Responsible Investment - Have a positive impact while making money.

Have you ever heard about responsible investment? No! Then keep reading, as it is important to learn about the future of investment? If you have heard about it, you will also discover how your firm and yourself can contribute, as well as, what's in it for you? This post is not about the history of the investment industry, but rather about understanding where it is heading and the impact of your investment on your life, the life of others, on your organization or even several organizations.

Investing has come a long way since its very first debut. Multiple drastic changes have occurred in the last 50 years and we have witnessed an even more critical shift during the past five years. A new wave of investors arose, aware of the powerful positive impact they can have towards environmental, social and governance (ESG) issues. These groups of investors have noticed that by reducing or even eliminating investment in non-sustainable business models and/or products they could have powerful impact on the environment and the world's inhabitants. This redistribution of money towards positive outcome investing is also called responsible investment (RI). Multiple responsible investing strategies are being used today depending on customers' needs and desired strategy. 

 

DIFFERENT RESPONSIBLE INVESTMENT STRATEGIES 

Now you are probably asking yourself: how can I ensure that my money is going where they say it will? The different strategies used to select the best companies to invest in can be complicated but they need to be well understood. There are multiple strategies to invest responsibly depending on the type of impact the investors wish to have. The most common used are: 

  • Positive / Negative Screening

This basic method is mainly used as a low energy process. It works by excluding a specific sector, industry, company or even country in some cases from a fund or portfolio. This a basic approach as it does not require a lot of research and analysis. However, by selectively eliminating sectors or industries it does not mean that the companies selected from a different area will automatically be involved in any sustainability practices. On the other hand, positive screening works the opposite way. It allows specific companies to be selected into a fund or portfolio according to their involvement in environmental, social and governance (ESG) performance. This strategy is often used for impact investing.  

  • ESG Integration

The ESG Integration strategy focuses on in depth research of ESG data, combined with financial analysis. It is also focused on non-financial and non-material issues. In other words, the companies' overall performances are being assessed on an ESG and sustainability level as well as on their financial performances. This type of responsible investment strategy has been proven to be the most effective on greater fund/portfolio return than other RI strategies. 

  • Shareholder Engement

The shareholder approach is utilized to encourage decision makers to promote corporate social responsibility behaviour. Specifically, this strategy consists in building relationships with companies to increase their ESG awareness level. In turn, this allows your firm to continue investing in these same companies and it promotes the creation of stable long-term business relationships as you are helping them moving their organization forward. 

  • Thematic Investing

Thematic Investing is a very powerful strategy as only the companies that are providing a solution to climate change issues ares selected. These companies can come from specific fields such as energy management, renewable energy, green agriculture, green building sustainable fisheries and so on. There are also have investment firms, such as Genus Capital Management who are taking the lead by creating Fossil Free and Impact Investment solutions for sustainability. These funds are very thematic as they are targeting a very specific objective. As reported by CERES, by 2050, an additional $36 trillion will need to be invested in responsible investment targeting innovations aimed at solving today's and tomorrow's environmental issues. 

  • Impact Investing

Impact investing is the most socially responsible type of investment as it is aiming on investing to generate benefits for the greater good. As per the Global Impact Investing Network, impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside with a financial return. Impact investment is rapidly growing among investors as it supports solutions to the world's most critical issues such as sustainable agriculture, affordable housing, access to healthcare, clean energy and social financial services just to name few. 

  • Mission Based Investing

Mission based investments are made to achieve the organization's philanthropic goals. Whether an organization has its own philanthropic projects or simply invests into those of other organizations to allow them to complete their mission. There are also two types of mission based investment options: market-rate: which focuses on having an impact while getting a financial return as well, and below-market: which accomplishes specific program objectives while earning below market returns. For more information on mission based investing, please visit the Mission Investors Exchange website.

  • Norms-Based Screening 

Norms-based screening strategy is simply screening for companies that are complying with international standards issued by a few global organizations such as the OCDE, the ILO, the UN, the PRI, the GRI, etc. 

 

Principle For responsible investment

As responsible investments became more popular among investors and portfolio managers new standards needed to guide this practice were created by the Principle for Responsible Investment (PRI) organization. This non-profit organization has been established in 2006. The organization has created six principles for responsible investment (see below), which all signatories have to follow as well as report on their practices in order to insure the quality of their products.

1- Incorporating ESG issues into investment analysis and decision-making process

2- Being active owners and incorporating ESG issues into our ownership policies and practices

3- Seeking appropriate disclosure on ESG issues by the entities in which we invest

4- Promoting acceptance and implementation of the Principles within the investment industry

5- Working together to enhance our effectiveness in implementing the Principles

6- Reporting on our activities and progress towards implementing the Principles

As of today (March 2015), the PRI organization has over 1250 signatories worldwide divided in three categories as follow:

Click on the image for full details.

As previously mentioned, the ever increasing demand for responsible investing is taking the investment industry by surprise. It is especially true when we consider that responsible investments increased by almost 50% in the last two years of total investments in Canada. Investors mindset has shifted dramatically in the past few years as they social awareness and environment have been hot topics creating a demand for impactful projects to get involved with. These changes have not only been observed in the investment world, but also have been reflected in many other industries and in our daily lives. To simply show you how quickly the switch has happened I will let the numbers speak for themselves in the graph below. 

 

 

New market and Opportunities

There are multiple opportunities inherent to responsible investing for investors, portfolio managers and investment companies. As this market is growing at a pace that the industry can't handle, shifting your company into responsible investing should not be only a consideration anymore but something to take action upon now before losing clients over to your competition. The mainstream vision in which investors are simply looking for the highest return on investment is not valid anymore. As I mentioned, a new wave of investors is arising and they are asking for different products and have different priorities. The baby boomers are now more aware of the environmental and social issues and wish to make a difference in any way they can. The Millennials have grown up with the environmental and social awareness which is now engraved in their mind as one of their top priorities. Not to mention, they also now count for over 50% of the work force in North America and will keep increasing which will result in an enormous purchasing and investing power. As any other business the investment industry will need to adapt to the new demand and create new products in order to meet clients' evolving needs. 

It is time for you and your company to get on the drawing board building new innovating products for the increasing demand of RI. Take the lead by building revolutionary customized options for the new buyers, which will result not only in generating a new income stream for your firm, but will also contribute to environmental and social matters. 

 

It's Not Only About Products

Often times companies present themselves as a proactive socially responsible organization that provides innovative products, but they usually forget to implement the strategy within their own business. It is just as important if not more important to implement sustainable business practices within you own organization as customers will also look at your business ethics, practices, mission and vision. People are now looking to do business with conscious organizations that have a greater purpose than simply making money which weight a lot in the buying process of numerous companies. 

 

LeadingAhead

It is typical to feel the need to reach out for help when it comes to these new strategies. Here at LeadingAhead, the investment industry is one our main focuses because of its importance in our world economy and because of its far reaching impact in one of the most important spheres of this world. As such, we can give our clients access to all the required resources and help them design customized sustainable and ESG solutions specific to the responsible investment industry. We are also working with a wide range of services in order to help them reach your sustainability goals and create a better work place, a better community, a loyal client base, and a better environment. All of this while expressing to the world your desire of making positive changes worldwide. It is not always easy to start from scratch when we do not have access to all required resources. It is great to offer socially responsible products however you also have to play a leading role by making your business model sustainable and not simply greenwashing the audience.  Put some effort into it! Show that you and your company are doing more than just what is "trendy". People want to see that you CARE.

 

Self-Investing 

Nowadays, most banks are simply attracting you to invest in an appealing high return on investment mutual fund or portfolio depending on your strategy and risk level only. However, we are seeing an increase in socially responsible investment offerings through credit unions such as VanCityBlueShore Financial and Desjardins Financial that are offering Socially Responsible Investment options. This is a huge step since RI is no longer solely accessible by pension funds and other big investment firms anymore. It also allows everyone to contribute to the greater good regardless of your buying power. If your financial institution or financial advisor does not have a responsible investment option for you, it is now time to take the lead and request such options . If all else fails, technology made it very easy to transfer your money to a different institution to get what you truly desire. Go ahead and invest your money where it matters!