Demystifying Responsible Investing: what you need to know

“Sustainable”. “Green”. “Ethical”. “Responsible”.

Although described in many different ways, investing in funds or companies that reflect your beliefs and values has been one of the fastest-growing investment trends in recent years. Around the world, investors expect to increase the share of sustainably invested assets from 18% to 37% by 2025.¹ At Educators Financial Group^®, our clients are also interested in RI – in our recent Responsible Investing Survey, over 80% of respondents told us that RI was important to them*.

What is Responsible Investment?  

Responsible Investing (RI), sometimes referred to as sustainable investing, is an umbrella term encompassing a broad range of approaches that incorporates environmental, social and governance considerations in the investment process.

Generally speaking, RI includes various investment strategies, but the 4 most popular are:

1. ESG Integration
2. Active Ownership
3. Exclusions and Screening
4. Thematic and Impact

“Because they feature an increased focus on the same values, RI’s main strategies may seem similar on the surface. But there are differences in their objectives and means,” says Nigel Goetz, Certified Financial Planner Professional, Educators Financial Group.

What is ESG Integration?

Objective: to generate financial returns while using a decision-making process that includes ESG criteria. The acronym stands for:

• Environment – concerns such as lowering carbon emissions, investing in green energy production, or greening certain industries
• Social – considerations like gender equality, supply chain treatment, or strong labour practices
• Governance – considers how well a company is run and managed; avoiding companies that may be corrupt, poorly run or have a poor reputation

ESG Integration looks at how a company’s policies and practices may impact future returns. Certain companies or sectors are commonly filtered out at this level (such as weapons, alcohol, tobacco, and gambling).

Nigel says investors should be aware there is an element of subjectivity in judging whether an investment follows ESG requirements. “ESG investment choices are based on data provided by rating agencies, which grade companies on a wide range of ESG factors. The metrics that agencies choose to use are subjective, though, and industry analysts agree there is a need for standardized reporting.”

What is Active Ownership?

Active Ownership is a practice of exercising shareholder (i.e., ownership) rights to influence corporate behavior and promote change. This can be done through direct corporate engagement (i.e., having conversations with key decision makers); proxy voting (voting for or against certain issues); and filing shareholder proposals.

What are Exclusions and Screening?

Exclusions and screening involve purposely excluding or including certain companies or sectors in the investment process. Examples are filtering out companies who produce controversial products such as tobacco or weapons or including companies that score high in one or more of the ESG factors.

What is Thematic Investing?

Thematic investing is taking advantage of mega trends (which often lead to long-term structural changes) happening around the world, often across many industries at once. Some of the past examples include investment opportunities in air travel, the rise of the Internet, bitcoin, and artificial intelligence, to name a few.

Thematic investing in relation to RI more specifically means investing in a ‘sustainability theme’. One example is investing in alternative energy funds, which aim to capitalize on the transition to a low-carbon economy. Other theme examples are electric vehicles, and climate change and innovation which all follow a narrative of sustainability.

What is Impact Investing?

The objective of Impact Investing is to make a measurable social or environmental impact.

“One example of Impact Investing would be investing in companies that are working on innovative solutions to clean-water access or the clean-energy transition,” says Nigel.

Impact investments are characterized by three terms:

• Intentionality: investors have identified a cause
• Additionality: the addition of the funds from the investor is necessary for the impact to be achieved, and
• Impact measurement: elements of measurement.

Does Responsible Investing mean lower returns?

For a long time, opponents of RI argued that it must result in lower returns, mainly because there were fewer companies to invest in. Advocates, on the other hand, argued that companies that adhered to unsustainable activities would underperform competitors, and that, while RI had fewer choices, those choices were more attractive.

However, more recent empirical studies conclude that RI does not equate to lower returns and may even enhance performance. Furthermore, RI can offer protection against downside risk.²

How do you decide what kind of Responsible Investment is right for you?

Now when you’re aware of the key differences between these approaches, it’s time to decide what works best for you.

You can start by asking yourself these questions:

• Which of my values is a priority and should be reflected in my portfolio?
• What aspect of responsible investment (Environmental, Social, or Governance) am I focused on? 
• Do I seek more returns, want to mitigate risks, or make an impact?
• Am I informed enough to make a decision?

Want to find out more about Responsible Investments offered by Educators Financial Group? Have one of our financial specialists contact you.

You can count on Educators Financial Group for the investment advice you need to bring your financial dreams to life. We’ve been exclusively serving the financial needs and goals of education members since 1975—let us put all of that experience to work for you.