Here are answers to some common questions about responsible investment. We encourage you to contact RIA members, who have RI expertise and will be pleased to assist you further.
The RIA is Canada’s membership association for Responsible Investment (RI). Members include mutual fund companies, financial institutions, asset management firms, advisors, consultants, investment research firms, asset owners, individual investors and others interested in RI.
Statement of Purpose
Our members believe that the integration of environmental, social and governance (ESG) factors into the selection and management of investments can provide superior risk adjusted returns and positive societal impact.
The Responsible Investment Association’s purpose is to:
The Responsible Investment Association shall expend its efforts primarily, though not exclusively, in Canada.
We believe that RI can be a powerful tool to reduce risk, enhance returns & catalyze positive societal change.
Responsible investment (RI) is the integration of environmental, social and governance factors (ESG) into the selection and management of investments. There is growing evidence that RI reduces risk and leads to superior long-term financial returns.
In recent years, responsible investment has come to encompass ethical investing, socially responsible investing, sustainable investing, green investing, community investing, mission-based investing and more recently impact investing. They are all components of RI and have played a part in its history and evolution.
ESG is the term that has emerged globally to describe the environmental, social and governance factors that concern investors and other stakeholders. The issues are ones that were traditionally considered non-financial or not material. Recent studies, however, have shown a correlation between strong ESG performance and financial outperformance.
Integration is different from screening in that integration combines ESG data, research and analysis together with traditional financial analytics in making investment decisions. Research has shown that ESG integration combined with a best-in-class approach is more likely to generate superior portfolio returns than negative screening or traditional socially responsible investing which has typically incorporated both negative and positive screening. The evolution of responsible investment has produced many funds that are hybrids of the various strategies. And SRI and RI are often interchangeable terms.
There are two types of screening. Negative or exclusionary screening and positive or best-in-class screening. So, screening companies out because of poor performance or screening them in because of good performance.
Corporate engagement is using the power of shareholders and stakeholders to influence corporate behavior.
Many of our fund managers employ the following strategies as active shareholders:
Canadian RI funds have been leaders in bringing forward proposals to press companies to consider the environmental, social and financial risks associated with issues like oil sands production or supply chain management.
RI addresses the ESG risks faced by today’s investors but there are many opportunities as well. Thematic funds invest in sustainable businesses that are involved in energy efficiency, green infrastructure, clean fuels, low-carbon transportation infrastructure and those that provide adaptive solutions to some of the most challenging issues of our time. These are investments that present solutions to our problems and are great opportunities for investors.
A recent Ceres report says that in order to avoid the worst impacts of climate change, we will need to invest an additional $36 trillion in sustainable businesses by 2050. That’s $1 trillion dollars a year in green business development – now that’s an investment opportunity.
In some cases, thematic funds are fossil fuel free and provide a good alternative for investors who choose to exclude resource extraction companies from their portfolios.
The Global Impact Investing Network (GIIN) defines impact investments as: “investments made into companies, organizations, and funds with the intention to generate a measurable, beneficial social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below-market to above-market rates, depending upon the circumstances.”
Climate change poses a severe threat to our planet and the global economy. Climate-related events disrupt investment markets and erode the long-term profitability of companies. As extreme weather events wreak havoc on business operations and supply chains, financial risks to investors will be amplified.
Organizations such as Carbon Tracker, warn that current estimates of fossil fuel reserves being accounted for by global energy companies are five times the allowable carbon budget necessary to limit our exposure to catastrophic climate risk. Regulatory and market responses to climate change and the transition to a low-carbon economy make it imperative that investors assess the financial impact of energy companies reducing their reserves to 20 per cent of current levels.
Investors and companies that assess climate risks will be better prepared to reduce the impact and provide competitive financial returns.
The Earth’s supply of fresh water is limited and the demands upon it are increasing. According to the Pembina Institute, it is predicted that climate change and industrial water use in Canada’s oil sands development will decrease the flow of the Athabasca River downstream of Fort McMurray by 30 per cent by 2050.
Globally, climate change is already affecting water patterns, leading to droughts in some areas and floods in others. Water is an important issue to investors because companies, especially companies in water-intensive industries, face significant financial risks. These risks include business interruption (directly through local infrastructure or indirectly through suppliers) and the potential market impact of negative media attention if the company is affecting a local community’s water supply or quality.
The 2013 collapse of Rana Plaza in Savar, Bangladesh attracted worldwide attention. The deaths of more than 1,100 garment workers show how a company’s business decisions have serious consequences for workers. They also underscore the reputational, operational and legal risks associated with human and labour rights in the supply chain.
Investors recognize the risk inherent in owning companies that are not addressing these issues. In addition to the devastating human cost, the Rana Plaza incident had a significant impact on the reputations of the companies involved. In Canada, thousands of consumers checked their labels. Without remediation, the next step would have been consumer boycotts.
Responsible investors are actively trying to prevent similar tragedies from happening.
The International Labour Organization (ILO) and the United Nations Declaration on the Rights of Indigenous Peoples have advanced the principle of obtaining the free, prior and informed consent (FPIC) of indigenous people before the approval of any project affecting their lands or territories and other resources.
It is especially important for the extractive sector to obtain and maintain support from local communities, Aboriginal or otherwise. Even if a project has received the necessary regulatory approval, community opposition has the potential to prevent a company’s project from coming to fruition – at great cost to the company.
Over the past two decades compensation awarded to top Canadian executives has grown at a much faster rate than wages paid to the average Canadian worker. The growth in executive compensation can lead to social inequality, negative media attention and increased regulations.
In the U.S., the Dodd-Frank Act has mandated shareholder votes on executive compensation or “say on pay” (SOP). According to Mercer, over the past few years, many Canadian companies have adopted SOP policies. Canadian institutional shareholders represented by the Shareholder Association for Research and Education (SHARE) and Meritas Mutual Funds have pressured the companies in their portfolios to adopt SOP policies.
It is widely recognized that effective boards reflect the diversity of their workforce and society. There is compelling evidence showing a positive correlation between the presence of women on boards and financial performance. A 2012 global study of 2,360 companies by Credit Suisse showed that companies with one or more women on their board delivered higher than average returns on equity, better average growth and higher price/book value multiples over a six-year period. Studies by Catalyst and McKinsey have shown similar results. Yet the 2013 Catalyst Census reports that women make up just 15.9 per cent of directors on corporate boards in Canada.
Canadian securities regulators are proposing amendments to corporate governance disclosure regulations that would require all TSX-listed issuers to disclose the level of representation of women on their boards and in senior management. This transparency is intended to assist investors in their investment and proxy voting decisions.
Responsible investments are found in all major asset classes: equities, fixed income (corporate bonds, green bonds, etc.), money market and alternatives such as impact investments.
RI Investment Vehicles
Despite evidence to the contrary, a 2014 NEI investor survey confirms that most investors and their advisors believe that responsible investments will underperform their traditional investments.
Critics of responsible investment argue that considering ESG performance will reduce the size of the investment universe and, according to modern portfolio theory (introduced in 1952), reduce portfolio efficiency and generate lower risk-adjusted returns.
Responsible investors agree that integrating ESG factors will eliminate companies from their investment universe, but argue that the remaining companies will be better long-term investments.
Historically, ethical investing and socially responsible investing (SRI) have been based, at least in part, on values-based exclusionary screening. There have been many studies on the performance of those funds relative to traditional investments.
The results have shown that they have achieved results similar to or slightly better than their non-SRI counterparts. There has been no penalty for investing according to one’s values.
Visit our RI Performance page for more information.