More Canadians than ever are expressing interest in sustainable investing , with a September 2019 poll by the Responsible Investment Association (RIA) finding that 72 per cent of Canadian investors want to invest with environmental, social and governance (ESG) issues in mind, up from 60 per cent in 2018.
A Fidelity Investments survey found similar results, with 70 per cent of its 40-and-younger retail investors and 80 per cent of its women clients saying they want to make an impact with their investing choices.
While many are concerned about how the companies they invest in are affecting the environment, they also want to own businesses that have women on their boards, that pay fair wages and that help combat income inequality, among other issues.
Nicole Connolly, a Fidelity Investments portfolio manager and head of ESG Investing, is not surprised that more people are choosing more socially responsible investments.
“For years we’ve seen consumers looking to brands that focus on sustainability when it comes to their purchasing behaviour,” she says. “Investing is really just another purchasing decision, so [it isn’t surprising to see] that behaviour moving into this arena.”
Win-win for investors and companies
Initially, people factored socially responsible principles into their portfolio because they wanted to avoid companies that were involved in business activities that conflicted with their values. Now, though, investors are buying various ESG products because they see it makes good financial sense.
For example, the RIA survey found that 70 per cent of Canadian investors believe companies that reduce plastic waste in their products and packaging will benefit financially, while two-thirds of respondents believe that companies that develop solutions to single-use plastics waste will be better long-term investments.
The returns back these ideas up. A 2015 report by Carleton University’s Centre for Community Innovation found that Canadian-based socially responsible fixed income and balanced funds outperform their respective benchmarks 67 per cent of the time, while their risk characteristics are in line with other balanced funds. And a 2015 study by the Morgan Stanley Institute for Sustainable Investing, which reviewed seven years of performance data for 10,228 open-ended U.S. mutual funds, found that sustainable funds tend to have slightly higher returns and lower volatility than their traditional counterparts.
That’s in line with Fidelity’s research. In its study of the top 1,000 U.S. companies over a six-year period, those with the best ESG profiles consistently outperformed the market.
“ESG is a powerful risk management tool,” says Connolly, adding that evaluating companies through an ESG lens can help identify externalities or intangibles that might not be apparent in the financial statements of a company – think the long-term impact of climate change or the way a company manages human capital, often a company’s biggest asset.
The business community is coming around to the benefits of ESG, too. In August, nearly 200 CEOs of some of the largest U.S. companies – known as the Business Roundtable – signed a statement recognizing ESG and sustainability principles in a new “Purpose of a Corporation” document, declaring that companies must serve all stakeholders, not just shareholders.
“Limiting the impact on the environment, having inclusive and fair workplaces, and putting the customer at the front of what they do are good business practices for all companies to have,” says Connolly. “In time, these will become commonplace at every company.”
To show its commitment to incorporating ESG into the investment process, Fidelity Canada has signed the United Nations’ Principles for Responsible Investment, joining 2,300 global asset owners and investment managers who pledge to evaluate their investments through an ESG lens, and report on their responsible investment activities annually.
How to choose responsible investments
There are three main ways Canadians can approach responsible investing, says Connolly:
- Thematic investing: For investors that are passionate about a particular cause and want to invest in funds that are selecting companies based on ther prioritzation of certain environmental or social issues. Fidelity’s Women’s Leadership Fund, for example, is investing in companies who are investing in women by helping women at all levels succeed in their careers and paving the way for the next generation of female leaders. “We’ve done research on gender-diverse companies and see that they’ve done well, and will continue to thrive over time,” says Connolly.
- Exclusionary investing: Avoid investing in companies that profit from harmful or dangerous products, such as alcohol, tobacco or guns. Fidelity has offerings in this area as well, with a fund that excludes companies in the tobacco, alcohol and firearms industries.
- ESG integration: For investors who are looking for a fund manager who incorporates ESG as one element of their investment process. Fidelity’s Focused Stock fund is one example and has been voted a top sustainable fund by Barron’s and is rated 5 stars by Morningstar.
“As people come to understand that you don’t have to sacrifice returns to invest with impact, we believe the conversation will move from why would I invest in an ESG fund to why wouldn’t I invest in a way where I can generate competitive returns while also having a positive impact on society and the planet?” says Connolly.
Advertising feature produced by Globe Content Studio. The Globe’s editorial department was not involved.