{"id":472,"date":"2022-06-24T00:00:00","date_gmt":"2022-06-24T00:00:00","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-asia\/2022\/06\/24\/sustainability-101-an-investors-guide-to-why-these-buzzwords-matter\/"},"modified":"2024-03-20T13:55:09","modified_gmt":"2024-03-20T17:55:09","slug":"sustainability-101-an-investors-guide-to-why-these-buzzwords-matter","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-asia\/insights\/sustainability-101-an-investors-guide-to-why-these-buzzwords-matter","title":{"rendered":"Sustainability 101: An investor\u2019s guide to why these buzzwords matter"},"content":{"rendered":"\n<p>Words matter when it comes to this space. At RBC Wealth Management, we use the umbrella term \u201cresponsible investing\u201d to describe how you can use environmental, social and governance (ESG) data \u2013 or extra financial factors \u2013 that can be analyzed to make more informed investment decisions.&nbsp;<\/p>\n\n\n\n<p>With a warming climate among the world\u2019s leading concerns, governments and corporations are making commitments to their communities to shoulder the responsibility of tackling this crisis.<\/p>\n\n\n\n<p>Many of us also want to help slow down the disastrous effects of climate change and are turning to our investments as a way of supporting companies that place adequate emphasis on sustainable operations and responsible business models.<\/p>\n\n\n\n<p>As this global push towards long-term sustainability grows, it\u2019s vital to comprehend the various investment approaches \u2013 and the different commitments they call for \u2013 to better assess which approach fits your financial goals.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-learning-how-to-incorporate-responsible-investing-into-your-portfolio\">Learning how to incorporate responsible investing into your portfolio<\/h2>\n\n\n\n<p>Understanding the definitions and concepts of terms in the responsible investing and sustainability field may aid the decision-making process in verifying a firm\u2019s climate commitments and help you build your investment strategy.<\/p>\n\n\n\n<p>At the end of 2023, the CFA Institute, the Global Sustainable Investment Alliance and Principles for Responsible Investment <a href=\"https:\/\/www.cfainstitute.org\/en\/about\/press-releases\/2023\/cfa-institute-gsia-pri-harmonized-definitions-responsible-investment-approaches\" target=\"_blank\" rel=\"noreferrer noopener\">issued guidance for harmonized definitions for responsible investment approaches <\/a>. In an effort to address greenwashing, it aims to bring greater understanding and consistency to terminology used in responsible investment, specifically: screening, ESG integration, thematic investing, stewardship and impact investing. This resource aligns with how RBC Wealth Management approaches responsible investment.<\/p>\n\n\n\n<p><strong>How it affects decisions:&nbsp;<\/strong><a href=\"https:\/\/www.rbcwealthmanagement.com\/en-asia\/solutions\/esg-responsible-investing\">Responsible investment<\/a>&nbsp;is about incorporating ESG data into a portfolio through various strategies. At RBC, we focus on the four main applications to incorporate responsible investing into your portfolio: ESG integration, ESG screening and exclusion, thematic ESG investing and impact investing. These applications are not mutually exclusive, and they provide investors with additional choice to a client&#8217;s portfolio to help achieve their financial goals. A portfolio or product can incorporate more than one strategy. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-esg-integration\"><strong>What is ESG integration?<\/strong><\/h2>\n\n\n\n<p>This is the practice of incorporating material ESG factors&nbsp;as part of the investment decision-making process to identify and assess potential risks and opportunities that can impact long-term, risk-adjusted returns. ESG factors can be material to different types of companies. Some of these factors include:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Environmental concerns:<\/strong>&nbsp;Climate change, natural resources conservation, pollution and waste management and water scarcity<\/li>\n\n\n\n<li><strong>Social issues:<\/strong>&nbsp;Data privacy and security, community and government relations, workplace health and safety, human rights and diversity<\/li>\n\n\n\n<li><strong>Governance topics:<\/strong>&nbsp;Accounting practices, board accountability and structure, disclosure practices, executive compensation, corporate ethics, regulatory compliance and transparency<\/li>\n<\/ul>\n\n\n\n<p><strong>How it affects decisions:&nbsp;<\/strong>\u201cESG integration is a risk-management framework that looks at ESG factors at the same time as traditional financial analysis \u2013 think enhanced fundamental analysis,\u201d says Stephen Metcalf, head of Sustainable Investing for RBC Wealth Management in the British Isles and Asia. Incorporating more data to an investment portfolio through ESG integration helps create a clearer picture to better understand the potential impacts to long-term value.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-esg-screening-and-exclusion\"><strong>What is ESG screening and exclusion?<\/strong><\/h2>\n\n\n\n<p>Applying positive or negative screens to include or exclude assets from the investment universe. Investors can use this application to align their portfolio with certain values or themes.<\/p>\n\n\n\n<p><strong>How it affects decisions:&nbsp;<\/strong>This is about values alignment and may include investing in line with certain principles, norms and religious beliefs. Screening identifies assets which meet a desired set of ESG-related criteria, often based on a percentage of revenue or product involvement. <\/p>\n\n\n\n<p>When applying a screen or exclusion, a threshold is incorporated which can narrow the investable universe, potentially causing unintended consequences that may impact an investment portfolio.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-thematic-esg-investing\"><strong>What is thematic ESG investing?<\/strong><\/h2>\n\n\n\n<p>Investing in assets involved in a particular ESG-related theme (e.g. water, clean energy, agriculture, sustainability) or seeking to address a specific social or environmental issue. This is where the theme of sustainability fits.<\/p>\n\n\n\n<p><strong>How it affects decisions:&nbsp;<\/strong>With thematic investing, there is an intentional allocation of capital to a specific investment theme.<strong> <\/strong>For example, funding in&nbsp;<a href=\"https:\/\/www.rbcwealthmanagement.com\/en-asia\/insights\/sustainable-technology-five-key-investing-themes-to-watch\">sustainable technology<\/a>&nbsp;(SusTech) companies, which help mitigate sustainability challenges through technology and have the potential to create long-term opportunities for companies and shareholders alike.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-sustainability\"><strong>What is sustainability?<\/strong><\/h2>\n\n\n\n<p>It emphasizes the long-term use of natural and socioeconomic resources without depleting their availability for the future.<\/p>\n\n\n\n<p><strong>How it affects decisions:&nbsp;<\/strong>As more people realize that immediate changes are needed to mitigate the impact of a warming climate, investment parameters have expanded from purely financial returns to encompass positive environmental and societal impact, says Jasmine Duan, senior investment strategist at RBC Wealth Management in Asia.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-impact-investing\"><strong>What is impact investing?<\/strong><\/h2>\n\n\n\n<p>It involves investing in companies and projects that intentionally seek to generate a measurable positive social or environmental impact alongside traditional financial risk and return.<\/p>\n\n\n\n<p><strong>How it affects decisions:&nbsp;<\/strong>\u201cImpact investing has a philanthropic element,\u201d says Metcalf. \u201cYou should be able to say, \u2018By investing, I have caused something to happen that wouldn\u2019t otherwise have occurred.&#8217;\u201d This is challenging to achieve in public markets, therefore, the bulk of impact investing tends to happen through private equity, venture capital or funding startups.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-a-carbon-footprint\"><strong>What is a carbon footprint?<\/strong><\/h2>\n\n\n\n<p>This is the total amount of greenhouse gas generated by the actions of individuals or organizations. Greenhouse gases can be emitted through things such as energy use, paper consumption, travel, the production and consumption of food and waste generation. As greenhouse gas emissions blanket the Earth, they trap the sun\u2019s heat which results in global warming and climate change.&nbsp;Warmer temperatures over time lead to changing weather patterns, disrupting the balance of nature.<\/p>\n\n\n\n<p><strong>How it affects decisions:&nbsp;<\/strong>It\u2019s important to consider what average emissions are at a sector level. Globally, the energy sector accounts for <a href=\"https:\/\/www.climatewatchdata.org\/ghg-emissions?breakBy=sector&amp;chartType=percentage&amp;end_year=2020&amp;start_year=1990\" target=\"_blank\" rel=\"noreferrer noopener\">75 percent of total greenhouse gas <\/a> emissions while other top contributors include sectors in agriculture, industrial processes and waste. A portfolio seeking to minimize carbon emissions will likely be concentrated in a few select sectors that produce lower emissions.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-are-net-zero-emissions\"><strong>What are net-zero emissions?<\/strong><\/h2>\n\n\n\n<p>This refers to achieving a balance between the greenhouse gases going into the atmosphere and those being removed from the atmosphere.<\/p>\n\n\n\n<p><strong>How it affects decisions:&nbsp;<\/strong>Achieving net-zero emissions calls for stricter requirements than being carbon neutral, another term within the space. \u201cMany companies are aiming for net-zero, but there\u2019s still a long way to go,\u201d says Duan. Net-zero firms must eliminate emissions without relying on offsetting whereas carbon neutral firms can still emit carbon dioxide and offset it by purchasing carbon credits.<\/p>\n\n\n\n<p>\u201cClaims that a certain portfolio is&nbsp;net-zero should be reviewed closely,\u201d adds Metcalf. For example, such a portfolio might closely follow the Paris Agreement and commit to seven percent year-on-year greenhouse gas emissions reductions. Verify claims against sustainability benchmarks, such as ESG scores or science-based targets.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-is-greenwashing\"><strong>What is greenwashing?<\/strong><\/h2>\n\n\n\n<p>This is the act of conveying an inaccurate impression or misleading information making it seem like an organization\u2019s actions or investments are more beneficial on environmental factors than they really are.<\/p>\n\n\n\n<p><strong>How it affects decisions:&nbsp;<\/strong>\u201cYou may detect greenwashing by reading a company\u2019s annual report to determine if it has transparent disclosure on climate goals and progress, and how it\u2019s integrating climate risks and opportunities into its corporate strategy,&#8221; Duan says. Analyze the language and look for declarative statements such as \u201cWe are\u201d and \u201cWe will.\u201d<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-determining-which-strategy-fits-best\"><strong>Determining which strategy fits best<\/strong><\/h2>\n\n\n\n<p>Both Duan and Metcalf say the lack of industry standardization for terminology can create confusion, so the best way to determine the appropriate strategy is to review your financial objectives.<\/p>\n\n\n\n<p>\u201cThe first thing to ask is, \u2018Do you want to incorporate additional data and choice into your portfolio?&#8217;\u201d says Duan.<\/p>\n\n\n\n<p>\u201cSome may prioritize the environment over social impact,\u201d adds Metcalf. \u201cOthers may not focus on impact but seek to invest in an ESG-integrated portfolio for the risk-adjusted returns. Matching those risk and value preferences to solutions is important. It\u2019s definitely something to address with your advisor.\u201d<\/p>\n\n\n\n<p>Strategies can also be combined. For example, a portfolio could apply both ESG integration and focusing on a thematic theme through product involvement screening to filter companies.<\/p>\n\n\n\n<p>Wealth managers with the expertise in the responsible investing space \u2013 such as those with backgrounds in climate science or environmental studies \u2013 also may create a diversified portfolio that isn\u2019t overexposed on a particular sector. <\/p>\n\n\n\n<p>For example, some managers may identify companies that \u201care considered \u2018improvers\u2019 \u2013 those that may not be great now but are rapidly improving and investing in new technologies for a more sustainable future and business,\u201d Metcalf says. \u201cAs this space continues to evolve, reach out to your advisor for more on responsible investing.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Understand common strategies within the responsible investing and sustainability space and how they could impact your 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