Responsible investment: More Than a “Green Trend”

Responsible investment, also known as "sustainable finance," "ethical finance," "green finance" or "socially responsible investment" (SRI), is establishing itself as an unavoidable trend in the modern financial world. This shift towards more constructive financial practices raises many questions: what is the real impact of this trend, and why has it become so popular? Let's dive into the world of responsible investment to help you understand the key aspects.

At the heart of sustainable investment are ESG criteria, short for environmental, social and governance factors in corporate management. These criteria are designed to guide investment decisions towards companies or issuers that stand out for their behaviour. They are often used to complement traditional financial criteria, such as value for money, debt or earnings.

For an in-depth exploration of ESG factors, we invite you to read our web page on the subject.

How does ESG performance evaluation work?

Evaluating a company's ESG performance aims to measure how it performs in relation to a wide range of issues. It involves analyzing a number of business practices, from environmental protection and biodiversity to executive compensation, employee relations, diversity and inclusion, and cybersecurity, in order to identify industry leaders.

Analysts and fund portfolio managers integrate this assessment into their investment processes by consulting published company reports or using ESG data and research providers who specialize in this field.

It is also possible to completely exclude industries from a portfolio on the basis of ESG criteria. This type of assessment helps avoid exposure to companies operating in particularly harmful and controversial sectors, such as arms, tobacco, gambling, pornography or petroleum development. Conversely, the manager may favour sectors focused on sustainable development, particularly those that encompass companies focused on renewable energies.

A recent survey by the Responsible Investment Association (RIA) highlights the growing demand for responsible companies, confirming that positive-impact investing is not just a passing fad. According to the survey, 82% of respondents expressed a desire to allocate a portion of their portfolio to responsible investment, and over 77% of these people believe that companies with good ESG records represent a better long-term investment.¹

Integrating ESG factors into company analysis enables us to assess the risks associated with investing in their stock. What's more, transparent companies are less likely to suffer scandals that could negatively impact their value. The Deepwater Horizon case involving the oil company BP in 2010 is a good example. The company suffered heavy losses following an environmental disaster, a controversy that damaged its reputation and sent BP's share price plummeting.

Opting for responsible investment is also a powerful way of influencing companies and investing according to one's values. By favouring companies that align their practices with ESG criteria, investors pressure management to adopt responsible behaviours in order to meet their expectations.

Responsible investment aims to generate better risk-adjusted returns over the long term. ESG criteria focus on risks and opportunities linked to issues that may take several years to materialize. In other words, the responsible investment thesis is based on the idea that companies and sectors that contribute to improving society and the environment are better positioned to avoid risk and offer greater long-term growth potential.

A simulation presented by RIA shows that $100 invested in August 2008 in the MSCI Canada ESG Leaders Composite Index would be worth $242 in August 2023, or 8% more than if it had been invested in the traditional MSCI Canada Index ($225).¹ Of course, the past is no guarantee of the future, but this simulation illustrates the long-term performance potential of responsible investment.

Some sectors stand out for their sustainable development business models. Renewable energies, clean technologies and sustainable agriculture are certainly at the top of the list, as their products and services are set to benefit from the transition to a lower-carbon economy.

Carbon capture, utilization and storage (CCUS) is a good example of a sector with significant economic growth potential. According to a report by the International Energy Agency, over 300 projects are currently under development worldwide.² Because this sector is one of the most highly defended technologies in the fight against climate change, it could play a key role in governments' carbon-neutral transition plans.

In short, responsible investment is far from being just a "green fad." Rather, it's a commitment to a financial future that's both prosperous and sustainable. By understanding ESG criteria, the long-term return potential of responsible portfolios and their impact, you can integrate responsible investments into your portfolio. Beyond just being popular, responsible investment is emerging as an essential approach for investors who wish to combine financial return with positive societal impact.

(Updated - 1st published February 1, 2021)