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If you think about the consumer marketplace over the last decade or so, there have been increasing trends towards more green or environmentally conscious products, sustainable practices and companies with social impact values. In large part, these trends are closely connected to a growing focus on environmental and social issues around the world, from climate change and pollution to human rights and equality.

Within the investment industry, there’s also been increasing focus on these same issues and the potential impacts on the investment landscape, which has led to the rise of responsible investment, in all of its forms, at the institutional investor level and now more consciously among some individual investors as well.

Responsible investment defined

Broadly, responsible investment (RI) is an umbrella term for a broad range of approaches that can be used to incorporate environmental, social and governance (known as ESG) factors into the overall investment process, including both the selection and management of investments.

“As a whole, responsible investment has been gaining ground in recent years, and general awareness is definitely growing,” notes Melanie Adams, VP and Head, Corporate Governance & Responsible Investment, RBC Global Asset Management. “At the same time, there still seems to be some confusion about what RI is and what it entails. Investors may recognize that investing responsibly is important to them but may be unclear about what approaches exist. For example, there is often confusion in differentiating between ESG integration and socially responsible investing (SRI). I think the best way to separate these is to think of ESG integration as looking at ESG factors as part of the investment process and determining whether they’ve been appropriately reflected in the share price, whereas SRI is an approach that typically screens out sectors or companies based on an investor’s values.”

In general, there are three main approaches that fall under RI: ESG integration, SRI or ethical investing, and impact investing. To help in understanding each, here’s a basic overview:

Approach ESG integration SRI/Ethical investing Impact investing
Objectives Financial return with improved process by integrating ESG factors Financial return while applying positive or negative screens to include or exclude certain sectors based on defined values Financial return and social purpose
Selection process More robust risk assessment and potential increased returns Constrained universe Focus on societal benefit/outcome

As Adams explains, “In looking at these three main approaches within RI, it’s important to understand how each works and how each can help achieve investor goals, and also recognize that these approaches don’t have to be mutually exclusive.”

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Integrating ESG factors

In more recent years, at the institutional investor level, the integration of ESG factors has increasingly become important. “ESG integration is an assessment of all factors—it’s a bottom-up and active approach,” notes Adams. “Within RBC Global Asset Management, our approach to responsible investment centres on the integration of relevant ESG factors within the investment process, and this takes place firm-wide.”

What’s included in ESG?
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Environmental

How does a company act as an environmental steward?

  • Climate change
  • Greenhouse gas emissions
  • Resource depletion
  • Waste and pollution
  • Deforestation
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Social

How does a company treat employees, customers and communities?

  • Working conditions
  • Impact on local communities
  • Conflict
  • Health and safety
  • Employee relations and diversity
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Governance

How does a company govern itself?

  • Executive pay
  • Bribery and corruption
  • Political lobbying and donations
  • Board diversity and structure
  • Tax strategy

As Adams explains, “As part of our investment process, ESG integration is led by our investment teams and involves looking at material ESG risks and opportunities. We believe it has the potential to add value and enhance the potential for long-term, sustainable performance.”

Among Canadians, research is also showing there’s an increasing awareness of, and gravitation towards, ESG integration on an individual level, as the Investor Opinion Survey from the Responsible Investment Association (RIA) shows that 77 percent of Canadian respondents agree that companies with good ESG practices are better long-term investments.1 In the 2019 RBC GAM Responsible Investing Survey, it was also found that among respondents, 70 percent use ESG principles as part of their investment approach and decision-making and 72 percent of Canadians believe integrating ESG factors can help mitigate risk.2

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A newer framework of thinking for performance and returns

According to the latest Canadian RI Trends Report from the RIA, between the end of 2015 and the end of 2017, there was an over 40 percent increase in assets being managed using one or more RI strategies, and these assets now account for more than half of Canadian assets under management.3

This growth may be quite telling of the potential benefits of RI and ESG integration for better understanding company risks and opportunities and how that fits into the overall investment landscape and may impact performance.

Take climate change as a core example. As more focus turns towards climate change realities around the world and as issues and concerns arise, the potential grows for both direct and indirect impacts on the companies and countries in which Canadians invest. “Climate is a broad-reaching and multifaceted issue that affects all sectors,” explains Adams. “With this in mind, it becomes crucial to look at how companies are addressing climate-related risks and opportunities.”

“For companies that properly address ESG risks, it makes intuitive sense that those companies will be less volatile over the long run, as they will be better equipped to handle any impacts they may face. In other words, there may be a correlation between companies that have good ESG management and companies that have long-term, sustainable financial performance,” Adams explains.

Exploring ESG integration among institutional investors

As a large, global investor, RBC GAM’s approach to responsible investment is anchored by a commitment to being active and engaged in integrating ESG factors into their investment process, and, as touched on earlier, the belief that doing so improves the ability to enhance long-term, sustainable portfolio performance. As part of these efforts, RBC GAM has a dedicated Corporate Governance and Responsible Investment (CGRI) team, whose role is to advance ESG integration in a number of ways.

As Adams shares, “Overall, our approach to ESG integration hinges on several main areas of focus: full integration of ESG in the investment process, including investment research and analysis on material ESG issues; engagement with companies, where we convey our views on material ESG issues and hear how the company is managing those issues; engagement with regulators and lawmakers to promote shareholder rights; and, proxy voting, which is part of our fiduciary duty and where we vote on about 33,000 ballot items per year in accordance with our Proxy Voting Guidelines.”

Current realities are hitting home

Amidst the growth of responsible investment as a whole, and as certain ESG issues come more to the forefront both globally and within Canada, investors of all ages seem to be turning increased attention to ESG as part of their investment decision-making. According to a new survey conducted by The Economist Intelligence Unit (EIU), commissioned by RBC Wealth Management (WM), among Canadian investors, over 40 percent say it’s increasingly important in today’s world to consider ESG factors when investing. Additionally, when it comes to investment strategies over the next five years, over 10 percent of those born in 1965 or after note that they anticipate investing more ethically by focusing on ESG and impact investing.

“With climate change and other ESG issues becoming mainstream, it makes sense that there’s a growing focus among some investors on ensuring their investment solutions are considering these factors,” notes Adams.

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A growing wave among younger generations

For younger generations who’ve grown up in a society where ESG factors have been and continue to be more prevalent, the potential is also there for a greater consciousness about their investments and the decisions they make.

Beyond integrating ESG as part of the investment process and being proactive when it comes to considering ESG factors as part of decision-making, younger generations may also be looking towards more values-based investing and having a greater measurable impact with their investments.

This line of thinking is supported in findings from the recent EIU survey, commissioned by RBC WM, where 64 percent of younger respondents noted it was important to them that they invest ethically, and 62 percent said they expected to increase their focus on impact investing in the future. 

“Younger generations are living in a different world where environment and sustainability are large-scale global issues, so it stands to reason that these are more strongly embedded in their value systems,” shares Adams. “I think most people generally want to do the right thing in terms of the environment and social issues and are beginning to think about incorporating this in how they want their investments managed.”

References
  1. Responsible Investment Association. Investor Perspectives. Accessed August 2019.
    https://www.riacanada.ca/responsible-investment/.
  2. RBC Global Asset Management. 2019 Responsible Investing Survey – Report Highlights. https://www.rbcgam.com/documents/en/other/esg-report-highlights.pdf.
  3. Responsible Investment Association. RI Market Growth. Accessed August 2019. https://www.riacanada.ca/responsible-investment/.