female engineer studying wind energy project

Responsible investing (RI) has been around in one form or another for more than three decades. But interest has boomed in recent years, particularly with individual investors. Climate change, corruption, cybersecurity and a lack of gender diversity in companies are some of the concerns prompting many people to think about changing the way they invest.

Data shows more than US$30.7 trillion was invested in RI around the world at the start of 2018 — a 34 percent increase in two years. In the U.S., $1 in every $4, or approximately $12 trillion total, is invested in an RI strategy.

“People are starting to care more about what a company does, and not just what its earnings are," says Kent McClanahan, a senior analyst and a member of RBC Wealth Management's global manager research team.

That sentiment, coupled with the data-backed realization that companies that pay attention to factors beyond their bottom line perform better in the long run, is pushing responsible investing to the top of many investors' minds, he says.

What is responsible investing?

RI is an umbrella term used to describe three different investment strategies:

1. Socially responsible investing (SRI): This is often referred to as investing in line with our values. Often SRI is accomplished by withdrawing support from investments that don't align with those values. Today, more than US$19 trillion in assets around the world include SRI strategies — an increase of more than 30 percent since 2016.“More and more, investors are looking to make a positive change by aligning their personal values with their investment choices," McClanahan says.

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SRI involves screening of companies, industries or sectors based on set criteria, including:

  • Positive screening: Using measurements to select specific companies or sectors, such as water or solar power portfolios.
  • Sustainability themed: Building portfolios that only include investments that meet specific sustainability-related criteria. This could include companies who receive a certain percent of revenue from clean power, or portfolios of companies with a certain level of board diversity.
  • Exclusionary (or negative) screening: Using measurements to exclude specific companies or sectors. As an example, Catholic value funds exclude alcohol, tobacco, and contraceptives.

2. ESG integration: This is when investors consider more than traditional financial measures. They consider the intangibles of a company's environmental, social and governance (ESG) practices and seek industry leaders based on these considerations“This approach considers risks that traditional finance might ignore," McClanahan says. “Increasingly, these risks have outsized impacts on the value of investments. Investors who are not considering these threats tend to see increased volatility within their portfolios."Examples of ESG factors: Environmental concerns, including climate change risk, natural resource consumption, pollution and waste management, and water scarcity. Social issues, including corporate philanthropy, community and government relations, workplace health and safety, human rights and diversity.Governance topics, including accounting practices, board accountability and structure, disclosure practices, executive compensation, corporate ethics, regulatory compliance and transparency.

3. Impact investing: This strategy focuses on companies and projects that proactively seek to generate a measurable positive social or environmental impact — alongside a financial return. These investments are seeking to fund change.

“Every company has a social or environmental impact, whether positive or negative," says McClanahan. “Impact investments attempt to measure this impact and see that they're having a positive influence on society or the environment."

For example, an investor seeking returns could invest their capital in a project that assists underserved communities through support for low- and moderate-income home buyers, affordable rental housing units, small business administration loans and economic development.

Responsible investing is here to stay

Just under half of Baby Boomers and one-third of Millennials align their spending with causes they care about, according to a study of high-net-worth women and men conducted by The Economist Intelligence Unit, commissioned by RBC Wealth Management.

This trend might signal a bright future for responsible investing. Millennials' incomes are rising, and they're poised to inherit US$30 trillion in the decades ahead. As they begin to invest that wealth, they might also fuel the growth of RI.

Women, meanwhile, are also rising in influence. According to RBC Wealth Management's New wealth rising report, women today control more than $72 trillion worldwide (32 percent of all wealth), up from $51 trillion in 2015. Women will inherit 70 percent of the wealth passed down over the next two generations and control two-thirds of household wealth by 2030. How they choose to invest that wealth will have significant impact, McClanahan says.

“The convergence of these demographic shifts and a growing desire among these influential groups of investors to have a positive impact in their community and broader society is likely the beginning of what will be a surge in interest in responsible investing," says McClanahan.