Responsible investing (RI) involves selecting companies with strong environmental, social and governance (ESG) track records, which are less prone to controversy.
Yet RI is no stranger to a little controversy itself. Some critics label it a fad, or say investors are giving up returns by aligning their portfolios to their values.
Such critiques are often based on misconceptions about RI. Here are five common RI myths, debunked by Canadian experts in the field.
1. “Responsible investing is a trend that won’t last.”
If RI is a fad, it’s a long-lasting one. It started centuries ago, with religious groups leading the charge. Quakers shunned the slave trade in the 1700s, and in modern times church organizations have excluded from their investments sin stocks such as weapons, gambling and tobacco. RI gained more traction with divestment from South Africa as a global response to apartheid, says Patricia Fletcher, chief executive office of the Toronto-based Responsible Investment Association (RIA).
RI has been growing in popularity for decades and today it is mainstream, with most publicly traded companies now measured for their performance on ESG issues, Ms. Fletcher says. An RIA survey found that 80 per cent of respondents want their fund managers to push corporations to reduce their impact on climate change.
2. “With RI, you’re missing out on sectors of the market.”
Some RI strategies do divest from sectors such as oil and gas. But the most common strategy is broad-based – “only you’re getting a tilt toward the companies with the best ESG scores,” says Tim Nash, a fee-only financial planner at Good Investing in Toronto.
MSCI research shows the majority of RI exchange-traded funds (ETFs) listed in North America mirror broad-based underlying indices, while using ESG integration to determine capital allocation.
Ms. Fletcher adds that RI also can involve investor engagement strategies with companies across all sectors, addressing concerns around issues like labour practices, diversity and climate change. She says this strategy aims to “influence corporate behaviour” through voting proxies, while engaging with management to improve on these issues.
3. “RI strategies underperform.”
In the short term, “all companies can underperform, including those with high ESG scores,” says Mike Thiessen, chief sustainability officer at Genus Capital Management in Vancouver. That has been the case lately with funds excluding oil and gas, a sector he notes has surged in value recently.
Over longer spans, RI can provide comparable if not better returns than non-RI strategies, says Patti Dolan, Calgary portfolio manager with Wellington-Altus Private Wealth Inc. “The long-running Jantzi Social Index has a great RI track record.”
From January, 2000 to January, 2022, the index of the top 50 sustainable firms on the S&P TSX 60 Index has an annualized return of 7.2 per cent, above the underlying benchmark.
4. “RI is confusing, with no way to really define and measure it.”
RI encompasses so many approaches – from divestment, to ESG, to thematic sleeves like wind energy – that it can be confusing, Mr. Nash admits. “Even regulators are sorting through the mud to come up with standardized ways of measuring and structuring just ESG reporting.”
Although a United Nations-supported network of institutional investors agreed on Principles for Responsible Investment in 2006, the industry and regulators have been slow to develop a clear set of rules. However, this year the Canadian Securities Administrators did issue guidance for investment funds on ESG reporting.
In the United States, the Securities and Exchange Commission proposed rules in March requiring climate change disclosure. “These developments reflect the maturation of RI,” Ms. Fletcher says.
5. “With ESG, you’re only investing in the best companies.”
Companies with the best ESG scores are not a “guarantee of success financially,” says Heather McLeod, an RI specialist with IG Wealth in Thunder Bay, Ont. That’s particularly true now that most publicly traded companies are reporting on these metrics due to investor demand, she adds.
What is true about ESG is that investors are often “avoiding the worst of the worst,” Mr. Nash says.
A recent study showed that companies with better ESG ratings experienced superior financial performance during the pandemic than those with lower scores. Moreover, a strong focus on ESG performance can help avoid investments at risk of controversy.
“The last thing you want is a company you own making headlines for the wrong reasons,” Ms. Dolan says.
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