Responsible Investing

Definition

Responsible investing consists of incorporating environmental, social, and governance (ESG) criteria into the process of selecting and managing investment products.

Also known as ethical investing, socially responsible investing (SRI), or sustainable investing, this approach invites companies, and consequently investors, to consider the challenges of sustainable development and the issues surrounding corporate financial decision making.

Background
The notion of responsible investing is largely a result of religious communities' refusal to invest in companies associated with vices like alcohol, tobacco, and gambling.

Over the years a number of factors and events have contributed to the growing popularity of this approach:

• Collective awareness of the impacts of climate change
• Numerous studies showing that
  • Taking ESG factors into account is good risk management
  • Including ESG factors in the company selection process does not mean financial returns will be lower than those of traditional investment funds
• The increasing transparency of companies that publish data on how their activities impact ESG factors (in sustainable development reports, for example) allowing investors to better understand the risks companies are exposed to
• The growing number of socially responsible financial products on the market.

Socially Responsible Investment (SRI) Strategies

As the diagram opposite shows, there are a number of socially responsible investment strategies. Here we will discuss the four that appear at the top of the diagram, i.e., those that directly affect investments. The other strategies, known as complementary, provide a better understanding of SRI.

1. ESG integration, which consists of using both nonfinancial (ESG) data and financial data to analyze and evaluate a sector or company.
2. Corporate engagement, also called "shareholder engagement," which allows investors to enter into dialogue with companies to build their awareness and influence them with regard to ESG factors. Very often this involves requesting more transparency or a change in behavior. Of course this method assumes shareholders will take responsibility by voting on proposals submitted at general meetings.
3. Filters, which may be exclusionary or negative, screen out companies tied to certain sectors or products, such as tobacco or weapons. These filters may also be positive or inclusive, allowing for selection of the best companies in a given industry.
4. High impact investments, also called "thematic investments," are investments that focus on the positive social and environmental effects they produce. Examples might include microfinance, investing in the social economy and venture capital which promotes jobs in Quebec or development of the cleantech sector.

Regardless of the strategy used or investment product selected, Quebecers and Canadians, like Europeans, are showing a marked interest in responsible investing. We can conclude that this approach is destined for grow around the world in the coming years.