Many greying Canadians are adding a green hue to their investment portfolios to make money, manage risk and leave a better world for their children and grandchildren.
Responsible investing – which considers both financial returns and social/environmental good – has long been on the radar of baby boomers and Gen Xers, with ethical mutual funds being widely available since the 1990s. Still, it was often seen as a niche strategy that potentially added risk to an investment portfolio.
Consequently, considering only companies with strong environmental, social and governance (ESG) track records may seem ill-fitted for today’s retirees who seek steady, low-risk investment returns.
But responsible investing has moved mainstream in recent years. ESG performance has become a critical metric used by large money managers such as BlackRock Inc. and institutional investment managers like the Canada Pension Plan Investment Board (CPPIB).
“Many mainstream institutional investment managers began to integrate ESG metrics and research into their investment processes in the 2000s,” says Simon MacMahon, head of ESG research at Sustainalytics in Toronto.
The CPPIB was among the first signatories to the Principles for Responsible Investment, a United Nations-supported network of investors agreeing to use ESG criteria in investment decisions. About 3,800 pension and other large-scale investment funds, representing more than $121-trillion assets under management, are signatories, Mr. MacMahon adds.
Everyday investors have also embraced ESG investing, although the focus has largely been on millennials.
Patti Dolan, a Calgary portfolio manager specializing in ESG at Mission Wealth Advisors with Raymond James, says many older Canadians are interested in responsible investing, too.
“Many were once hippies with these great, glorious ideas but no way to express them through their portfolios,” she says. “Now they’re retiring and have more time to consider their portfolio and align it with their values.”
ESG offers them a way to measure how companies share these values, she says.
A 2020 study by the Responsible Investment Association shows 50 per cent of investors ages 18 to 34, and 31 per cent of those 35 to 54 own investments that incorporate ESG issues. Only 20 per cent of those age 55 and up own ESG investments, but that number is up from 18 per cent in 2019, the survey shows.
“The older generation is really just waking up,” says Robert Armstrong, vice-president and portfolio manager with BMO Global Asset Management in Toronto who manages the company’s sustainable portfolios.
Mr. Armstrong says even many advisers aren’t up to speed on responsible investing.
“There is so much lingo going on out there … that it’s very confusing,” he says.
At BMO, he says responsible investing encompasses ESG, ethical, sustainable, thematic and impact investing.
While the different styles of responsible investing are connected, thematic and impact are focused on certain industries and often involve higher risk investments because they’re less diversified. For example, investors can look to thematic exchange-traded funds (ETFs) that focus on solar. Or they can look to impact investing, purchasing green bonds funding net-zero construction projects.
Ethical investing includes religious-based approaches, screening out gambling, pornography and alcohol stocks. Others may divest from oil and gas companies, while another ethical tactic seeks to own shares in those firms and engage them to push for climate-friendly policies, Mr. MacMahon says.
ESG considerations are different “where the focus isn’t on values alignment so much as trying to make better investment decisions,” he adds.
It involves a set of broad metrics covering workplace health and safety, product safety, business ethics, land use and biodiversity, and carbon emissions. These are just some of many ESG criteria publicly traded companies disclose annually in reports, he says.
“These are real risks considerations, and people are paying attention.”
While investors have always sought to avoid companies with controversial practices, ESG scoring now provides a better snapshot of how well firms manage risks like climate change or improve corporate diversity and inclusion.
“In turn, investors even use ESG as a proxy for identifying good management,” Mr. MacMahon adds.
Through this lens, ESG is a helpful tool for retirees seeking more resilient portfolios “because companies with strong ESG practices have strategically prepared for associated risk and downturns,” Ms. Dolan says.
Research suggests companies with strong ESG scores lead to better returns. One MSCI study from 2017, for example, found publicly traded firms with high ESG scores are more competitive and have higher profitability and dividend payments.
It’s “not a panacea,” and thinking ESG strategies will always outperform similar ones that don’t incorporate it, is misguided, Mr. MacMahon says.
“ESG is really just an additional set of information and data,” he says, similar to cash flow and balance analysis that retirees should consider evaluating investment risk.
“If I was a retiree, I would talk to my adviser to understand ESG and whether it’s part of my portfolio,” Mr. MacMahon says.
For many retirees concerned about the future they’re leaving for the next generation, ESG strategies can be a good fit, adds Mr. Armstrong of BMO.
“If you can put your money to work in something that increases sustainability … all while being invested in good companies, it feels good knowing you’re making the world a better place,” he says.