Responsible Investment (RI) is defined as the inclusion or integration of environmental, social and governance (ESG) or extra-financial factors in selecting a security (before a purchase or sale) and in the management of this security while holding it. RI seeks to better manage the risks inherent to ESG issues and generate sustainable long-term returns. Over time, several implementation strategies were developed, so that we now have seven.
Motivation has also increased over the years. Initially, RI's followers wanted to align the management of their savings with the values they advocated. Now many investors, both individual and institutional, choose RI to facilitate extra-financial risk management or to seize business opportunities by opting for companies that stand out both financially and extra-financially. In doing so, they position themselves favorably for tomorrow's economy.
The Responsible Investment Association (RIA) mentions that at the end of 2014, over $1,000 billion in assets under management, representing 31% of Canadian assets, used responsible investment strategies. If this number is surprising, it is explained by the fact that several large pension funds have decided to use RI strategies. This is also a global trend as more than 1,500 investors, portfolio managers and service providers have signed the Principles for Responsible Investment supported by the United Nations. This commitment represents assets with a total value of $60,000 billion.
Interest in RI is significant because choosing this method of investment does not sacrifice financial performance. In fact, responsible investment returns are comparable to those of traditional investments. Just compare RI stock indices (Jantzi Social Index and MSCI KLD 400 Social Index) to traditional indices to appreciate this.
How do we evaluate whether a company is responsible? There is no benchmark or standard that allows such for an assessment. However, there are rankings maintained by the media (Corporate Knights, for example) and service providers that compile environmental, social and corporate governance information. This information is useful, but it does not take into account individual investor sensitivities and tolerances.
With RI, investors generally seek to assess whether a company is exposed to environmental, social and governance issues and how it manages the risks inherent in these issues, if any.
Here are some tips for investors who wish to integrate the concept of responsible investment in their investment strategy:
- Get informed: Sites like LetsThinkRI.com and ethiquette.ca allow you to become familiar with the concept of responsible investment.
- Find products: If investment solutions interest you, you can choose responsible or ethical investment products [the Responsible Investment Association (RIA) provides a useful guide] or products with themes that offer solutions to specific environmental or social issues.
- Select securities: If you'd like to adopt an RI strategy that meets your objectives for choosing individual securities, ethiquette.ca is a good source of information. To help with analysis and stock selection, start with the following:
- View reports of sustainable development or social responsibility published by companies. Be aware that not all companies publish these, and their contents may vary.
- Compare what the company reports with external data sources. Among these sources, there is the Carbon Disclosure Project register, which presents data on company greenhouse gas emissions and the Business & Human Rights Resource Centre, which reveals any lack of respect for human rights.
- RI market indices are also a good source, as the extra-financial practices of companies whose securities are held in indices such as the Jantzi Social Index, the MSCI KLD 400, the Dow Jones Sustainability Indices and the FTSE4Good Indices have already been analyzed.
For individual investors, considering responsible investment when building an investment portfolio includes challenges, especially since the information required to make informed decisions is often inaccessible. This is an aspect which is addressed by responsible investment.