Gail Taylor, who has made a career of helping high-net-worth individuals reach their retirement goals, has long had some goals of her own. She always thought that when she had made enough money to retire, she would do some work to make the world a better place. Her dream was to help people in the developing world through philanthropic work, focusing on human rights.
But Ms. Taylor, a vice-president and investment adviser at CIBC Wood Gundy in Edmonton, found that she didn't have to wait for retirement to start contributing to the greater good.
In 2007, following the advice of a career coach, she began looking for ways to start making a difference without retiring.
Through the responsible investing movement, she discovered the perfect way to align her professional life with her personal values. She found that she could help clients make money while at the same time supporting companies that included environmental, social and governance concerns in the way they did business. Thus "ESG" soon became her guiding principle.
"I call it building your prosperity while strengthening the world," Ms. Taylor says. "I expected a haircut. I thought I was going to lose 20 per cent of the practice, but when I went to my clients and said, 'Here's what I'd like to shift over to,' I got no pushback. I thought, wow, this is great."
Indeed, a growing number of investors are expecting corporations not only to make money but to make it in responsible ways.
According to the Responsible Investment Association of Canada, assets under management in this category rose to more than $1-trillion at the end of 2013, a 68-per-cent increase from two years earlier. While the majority of that growth came from institutional investors, responsible-investing-oriented retail mutual funds and venture capital funds grew from $13.48-billion to $17.5-billion over the same two-year period.
It's no longer a question of responsibility against maximum returns, especially when it comes to the long view. It is becoming accepted wisdom that the best companies are the ones that offer both.
ESG is increasingly being seen as a risk management tool that helps companies avoid harm to their reputation that can result from behaving badly. And in these days of social media and instant communication, a hit to reputation can quickly translate to the bottom line.
"The biggest myth out there right now is that you have to give up return," Ms. Taylor says. "But you don't. My portfolios make the same returns as my traditional portfolios did. And any time you look at a responsible index compared with a traditional index, it tends to be the same, plus or minus 50 basis points."
Ms. Taylor uses large money managers, such as Guardian Capital Group Ltd., to suggest stocks and manage trades in her clients' accounts, which start at a minimum of $250,000. This gives her clients access to advice that is generally available to much larger investors, such as pension funds.
She applies an ESG screening framework developed by the global research firm Sustainalytics to weed out companies that don't live up to responsible standards.
For Ms. Taylor, companies that deal in weapons, tobacco and pornography are off the table. She doesn't exclude fossil fuels but rather looks for resource companies that are working toward sustainability and take environmental concerns seriously. She relies on research to weed out the ones that are simply "greenwashing," rather than contributing to sustainability in meaningful ways. She likes companies that are putting R&D dollars into alternative sources of fuel.
Research companies also help when it comes to screening for societal considerations. "I can say, 'I don't want to own anything that has a controversy right now with respect to human rights,' and they come back and say, 'Okay, then you can't own these five companies.'"
Social factors also include employee relations, labour standards, work-force diversity, relationships with unions, child labour and health and safety concerns.
The screening also eliminates companies that have contractor or supply-chain issues with regard to the environment or human rights. If there has been controversy or an incident, however, some companies are given a second look if they respond quickly to fix problems.
Deb Abbey, chief executive officer of the Responsible Investment Association, says that ESG is becoming increasingly mainstream as part of good investment management. She cites a recent survey by the CFA Institute in which 73 per cent of respondents said they take ESG issues into account in their investment analysis and decision-making.
According to Ms. Abbey, issues in the forefront are climate change, human rights and executive compensation.
"I think responsible investors are united in the goal of trying to move us down the path to a low carbon future," she says. Some rule out companies that are engaged in fossil fuel production altogether and will invest only in renewables. Another approach is to look at how corporations are managing their fossil fuel consumption.
When it comes to corporate governance, investors are looking at executive pay for performance, particularly long-term performance. There is also more concern about disclosure of executive pay and the desire for a healthy separation between chairs and chief executives.
"Companies that have good governance are also likely to see long-term risk management policies that flow through both social and environmental and other areas," Ms. Abbey says. "We're finding more and more that companies that don't pay attention to these issues are being penalized in the marketplace."
But while responsible investing is definitely catching on, advocates such as Ms. Taylor say there is still a lot of work to be done.
"Another myth is the belief that corporations are already using stakeholder theory [which states that good management goes beyond the mandate to please solely the shareholders], that ESG is already built into most of their mandates," she says. "But it's not."
Moving away from a shareholders-only approach of past decades is a big job, she adds. "It's like trying to turn a cruise ship around."