Article appears in the October issue of Benefits & Pension Monitor industry magazine
The trend toward responsible investing (RI) is growing. But can you mix morals with money? The answer is ‘Yes!’
Institutional investors don’t need to sacrifice returns to find a meaningful way for their hard-earned dollars to contribute to a more sustainable environment and promote positive social change within communities and corporations.
Did you know? According to the latest Responsible Investment Association (RIA) investor opinion survey, a whopping 77 % of Canadian investors want their investments to promote a higher level of environmental sustainability, social responsibility and corporate governance (ESG). So, what’s stopping more investors from choosing a money manager with a responsible investment strategy? Persistent misconceptions and a need for better awareness.
Here we disprove the most prominent misconceptions around responsible investing:
Myth #1 - Responsible investing means accepting lower returns
Not true. Evidence shows that a strong responsible investment approach can be a source of added value when incorporated into a strong and disciplined investment process.
In other words, adding environmental, social and governance factors into stock and bond research and analysis serves to augment a portfolio manager’s insight into a company’s risks, opportunities and ultimately expectations for long-term shareholder value. Consider that when a company improves their efforts to lessen their environmental impact, improve policies affecting society, and put good governance policies and practices in place – this can actually improve shareholder value.
At GLC Asset Management Group, environmental, social and governance (ESG) criteria are integrated into existing investment processes for a more complete assessment of a company’s risks and opportunities. As such, we see this as adding potential to increase long-term performance.
Third-party evidence backs that up too. In addition to better risk characteristics, a Carleton University studyOpens a new website in a new window found that responsible investing equity mutual funds in Canada financially outperformed their respective benchmarks 63% of the time.
What’s an ESG factor?
|Carbon emissions||Community relations||Board structure|
|Climate change||Diversity issues||Bribery and corruptions|
|Habitat protection||Employee relations||CEO/Chairman duality|
|Energy usage||Health and safety||Executive compensation|
|Waste and recycling||Human rights||Shareholder rights|
|Water management||Product responsibility|
Myth #2 - Diversification benefits are lost
Also not true. While some funds follow a specific exclusionary approach (referred to as SRI funds) by excluding certain industries like tobacco, military arms or pornography, a growing number of investment options pursue what’s called an integrated responsible investing approach, whereby no sector is specifically excluded. Rather, the portfolio manager integrates the ESG risks and opportunities within the overall fundamental analysis of the company. Both the absolute and relative ESG risks and efforts of the company are considered in comparison to industry and sector peers. As a result, you may still find energy companies within the portfolio, but they will tend to be those companies that demonstrate better ESG ratings – essentially showing industry best practices.
All of GLC’s portfolio managers have access to specialized ESG research and ratings through a combination of in-house dedicated resources, such as an ESG Analyst, and the services of a leading third-party global RI expert. ESG factors are considered within every GLC portfolio, including alternative asset class portfolios and asset allocation funds - specialty-type funds where we see few money managers speak to a formalized approach to responsible investing.
Myth #3 - Responsible investing doesn’t make a difference
Money talks. Stock selection isn’t the only way money managers wield influence over companies. Proxy voting and shareholder engagement have become increasingly prominent in influencing corporate management to create positive change, report on their ESG policies and actions, and be more mindful of the environmental and societal impacts of corporate strategies.
Shareholder interests play a strong role in most publicly traded companies. Money managers who are committing to the principles of organizations like the United Nations Principles for Responsible Investing (UNPRI) and Canada’s Responsible Investing Association (RIA) are letting it be known that ESG factors are taken seriously.
This also speaks to the difference between many ETFs and passive investment funds. While fees tend to be lower for passive investment funds, this can come at the cost of active portfolio management considering ESG factors when putting your money to work. Typically, with a passive index fund you get the ‘good’ with the ‘bad’ companies and without active decision making around proxy voting and opportunities for engagement to incite positive change.
Responsible investing approaches
The biggest challenge is investor confusion around what an integrated RI approach is, relative to an exclusionary SRI strategy, or the recent focus on Impact investing (sometimes called Thematic investing). Each are different approaches to portfolio construction, and each takes a unique approach to how ESG factors contribute to the selection or omission of securities within a portfolio.
Exclusionary SRI strategies:
- Excludes entire industries based on values or belief set
- Commonly excludes the “sin sectors” of tobacco, alcohol, adult entertainment and weapons
- Can be difficult to implement on a large scale due to the differing value sets of investors
- Integrates ESG risk factors into investment analysis as a qualitative factor
- Can be implemented across all asset classes
- Subject to each money manager’s internal policies
- Pursues an objective of achieving social/environmental objectives alongside a financial one
- Funds with specific ESG objectives might focus on water scarcity, gender diversity in leadership, renewable energy, etc.
- Still considered niche products, with limited relative assets garnered to date
An integrated RI approach can transcend all asset classes. Clients with specific desires to exclude “sin-sectors” or achieve a very specific societal goal will want to look to the exclusionary approach of an SRI fund, or an impact fund specifically aligned to their goals.
Myth #4 - Responsible investing is a passing fad
Value-based and exclusionary investment strategies have also been around for decades. GLC was an early adopter of such strategies, well before the recent surge in interest. GLC’s SRI Canadian Equity and SRI Bond portfolio strategies have been around for 19 and 12 years respectively and have served the needs of discerning institutional investors with annualized gross return track records that have regularly been above benchmark over the long term.
Beyond offering exclusionary SRI portfolios, GLC sees incorporating ESG factors into investment analysis as a key tenant to upholding our fiduciary responsibility across all our portfolios. In 2016 we formalized the integration of responsible investing and ESG considerations into all GLC portfolios – making a commitment that is here to stay. As a Canadian money manager for individual, group and institutional investors, we see our disciplined investment approach and commitment to RI as an integral part of our disciplined and proven investment processes.
Do good and feel good
According to the latest RIA investor opinion survey, a whopping 77% of Canadian investors want their investments to promote a higher level of ESG. So, what’s stopping more investors from choosing a money manager with a responsible investment strategy? Persistent misconceptions and a need for more education.
Asset managers who incorporate responsible investing strategies into existing disciplined investment processes are leading the way toward a more sustainable global financial system. By tackling the myths head-on and providing clarity around various RI investment approaches, we believe investors will seek out top asset managers that incorporate ESG factors into disciplined investment processes and offer active portfolio management.
The “do good and feel good” philosophy can apply to your long-term investment strategy and should be part of the added value offered by asset managers seeking to deliver strong risk-adjusted returns for investors.
Copyright 2019 GLC. You may not reproduce, distribute, or otherwise use any of this article without the prior written consent of GLC Asset Management Group Ltd. (GLC).
This commentary represents GLC’s views at the date of publication, which are subject to change without notice. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor.