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Creating a better future for society, your children or grandchildren, and for you too, is part of a responsible investing strategy.iStock/Monkeybusinessimages

Canadians in or near retirement are often driven by a desire to leave the world a better place for subsequent generations. That includes decisions about where to put their money.

Sixty per cent of Canadians aged 55-plus say environmental, social and governance (ESG) factors play an important role in helping them decide on their investment strategies, according to an Ipsos survey conducted on behalf of Sun Life Financial.

The challenge is that the older you are, the shorter your time horizon. There’s a good chance you need your investments to produce income, and you cannot afford to take on the same risks as younger investors.

Can responsible investing still meet the requirements of retirement-age individuals? Absolutely, says David Kletz, vice-president and portfolio manager with Forstrong Global Asset Management Inc., in Toronto.

While an emphasis on ESG performance can shrink the universe of available options, he explains, investors have access to a “flood of ESG investments – including individual securities, mutual funds and ETFs – which offer broad diversification across all asset classes.”

The range of investments for sustainable income plus growth spans the full spectrum of developed and emerging markets, and it includes equities, investment grade and high-yield bonds, structured credit and real assets, Mr. Kletz says.

Responsible investors don’t have to sacrifice returns to achieve their broader objectives. A paper from RBC Global Asset Management notes there is a positive relationship between superior governance practices and environmental performance and stock price performance. Companies with high ESG ratings outperform the market in both the medium (three to five years) and long term (five to 10 years).

The RBC paper also found that strong ESG practices improve operational performance of firms, and companies that prioritize sustainability tend to manage environmental, financial and reputational risks better. That reduces the chance of volatility. So these investments can actually be less risky.

Funding retirement usually means increased allocations to relatively safer fixed income securities, and a lower allocation to riskier equity securities.

However, “while fixed income investments are typically associated with retirement, and play a significant role in income generation, investors probably still need some exposure to equities,” says Konstantin Boehmer, senior vice-president of investment management and portfolio manager at Mackenzie Investments in Toronto.

With their strong performance and ability to reduce risk, investments with an ESG focus can fit the bill. There is a lack of consistency in the naming conventions of sustainable investments. It’s prudent for investors to determine in advance the issues that are most important to them. For example, some funds focus on thematic issues such as climate change, while others exclude certain sectors like fossil fuels.

While investors have access to sustainable investments through several companies, five key players dominate the space in Canada: NEI Investments, RBC, BMO, Mackenzie, IA Clarington and Desjardins. Collectively, they managed 81 per cent of sustainable mutual fund and ETF assets at the end of the first quarter of 2022, according to Morningstar Canada.

For responsible investors seeking income from equities, Mr. Kletz advises taking the ESG filter to mature larger companies, which pay a steady-to-rising dividend. He says sustainable emerging markets bond ETFs can potentially offer significantly higher yields, but may be riskier.

Mr. Boehmer says that in recent years the sustainable fixed-income space has seen a proliferation of ESG compliant debt, which offer investors the opportunity to invest in four types of “labeled bonds.” There are green bonds that target environmental protection, and social bonds that focus on gender and income inequality issues. Sustainability bonds incentivize companies to lower emissions, and transition bonds encourage the shift away from fossil fuels to renewable sources.

Labeled bonds can complement traditional government and corporate bonds that meet ESG criteria, as well as bonds that target specific environmental issues. For instance, Mr. Boehmer says his firm recently invested in the first “rhino bond” issued by the World Bank, the proceeds of which will be used to conserve the black rhino species in South Africa.

“Sustainable investors in the fixed-income space are not really giving up anything,” Mr. Boehmer says. “The opportunity set is pretty much the same as if they were investing in traditional fixed income products.”

Responsible investing isn’t just reserved for millennials. For those of retirement age who are drawn to income, who shy away from risk and who care about ESG issues, this sort of strategy can be prudent.