What is responsible investment?
The concept of responsible investment has evolved substantially in recent years, and has now moved far beyond what used to be known as “ethical” funds*. A five-point overview.
Investment approaches known as "responsible" are those that take into account criteria other than strictly financial performance. They have been gaining in popularity for a few years now, as we can see from the figures compiled by the Responsible Investment Association:
Considering that, along with these statistics, the value of the global "green" bond market has been estimated by the J.P. Morgan company at US$87.7 billion for 2016 (versus only $500 million in 2012), one can probably conclude that the concept of responsible investment is quickly gaining ground in the financial world.
But what, exactly, do people mean by "responsible investment"?
1. Where did the concept come from?
Originally, the idea of responsible investment arose when certain investors wanted to refrain from investing in sectors that conflicted with their values. The basis for this would often be religious: in the United States, as far back as the early 1700s, one of the founders of the Methodist Church encouraged the avoidance of business practices that could endanger the lives of workers. In the same period, the Quaker movement prohibited members from participating in certain trading practices, notably slavery. Closer to our time, in the 1970s, the Taskforce on the Churches and Corporate Responsibility (TCCR) was formed in Canada in reaction to investments that supported South African apartheid.
2. What is responsible investment?
Over the years, the concept has become more complex and today includes three broad approaches (which are not mutually exclusive):
- Integration of ESG criteria
This approach consists of integrating non-financial criteria in company evaluations and investment decisions. These criteria include environmental, societal and governance components – thus the acronym ESG. In fact, a growing number of investors consider these components as risk factors that they need to manage just like other investment risks, because they can have an impact on the value of their investment.
- Shareholder engagement
This approach extends the management of ESG criteria as far as initiatives aimed at directly influencing company decisions, usually by exercising voting rights at shareholders’ meetings.
Finally, the exclusion of securities that don’t meet certain social criteria (for example, companies that exploit children) or environmental criteria (for example, businesses that pollute) continues to be recommended by many portfolio managers.
3. Who are the major players in this field?
According to the Responsible Investment Association, most of the growth in responsible investment in Canada has come from institutional investors, especially those managing a number of public and private sector pension funds.
4. Are there control and verification mechanisms?
International reporting standards are increasingly being adopted so as to give investors measuring instruments that are as highly developed as those for financial criteria. One of the systems commonly used is the Global Reporting Initiative (GRI), created in 1997.
5. How can you go about investing responsibly yourself?
First: inform yourself! Managers of mutual funds* that use an ESG approach will very often be signatories of the Principles for Responsible Investment (PRI) launched in 2006 by the United Nations. It could be important to read the prospectus, since a fund could well be managed using social and environmental responsibility criteria without necessarily being billed as "ethical" or "green."
Your mutual fund representative can help you sift through all this information.