Responsible investing is a growing trend, but not all responsible investing is created equal. For example, a distinction can be made between socially responsible investing (SRI) and environmental, social and governance (ESG) investing.
“Responsible investing has evolved beyond SRI funds into full ESG integration,” said Amanda McPherson, vice-president of global fixed income – credit at CIBC Asset Management, in a December interview.
While SRI funds typically apply negative screens to avoid investing in companies associated with such things as alcohol, gaming and tobacco — or incorporate restrictions on exposure to things like nuclear or carbon emissions — ESG investing incorporates analysis.
McPherson described ESG investing as the “systematic and explicit inclusion” of ESG factors into traditional financial analysis. “It means really looking deeper into companies’ efforts in the areas of ESG,” she said.
For example, managers wouldn’t simply exclude certain bonds from their portfolios because they were issued by a brewery. Instead, relevant ESG issues that affect the company’s credit quality would be considered, such as water and energy use.
“How does the company minimize the use of water, and how is management looking to reduce electricity consumption and production?” McPherson asked. “The answers tell us a lot about whether or not the company has already invested for the future and is in a good competitive position versus their peers.”
McPherson estimated that about two-thirds of asset managers employ a form of ESG investing over at least a portion of their investment mandates.
ESG trends to watch
A key trend in ESG investing is impact investing, McPherson said, whereby investments are chosen with the intention of making a specific social or environmental impact.
Green bonds are a popular example of impact investing. In the first three quarters of 2019, global green bond issuance was 67% higher year over year relative to 2018, as reported in November by Moody’s Investors Service.
Canada may soon have a framework for these bonds based on the International Capital Market Association’s green bond principles.
“The Canadian Standards Association is actively working on developing definitions and structures appropriate for the Canadian market,” McPherson said. “They’re trying to develop a national standard in Canada for green and transition finance.”
Europe, Japan and Australia have also implemented standardization, she said, which could help the ESG market expand and prevent green-washing (making misleading claims about the environmental benefits of a product).
Another trend in ESG investing is increased engagement with companies, especially regarding disclosure and transparency, which helps inform investment choices. And it’s not just equity investors engaging with companies, McPherson said. “Fixed income investors also have the opportunity to meet with management teams.”
Responsible investing risks
McPherson cautioned that responsible investing has a “high degree of subjectivity.”
“There’s no clear definition of responsible investing, and some people equate it with ethical investing,” which isn’t necessarily accurate, she said. That means investors must do some legwork.
For example, unless a responsible-investing portfolio explicitly says it’s fossil-free or low-carbon, it could include oil and gas companies.
These companies could score well on ESG criteria if they use new technologies or work with local Indigenous communities.
“We’ve seen some bonds issued by the East Tank Farm Development,” McPherson said, which is a partnership on an oilsands project between Suncor Energy and First Nations in Alberta.
The takeaway for investors is “the importance of doing your own due diligence and checking the investment parameters to see if they align with your objective,” she said.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.