Why sustainable investing is important

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Responsible investing considers environmental, social and governance factors alongside financial returns. If you want to get started, you have more options than ever.

Why sustainable investing is important

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We all want to make money on our savings. But is it possible to earn good returns while also choosing investments that are sustainable and responsible, and avoiding those that might be doing harm to society and the planet?

Good news: It’s not just possible but might even be beneficial. “Excluding ‘irresponsible’ companies which engage in unsustainable practices reduces portfolio risk,” says Priscilla Ncube, an investment advisor at Mandeville Private Client Inc. in Toronto—and it can even eliminate companies that are likely to underperform.

What is responsible investing and why is it important?

“Responsible investment (RI) is an investment discipline that embodies the incorporation of environmental, social and governance factors into the selection and management of investments,” says Ncube.

“Environmental, social and governance” is typically abbreviated to ESG, and experts use these criteria to evaluate various investment opportunities. Specifically, Ncube says, these include:

  • Environmental: How a company’s practices affect the natural environment.
  • Social: A company’s relationships with employees, customers, suppliers and communities in which it operates.
  • Governance: Structures and systems to do with the company’s leadership, executive pay, audits, internal controls and shareholder rights.

Another term you might hear is socially responsible investing (SRI), which is a values-based or ethical investing strategy. Ncube explains it as “investing with the intention to drive social and environmental benefit.”

What a responsible portfolio might look like for you depends on your priorities. Some investors might simply want to keep specific kinds of investments out of their portfolio (this is called a negative screen)—things like fossil fuels, weapons or tobacco. Others might focus on what they are including (positive screen), such as choosing to invest in companies that promote gender and racial diversity or environmental stewardship.

Socially responsible investments aren’t limited to stocks. You could also consider ESG exchange-traded funds (ETFs), mutual funds, bonds and bond funds. As with any investment, you’ll need to consider your risk tolerance, time horizon and overall investment goals and strategy.

Responsible investing terms

The ESG world comes with its own set of acronyms and terms. Here are some to know:

Purpose-driven investing is “investing with the intention of generating positive socio-economic benefits and environmental impact,” says Ncube. This includes tools like community investing and impact investing. A key feature of these investments is that some of the returns are non-financial and “contingent on the achievement of positive social and environmental benefits referred to as social or community returns,” Ncube notes. They might address issues such as renewable energy, affordable housing or civil rights. For instance, if you buy bonds from the Fair Finance Fund, you’ll earn an annual return of either 2% or 2.95% interest—but you’ll also be helping to provide loans to local food and farming entrepreneurs with a social mission. (Disclosure: I’m an investor.)

Activist investing and shareholder advocacy refer to a situation where shareholders in a publicly traded company “seek to leverage the power of stock ownership to influence a corporation’s adoption of environmental, social justice and governance stewardship,” Ncube says. A recent example: In 2021, activist hedge fund Engine No. 1 worked to install new board members at oil and gas giant Exxon Mobil, as part of an effort to shift the company away from fossil fuels.

Divestment, or divestiture, means removing capital from an investment vehicle for ethical and moral reasons. “The strategy promotes investing only in ethically and socially valuable businesses whilst disposing and excluding those associated with a widely known social or environmental cost,” says Ncube. One common example is fossil fuel divestment, a tool aimed at reducing carbon emissions and accelerating the adoption of clean energy to help fight the climate crisis.

What are the challenges or risks of responsible investing?

Assessing and managing risk is part of every investment strategy, and RI is no different. Ncube points out that social and community investments in particular carry a significant amount of risk, because returns are contingent on the success of the social outcomes. She notes that in these cases, it is “especially critical to thoroughly assess the financial outlook of the investment while gauging its social value.”

Another potential risk is that ESG reporting is “a practice in evolution” that lacks a regulatory standard, says Ncube. Unfortunately, differences in reporting methods and levels of rigour can lead to inconsistent standards and even greenwashing, she says, making some companies or funds appear more sustainable than they actually are. “This can result in investors inadvertently populating their portfolios with risky companies or funds that could trigger portfolio losses,” she adds. (Global regulators are working on it.)

How can I get started with responsible investing?

Start by working with an expert who understands the RI landscape and can help you with your impact goals, recommends Ncube. She is a member of the Responsible Investment Association (RIA), which maintains a list of service providers on its website, as well as a database of investment products that you can filter by type, asset class, geography and more. Your current advisor or investment firm might also have resources and product offerings for those looking to incorporate RI into their portfolios. 

For self-directed investors, many robo-advisors have introduced SRI, RI or ESG investment options. Learn more in MoneySense’s guide to the best robo-advisors in Canada. You can also do your own research. The financial planners at Toronto-based Good Investing, for instance, offer a self-directed online course on creating a sustainable investment portfolio. Or you can review ESG ratings via online tools like those from MSCI and Sustainalytics.

Sustainable investing has a bit of a learning curve, but in the end, it’s a question of figuring out what your goals are and then developing a path to get there. “I strongly believe that successful responsible investing requires a sound investment framework and a disciplined approach to the incorporation of ESG factors,” says Ncube—but the effort will be worth it. “RI reduces portfolio risk, enhances long-term investment return outcomes, and allows investors to leave a positive impact in the world.”

Read more about ethical investing:

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