We often say that to be an investor, you need to believe in a better future. Nowadays, we are seeing companies, institutions, pensions and investors take deliberate action to help leave the world a better place.
For example, in 2021, UBC Investment Management Trust added $110 million as part of a strategy focused on achieving a more sustainable global economy.
TD Bank itself is the only North American bank listed on the Dow Jones Sustainability World Index for the seventh consecutive year. Globally, there is more than $1 trillion invested within this space and Canada now has more than 100 sustainable funds.
We believe this could be a mega-trend for years to come. We have spent a considerable amount of time researching responsible, sustainable and impact investing.
The Responsible Investment (RI) Association of Canada defines RI as the incorporation of environmental, social and governance factors (ESG) into the selection and management of investments.
Some common examples:
We were quick to learn the RI space includes a wide spectrum of options for investors to match to their goals and values, which can largely be categorized within three buckets, ranked from lowest to highest:
1. ESG consideration and integration: Focus on ESG scoring, removes laggards and focuses on leaders or best-in-class; however, may still hold controversial investments. For example, we found an ESG branded strategy that held casinos and alcohol companies. The rationale is that their fund is 25 per cent more ESG friendly than an unscreened index. Sometimes, this phenomenon is referred to "greenwashing,” which we believe can mislead investors.
2. ESG exclusion: Typically aligned to common values and ethics by using negative screens and excluding industries like gambling, tobacco, alcohol, adult entertainment, weapons and, in certain cases, fossil fuels. Companies failing to meet a minimum ESG score will be rejected. Many pension plans are updating their investment policy statement (IPS) to include this more active approach.
3. Impact, engagement and themed funds: Invests in companies with the intention to achieve positive ESG impact alongside a financial return. These managers have a fiduciary duty to you and typically measure and report to the underlying objectives. One strategy we like suggested that every $100,000 invested results in the annual reduction of:
• Co2 equivalent to 1.1 cars removed from the roads;
• 1.3 households’ electrical consumption;
• 1.1 households’ waste;
• eight households’ water consumption.
The idea here is you could, in theory, help offset your own household environmental impact.
Some common themed funds are low carbon, gender equity and, among the most popular, fossil fuel free (FFF), which excludes any company supporting the industry (producers, pipelines, distribution, etc.). Often the managers of these funds will engage the board of directors for the companies, allowing them to vote their shares with full transparency so investors can see exactly how the fund company voted on each issue.
How can I incorporate responsible investment into my portfolio?
1. Consider dedicating a percentage of your portfolio (e.g.: 10 to 20 per cent) to RI overall.
2. Decide what ESG themes are core to your beliefs. Would you prefer to invest in "better companies" or take a more direct stance on a particular issue?
3. Recognize there is no perfect solution, but working with an experienced professional knowledgeable in responsible investing can help tailor to your preferences and values.
We believe companies that are more responsible to their employees and environment carry less risk and are more likely to outperform over time. The ESG space is challenging to navigate because there are no universal definitions, standards and measurements — yet.
When a client desires to invest more responsibly, they are putting their money where their heart is. We enjoy exploring what is important to our clients and having a deeper and more personal conversation.
Until next time, Invest Well. Live Well.
Written by Eric and Keith Davis. This document was prepared by Eric Davis, vice-president, portfolio manager and investment advisor, and Keith Davis, investment advisor, for informational purposes only and is subject to change. The contents of this document are not endorsed by TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc.-Member of the Canadian Investor Protection Fund. All insurance products and services are offered by life licensed advisors of TD Waterhouse Insurance Services Inc., a member of TD Bank Group. For more information, call 250-314-5124 or email Keith.firstname.lastname@example.org.