found that in my own research, some of the funds that I was looking at weren’t even necessarily better from an environmental perspective. So I think people are skeptical for that reason as well.

ROMA: After all her research on ESG investing, Sonja wanted to find a way to share the information with friends who didn’t know where to start.

SONJA: So I think it was in October or November of last year, I started an Instagram account to document some of the things that I was learning about ESG investing. And the reason that I did that was I found that there was kind of a gap out there in terms of what was available for education on ESG investing. I follow a lot of other personal finance influencers and personal finance bloggers, but you know, like, very few of them are kind of talking about personal finance through a climate change lens. And so I started my Instagram account just to like, share when I was learning and sort of helped myself process all of these, like messy, messy topics.

ROMA: And the ESG world is messy. For Sonja, there’s a pull between her work in the natural gas industry and her environmentalism.

SONJA: So there is a tension that exists and like, it’s a tension I have in my job, and it’s a tension I have in my investing. And I have a strong interest in, you know, personal finance and wanting to be financially secure and build wealth, but also, I am an environmentalist. And those two things can seem conflicting at times. And so one thing I will say is like, I do prioritize, when it comes to my investing, like I do prioritize my own financial security, and I would never invest in something that I didn’t think was a good financial choice, but I don’t think they have to be at odds with each other. Like, there are ways of being a more conscious consumer, you can save money and, you know, reduce your environmental footprint as well. Like, there’s no way to invest, that’s perfect. Like, no company is perfect. No company is, like, completely good. And you can always work on minimizing the damage that you do. But it can be really paralyzing too, like, it can be really paralyzing if you start digging into it and realize that every company, or most companies are not black and white. Like they have shades of grey. And it’s very difficult to have an investment portfolio that, like completely divests from any company that does harm. Yeah, like all the companies, the big companies that you invest in, if you’re invested in the US stock market, are Amazon, like Facebook, a lot of people would consider those companies ethically questionable. But to completely divest in them. I think at that point, then you’re like, just completely disengaging from capitalism and doing harm to your own financial security. So yeah, I don’t have a perfect answer for that. And I think it’s something you know, I struggle with and a lot of people struggle with as well.

ROMA: Sonja’s not convinced that her personal ESG investment will instantly help the planet. But she wants her money to send a message.

SONJA: I don’t think it makes a massive difference in terms of my personal carbon footprint. To me, the benefit is that it’s like sending a message like it’s a way of voting with your dollar. I think if you see a lot of money flowing into ESG funds, companies will take note of that, like, you know, if everyone did what I did, and put 5% of their portfolio in an ESG fund, you might not have that much tangible, immediate difference in terms of your carbon footprint. But people would notice. People would notice if everyone started doing ESG investing companies would notice. Like, if people are excluding you from their investments because you haven’t diversified at all, or you haven’t made a plan to decarbonize, I think that would send a strong message and that, like, it would make a difference.

ROMA: And she had one final message for all the younger listeners who are worried about climate change.

SONJA: It’s like climate change is not our fault. So like for the Millennial generation, especially the Gen Z generation, like by the time we were born and entered the workforce, like things were already like, really far gone and like the Earth was already quite damaged at that point. And so I don’t think you have to, like, take the entire burden of fixing climate change, like on your own shoulders. I think it’s great, like, if you’re willing to make some changes, but you don’t have to like, feel guilty or make a choice out of guilt or feel like the entire burden of fixing the world is on you. Right?

ROMA: After the break, we’ll talk about what changes you can make and why more people are deciding to get into ESG investing.

ROB: To learn more about environmental, social and governance investing, I spoke with my colleague Jeff Jones. He’s a veteran business reporter who covers ESG for the Globe.

So there’s a lot of analysis that goes into the scoring on these ESG factors, who does the scoring, who decides who qualifies to get included in an ESG fund?

JEFF: If you look at the funds themselves, you’ve got two different types of funds that that encompass various ESG issues. So you’ve got ETFs, which you’ve discussed a lot Rob, and you’ve got mutual funds, as well. So if you’re investing in a mutual fund, the Fund Manager, Portfolio Managers will probably have all kinds of their own in-house expertise to determine based on their criteria. Whether it’s a fund that’s focused on climate solutions, whether it’s a fund that’s focused on water conservation for instance. So they’ll have their own contacts, they’ll talk to the managers of the company itself and do a deep dive into all the issues that they report. So that’s that’s one But on the issue of ETFs. And other funds as well. There are third party ratings agencies that provide overall scores on corporate performance of ESG issues. So this could be hundreds of various questions that companies have to answer on, on climate policy, on analysis of how their business will change and a net zero world of, you know, the number of women on the board of directors, all kinds of things like that. They slice and dice this information and put out a final score. And based on that, they assemble indexes which are tracked by various ETFs.

ROB: So in the years I’ve been following ESG, or socially responsible investing in all its previous guises and names, the people in the sector, were always saying, I think we’re on the verge of something big here. I think investors are really coming around. In fact, they weren’t. We went through decades of this where these these funds had sort of modest assets growing very, very mild. It’s certainly not enough to say a trend was taking shape, but I think we’re at a different point right now. Is ESG really catching on and is money flowing into these products.

JEFF: Well, money is flowing in. So let’s talk about is it catching on. I went back and looked at a poll that Ipsos did for Sunlife back in November. And its results showed that two thirds of Canadians consider ESG factors when making their investments. So that’s a big number and and of though of that number, it really is the the Gen Zed and millennials who are taking this most seriously so 18 to 34 and 35. Have to 5454 year olds are more likely than those who are 55 Plus to agree that ESG factors are important. There is also interesting among those who don’t consider it important, there’s a real lack of awareness out there. So 35% really don’t know what ESG is. So that’s kind of a telling stat in itself.

ROB: You mentioned that polls show people have a strong inclination to consider ESG factors when they’re investing. But I’ve seen so many polls over the years, when you ask people, do you intend to do some very positive activity with your finances? And yes, I certainly intend to do that. But we only when they actually do. They’re not doing it. What about with ESG, is money flowing into these products?

JEFF: It really is. I mean, it’s a gusher of money. If you take a look at where we are on a worldwide basis, from an ETF and mutual funds standpoint, globally, the end of 2021, there was $2.74 trillion US in those funds and assets. And that was up 34%, from the year before and here in Canada, assets doubled last year to $34.5 billion.

ROB: What’s your sense of where the money is coming from? Is it primarily retail investors? You know, typical, you know, individual investors, or do you see institutions like pension funds also getting into this heavily?

JEFF: It’s all of the above. And you know, when you hear some Canadians or see online where people say I just don’t care about these issues, or I don’t invest in ESG related products. I think that they’re fooling themselves a bit because if you’re a beneficiary of a pension plan, especially a major Canadian pension plan, all of them have big ESG investment programs. They’ve all been convinced by pensioners and those who are affected by their investments that these issues are important and also CPP Canada Pension Plan is also very focused on ESG issues in its investing as well and it has published quite a bit of material on its philosophies there.

ROB: Jeff, can you tell me how ESG funds have been performing?

JEFF: So I tend to look at an index on the TSX, called the S&P TSX renewable energy and clean technology index, which has 21 clean tech developers listed. So in 2020, that index increased by 84%. And let’s go back and remember what we were doing in 2020, you may have read that there was a bit of a health issue that popped up. And when it did, it really forced society to take a look at not just where we were, where we were vulnerable from a healthcare perspective, but also, everywhere else, right. So issues of climate change, issues of racial equality, because of the George Floyd murder, all brought those issues to the fore. And we really believed as a society that things were on the verge of some pretty big changes. When 2021 rolled around, that index fell by 21% and this year, it’s also down by another 8%, because we’re seeing other issues that have obscured this. And that has to do with shortages of traditional energy, of inflation. You can see that it is very susceptible to the winds of societal pressures. I mean if you take a look at the TSX composite during the same time, we’ve had a slow increase over those three periods. So up 2.2 per cent in 2020, up another 19 per cent in 2021, and so far this year it’s up 3.2 per cent.

ROB: Jeff, what is the long term record on ESG type funds, and their long term returns versus regular investments? I mean early on there was this question, are you sacrificing returns to invest in an ethical sort of way. And the industry’s response was always oh no no, you’re not. Generally speaking long term, are you giving something up with ESG? Or should you expect comparable returns to what the traditional indexes are doing?

JEFF: It can be any one of the above. It depends on the funds themselves. And let’s say you have a collection of stocks that are startup cleantech companies. They can do very well, say, when the tech industry itself is performing well. And when the market moves on to something else, they’ll perform a lot less favourably. I think, from a broad standpoint, the world is moving to more ESG integration in all of the corporate world and the investing world. So these factors are being taken into account as overall risk factors when analyzing a company or fund.

ROB: One thing that trips people up with ESG is that they sometimes look at a fund and think, wow, there’s oil companies in there. And there’s mining companies there. How could that be? Can you talk to us about how some funds do a Best-In-Breed approach where they look for the most environmentally sensitive energy company, for example?

JEFF: If you take a look at some of the more broad ESG-themed ETF funds, you’ll see companies such as Enbridge, such as the other major pipeline companies, energy companies. And the reason is that they have put in place very stringent programs to measure, report and develop strategies to improve things such as their CO2 emissions. So they’re focused on if they have large employee compliments that are working on those things. And they report using some of the most stringent sort of globally accepted templates for doing so. And have strategies to improve. So these help them with their overall ESG scores as measured by third party rating agencies.

ROB: What strikes me as interesting about this is that ESG investors still have access to some of the great Canadian companies, the big dividend payers, the big blue chips, the big stable companies that have like proven over decades that they can generate value as as an investment, you don’t need to be excluded from those in any way, do you?

JEFF: No you don’t. And there’s a philosophical war taking place in the ESG world. Between people that say, companies should not be either investing in fossil fuels, producing fossil fuels in any way if Canada is going to meet its net zero by 2050 target. So that’s one philosophy out there that says divest. There’s another one, and this is the one that you’ll hear from Canada’s big banks and various responsible investing groups, that says, look, you know, go where the emissions are the highest. Go to the oil patch, go to the mining industry, and help them develop strategies to decarbonize and you’ll have a very large overall impact on Canadian emissions.

ROB: Jeff, can we trust the ESG label? Or are there companies out there making themselves seem better than they actually are on their ESG record?

JEFF: That’s sort of like the underlying kind of simmering issue with ESG. You know, with so much money going into ESG related funds, what is sort of the risk that, you know, this has sort of become the flavor of the month. That people people see dollar signs and that’s kind of like the only green they’re seeing here. It’s that they’re seeing dollar signs. And, you know, the risk that companies will be playing up sort of minor environmental gains. And so greenwashing is very much an issue and it’s one that regulators have, have really taken notice of and are starting to starting to take issue with. So you see in the US the SEC, in Canada, the Canadian Securities Administrators are all starting to implement policies that will mandate much more specific corporate reporting disclosure of ESG related issues, specifically climate at first, to make sure that companies are living up to their claims.

ROB: So greenwashing would be where a company portrays itself as being an environmental fighter, when in fact, it’s, it’s not really it’s just presenting that image.

JEFF: That’s right. And we’re seeing all other types of washing to that people are talking about. ESG washing is a sort of overall problem, when you could say that, you know, could be the same issue when it comes to, for instance, making claims about how you want to have much more gender equity in your workforce, and all kinds of promises that are out there, but there’s very little to show for it on on a real basis.

ROMA: The rise of ESG has come with naysaying - some are questioning whether it’s all a big marketing ploy - or just plain ineffectual. Rob, what do you say to those who are critical of ESG investing?

ROB: I say take a step back. This is a trend that has legs, it’s coming on. There’s a lot of good logic and sense behind it. People want to invest according to their values and ESG investing lets them do that in a low-cost, clean, transparent way if you use ETFs. I am surprised that it’s taken this long to take off.

ROMA: With the rise in ESG investing, it’s certainly something we’ll be keeping an eye on in the months and years to come. Now let’s get to our takeaways.

ROB: One, socially responsible investing – ESG is totally legit. I see no reason not to invest part or all your TFSA and RRSP this way. Try a 50-50 split to start off. Two, all the big investing companies have ESG investing options. Find out how they work and choose the one that suits you best. Three, many robo-advisers offer ESG portfolios. That’s the easiest way to get started.

ROMA: Thank you for listening to Stress Test. This show was produced by Kyle Fulton, Emily Jackson and Zahra Khozema. Our executive producer is Kiran Rana. Thank you to Sonja and Jeff Jones for joining us this week.

ROB: You can find Stress Test on Apple Podcasts, Google Play, Spotify or your favourite podcast app. If you liked this episode, please share it with a friend and leave us a five-star rating.

ROB: Next up on Stress Test - we’re talking TikTok. There’s been an explosion of personal finance advice on the social media network famous for its short, eye-catching videos. We speak with a user and a creator about why Gen Z is getting money advice from this non-traditional source.

ROMA: Until then, find us at the Globe and Mail dot com. Thanks for listening.