2021 was a tough year in British Columbia in terms of climate change. The wildfire season was the third worst on record in terms of area burned and scorched the town of Lytton, leaving two dead. The White Rock Lake Fire burnt 78 properties. In November, southern B.C. was hit by record-breaking rainfall that contributed two days later to the breach of the Sumas Dike in two places. Thousands of residents were displaced, crops destroyed, livestock killed, and valuable farmland was flooded.
Unfortunately, these severe swings in climate are becoming our new normal. Not just in BC, but in other areas of the world as well. Climate change is fast becoming one of the biggest source of disruption to our planet, way of life, and our investment portfolios.
Interestingly, these new risks also come with new business opportunities. According to the UN Intergovernmental Panel on Climate Change (IPCC), the world must invest US $2.4 trillion into the global economy to help mitigate climate change. This can’t be done by governments and corporations alone. Much of this is going to come from you – the individual investor – in the way of socially responsible investing.
Socially responsible investing (SRI) and environmental and social governance (ESG) is not as fringe as you may think. The wealth sector now sees SRI as a critical component of the investment process. Net assets in ESG mutual funds and ETFs in Canada alone have quadrupled since 2011, reaching over $20 billion in 2020 (Footnote 1). Not chump change.
Why consider socially responsible investing? Here are five reasons:
1. Massive Investment Opportunities Exist
You know the old saying, “necessity is the mother of invention”. This can’t be truer than when it comes to climate change. The climate revolution is expected to make the industrial revolution and the information age pale in comparison (Footnote 2). Climate change will drive new innovation and create products in an unprecedented manner. Companies will find new ways to reuse plastics and others are finding ways to capture carbon emissions just to name a few. Old technologies will become obsolete and new technologies will develop and become investment opportunities. Well managed companies that are solving global environmental and social problems are well positioned to create value and growth in the long term.
2. The world is watching
Globally, it has become quite obvious that social issues are becoming financial issues. In fact, ESG issues have now become a better signal of earnings risk than any other metric (Footnote 3). Public companies are being scrutinized on their ESG integration. Is their board diverse enough? Is their executive compensation excessive? How is their history on labour standards? What are their political affiliations? Firms that positively address these issues will see increased revenue and performance and will be better equipped to face the challenges of a growing world. As an investor, ESG = better risk management.
3. SRI Equals Enhanced Returns
The myth that investing in SRI means sacrificing performance is untrue. Many SRI funds have proven that they can perform as well or better than many traditionally managed funds. S&P Global Market Intelligence looked at the performance of 26 ESG mutual funds and ETFs with AUMs larger than US$250 million. It found in the 12 months after COVID-19 was declared a pandemic, 19 had outperformed the S&P 500 (Footnote 4). SRI, at its core, is investments which means that at the end of the day, it is returns-focused, but has the benefit of also producing positive impact. Investing in SRI funds does not mean sacrificing performance.
4. Investing in RI has a global impact
As an investor, how can you be sure your investment choices are making a positive impact? Active ownership is a big part of it. Desjardins Investments Inc. for example, met with 163 firms in 2019 as part of their Shareholder Engagement program to drive companies in all sectors to reduce their environmental footprint, and improve their social and governance practices. Additionally, all of their fund managers must complete a 100 point questionnaire to ensure they incorporate ESG integration into their funds.
Another way to have impact is by investing in companies actively working on the solution to environmental or social issues. Desjardins Investments Inc. measures their impact and reports actual numbers such as net CO2 emissions avoided, number of tons of waste recovery, and the amount of MWh of renewable energy created. Investing in SRI products can generate positive, measurable outcome.
5. Leave a better world for your children & grandchildren Here is a sobering fact: By the year 2050, there might be more plastic in the ocean than fish (Footnote 5). Imagine your grandchildren snorkeling on a tropical vacation while watching plastic bottles float by. Or maybe that they can’t play outside without wearing a mask because the pollution is so bad? Doesn’t paint a very nice picture, does it? Will they wonder how their parents and grandparents allowed this to happen? What do you want your world to look like? You can be a part of the solution by investing in RI products. Your grandchildren will thank you.
Do you want to be part of the solution? I do. In December, I became certified as a Responsible Investment Specialist. I can help you strengthen your portfolio and turn your investments into agents of change for a better future.
Make money and help the planet. Contact me today to learn how.
1. The Investment Funds Institute of Canada (IFIC) (2020). 2020 Investment Funds Report.
2. Nili Gilbert, Financial Consultant Ted Talk
3. Desjardins Investments Inc. Lead The Way 2021 RI Certification Program Webinar Presentations
4. Whieldon, Esther & Clark, Robert. (2021). ESG Funds Beat Out S&P 500 in 1st Year of COVID-19; How 1 Fund Shot to the Top.
5. Futureagenda.org