Hello, and welcome back to Green Investing 101.
It’s me again, Jeff Jones. I’m The Globe’s ESG and sustainable finance reporter. This is the final instalment on our green investing series, and we want to send you out with some tips from the experts. Let’s get started.
Getting started guide
In this issue, we’ll cover:
- Tangible advice as you prepare to put some money to work
- What the pros have to say: What’s a good investment vs. what’s greenwashing?
- Is the market the solution to our big problems?
David Berman has already explained what green investing is and he showed how sustainable investments have fared compared with traditional stocks and funds. Emma Graney described what the energy transition is all about, and how that could affect your investments. Last week, I took you on a stroll through the world of sustainable finance. We discussed what is driving money to go green and ways for investors to determine just how green those investments really are.
Now, for today: To help bring it all home, I’ve enlisted the help of some smart people who make a living finding and analyzing ESG (environmental, social, governance) investing.
- Meet Lisa Meger, she is a portfolio manager with Leith Wheeler Investment Counsel and she leads the firm’s ESG initiatives.
- Also providing insight is Martin Grosskopf, portfolio manager at AGF Investment Management. He manages AGF’s sustainable investing strategies.
- Amber Brown is an ESG and sustainability analyst with National Bank Financial.
Thanks for helping out!
Before making any investment you should consult your own adviser to make sure that it is right for your objectives and tolerance for risk.
Get your mindset in order
Look in the mirror: Lisa Meger says the first step everyone should take before putting hard-earned money into a green investment is to do a self-assessment. Define what your investment objectives and beliefs are. Perhaps you’re focused on the climate crisis, or loss of biodiversity, or gender and racial equity, or all of the above.
- “Is there a mission, value or belief that you want your investment portfolio to be aligned to? Are there sectors or themes that you want to target for inclusion or exclusion in your portfolio? Or are your goals more broad-based in that you would own any company, as long as ESG issues were considered as part of the evaluation of its risk and return?”
Look at your options: For a first-time green investor, ETFs that track ESG-related stock indexes are a solid starting point, says Amber Brown. Their fees are low and they tend to be lower-risk as you get more comfortable with the process. “Your price fluctuation is probably going to be less than a specific stock, so it’s a good way to dip your toe into it.”
These options range from broad sustainable investment funds to others that target specific themes such as water, energy or health.
- “It all depends on how laser focused they want to get. Obviously for a younger investor, we think broad exposure makes a lot of sense,” Martin Grosskopf says. “You can pick something that’s very directed, and for a period of time it can struggle. You get frustrated, you don’t stick with it. The more specific you are, the more you need to be able to deal with volatility against the broad market.”
That’s good advice for any investor – more diversification most often equals less risk.
Look past the label
Think critically about what you are buying, says Lisa. Not all broad ESG funds are created equal, and you won’t be saving the world investing in one just because it has “green” in its title.
- “In Canada, there are no regulations currently that govern the marketing of ESG funds (although that is likely coming). In the meantime, understanding exactly what you are getting means doing your homework and digging under the surface. For example, for DIYers looking at ETFs, you should find out what ESG index it’s replicating, then look at how that index is constructed. Read the fine print. You might be surprised at what companies are included or excluded based on the index’s ESG criteria.”
The same goes for mutual funds. Investors should look at the prospectus and other disclosure materials that firms publish that spell out in detail the investment philosophy, what sectors and stocks are specifically included and excluded and how much experience the manager has, says Martin.
- “I always go back to basics. It’s people, process and product. If the people don’t have specialized expertise in assessing something like climate opportunities and risks, that’s the first red flag. If the product isn’t structured in a fashion where these issues make a difference – if it looks extremely benchmark, yet it says it’s a climate fund – you have to obviously be somewhat concerned with that.”
Keeping up with the trends (and the economy)
How is this changing the way to look at investing? As more companies look to adopt ESG principles, energy producers, steelmakers and auto manufacturers are trying to transform their businesses as the economy shifts to reduce carbon emissions, and this takes money.
- “We tend to invest in companies that are solutions providers, often, to industries, but that’s not to say there isn’t a ton of work and opportunity as carbon-intensive industries transition,” Martin says. “We had noted in our annual report last year that we thought transition as a term within the industry would become a very important one. Already, here we are nine months on and in every industry transition has become a very important topic in terms of how they meet these targets.”
Should ESG considerations be factored into all investments? Yes, unequivocally, says Amber. ESG moved from niche investing to the mainstream in 2020, as the world dealt with the pandemic, social upheaval following the killing of George Floyd and the continuing effects from climate change.
- “Companies that are essentially old economy, and have the largest emissions, will be making transitions to the new economy, and to starve them of investment doesn’t mean that we’ll reach our goals. This is where I would be looking to see if a company is in line with net zero emissions, because you’ll be able to see it as in transition, as opposed to green or not green.”
No label doesn’t mean no action. Investors should be aware that fund managers are already taking all the above into account as they weigh the risks and potential gains that go into building portfolios, Lisa says.
- “A fund that doesn’t carry the ESG label is probably not ignoring these issues either. In fact, for long-term active investors, we believe if you’re not considering all the potential risks in a business, including ESG risks, then you’re not doing your job,” she says. “A knowledgeable adviser can help you find active managers that are doing good things when it comes to addressing ESG, even though their funds’ names don’t carry the latest green catchphrase.”
Tough, but fair.
Then comes greenwashing. How do you spot it and avoid companies engaging in it? One factor is to look for companies that are moving in the right direction, Martin says.
- “It’s a challenge in any area capital has started to flow. Things get spun, as opposed to having rigour and reality behind it. We have a pretty in-depth approach to assessing what companies do. We’re very interested in what they do, what products they make, what services they offer – that for us is step one,” he says. “Further along, do they have a sustainability report? Are they reporting on a variety of different metrics? One thing for us is, do we like what they do?”
A final thought
Will all this green investing make a difference in a world with so many problems to solve, from climate change to ocean pollution to loss of biodiversity? Let’s face it, a lot of big environmental problems have been caused by the quest for financial gain. Here’s Martin’s take:
- “The markets do provide a lens that directs economic activity. They are not a replacement for government action, but once those goals are set, the markets can be very effective and efficient at directing capital to achieve those objectives. I think you need to have growth, and that’s where investors come in because the more motivated the investors are to help that capital get directed in the right areas, the faster we’ll be able to address the issues.”
The bottom line: Change takes good ideas and conviction, but it also takes money. This is where we can play a role with our own investing.
Here are three key points to remember:
- For a first-time green investor, consider ETFs for a low-fee, lower-risk option.
- Stay skeptical: Look past ESG claims and at the index or fund itself.
- Don’t go all in on “green.” Remember that many companies are adopting environmental and social targets, and that could mean they are in for big transformations.
The value of sustainable funds in Canada grew by what percentage, year-over-year, at the end of the first quarter of 2021?
- 30 per cent
- 100 per cent
- 160 per cent
- 220 per cent
This is the final newsletter in this green investing course. Now it’s up to you to put this knowledge into practice.
- To get more exercise before you jump into the real world with your real dollars, consider experimenting with a stock market simulator. As mentioned earlier, Investopedia is a cool place to get started with virtual cash and trading challenges. Wealthsimple also has a list of the best stock market simulators in Canada with a range of complexity and resources.
Thanks for reading. If you took action using tips from this newsletter, let us know using #GlobeGreenInvesting on social media or e-mail us with the subject line Green Investing 101. We would love to hear from you.
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Evergreen investing reading
- Why understanding the differences among responsible investment strategies is vital.
- The rise of ESG investing has caught even top investors by surprise.
Pop quiz answer: The value of sustainable funds in Canada grew 160 per cent year-over-year at the end of the first quarter to $18-billion, according to Morningstar data.