Responsible or sustainable investing
Defining responsible or sustainable investing
There is no official definition of responsible or sustainable investing. It generally means an investment approach that combines environmental, social and governance (ESG) factors with traditional financial research. Those factors can vary depending on each investor’s values and goals.
Although this approach to investing goes back decades, it has really taken off in the past few years in Canada and globally. ESG factors can be integrated into virtually every type of investment, including mutual fundsA mutual fund is made up of money that is pooled by several investors and used on their behalf by a manager to buy shares, bonds or other securities in line with the fund’s objectives. , exchange-traded funds (ETFs)An exchange-traded fund (ETF) is an investment fund whose securities are traded on an exchange like shares.
These funds generally track a benchmark index. Unlike a mutual fund manager, an ETF manager does not seek to maximize the fund’s return but only to follow an index; this explains the typically lower management fees for ETFs. , stocksA share, also referred to as stock, is an equity security that entitles you to an ownership interest in a company.
The company can distribute a portion of its earnings to shareholders by paying them a dividend.
The shares of companies listed on an exchange are bought and sold at the exchange.
When a company ceases to operate, the proceeds from the sale of its assets are used to pay its debts and taxes, and the rest of the money is distributed to shareholders., bondsA bond is a security issued by governments and companies through which an investor lends money to the issuer.
In general, the government or company promises to pay the investor interest at a fixed rate and at certain intervals (for example, 2% per year). Interest is normally paid twice a year. At maturity, the government or company pays back a predetermined amount that is called the face value. The face value is usually $1,000.
There are several types of bonds:
Stripped bondReal return bondConvertible bondSavings bondRetractable bondUnsecured bondEtc. issued by certain governments, in particular that of Quebec and bonds issued by publicly traded (or listed) companies.
The consideration of ESG factors can be useful and relevant in particular to identify investments which, compared to others, could offer a higher return potential or present overall lower risks, or even make it possible to generate a positive impact on the environment, society and good corporate governance.
Examples of ESG factors include:
Environmental
- Impact of the environment on company operations and performance, particularly climate change
- Environmental impact of company operations, which may be reflected in the following actions:
- Protects biodiversity
- Uses clean energy
- Mitigates climate change
- Limits greenhouse gas emissions
- Conserves water
- Reduces pollution
- Limits the amount of waste produced
- Uses natural resources while restoring them, if possible, to their original condition regeneration
- Does not contribute to rising sea levels
Social
- Impact of social factors on company operations and performance
- Impact of company operations on society, which may be reflected in the following actions:
- Respects local communities
- Offers fair working conditions
- Does not use child labour
- Ensures gender equity
- Treats minorities fairly
- Partners with charitable organizations
- Provides a safe workplace
- Respects human rights
- Does not manufacture offensive weapons or tobacco products
Governance
- Fosters board independence from senior management
- Does not pay executives excessive compensation
- Implement anti-corruption policies and ensure their respect
- Adopts ethical behaviour
- Promotes a culture of compliance
- Set up transparent accounting that complies with applicable standards
- Pays its fair share of income tax
- Properly manages lobbying activities
- Foster a culture of diversity, equity and inclusion within companies, and particularly within their board of directors and their senior management team
The challenges of investing while taking ESG criteria into account
The disclosures of various publicly traded companies, mutual funds or exchange-traded funds (ETFs) regarding the ESG factors you’re interested in must be assessed one by one, making it potentially difficult to compare ESG performance. For example, what ESG factors are applied by the portfolio manager when picking securities for a particular mutual fund or ETF?
Organizations that assess the ESG performance of publicly traded companies, mutual funds or ETFs differ substantially in terms of the methodology used. It is therefore important to do your homework before investing on the basis of such assessments.
Where to find ESG information about a specific publicly traded company or investment fund?
Every investment fund must disclose its principal investment objectives. It must also describe the fundamental nature or features of the fund that distinguish it from other funds.
If a fund takes certain ESG factors into consideration, it must list and provide details about them in its documentation, specifically in the description of its investment objectives and strategies.
Regulatory documents
An investment fund manager must typically produce and file various disclosure documents on SEDAR+ 
This link will open in a new window and its own website. This platform contains, among other things, the documents of capital market participants in Canada, such as prospectuses, management discussions and analysis (MD&A) and annual information forms of publicly traded funds and companies. Some of these documents provide information about how ESG factors are considered or integrated by the investment fund.
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The prospectus
An investment fund is required to describe in its prospectusA prospectus is a detailed information document that a company must prepare to be able to sell securities (such as shares) to the public.
It must provide full, true and plain disclosure of all material facts likely to affect the value or market price of the security in question. :- its investment objectives
- the principal investment strategies that it intends to use in achieving its investment objectives
- the process by which securities are selected for the fund’s portfolio, including any investment approach, philosophy, practices and techniques used
An ESG investment fund must disclose this ESG aspect in its prospectus. A fund that does not include ESG in its fundamental investment objectives should not characterize itself as an ESG fund.
Some funds may make investments that appear to be contrary to the ESG-related aspects of their investment objectives. It is important to read the investment strategies so you understand the approach used and the investments permitted.
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The fund facts document (Fund Facts) or ETF facts document (ETF Facts)
An investment fund must also include a description of its fundamental investment objectives in its Fund Facts or ETF Facts. These objectives may be related to ESG factors.
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Management report of fund performance (MRFP)
This report enables investors to monitor a fund’s performance and evaluate its ability to meet its objectives on an ongoing basis. A fund that includes ESG factors is required to disclose in its MRFP how the composition of the portfolio relates to its ESG-related investment objectives and strategies.
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Proxy voting record
A fund is required to maintain a proxy voting record and make its most recent annual proxy voting record available on its website. It must promptly send it to any investor upon request. The votes cast by the fund may be related to certain ESG-related considerations or objectives.
Reports on sustainable investment approach or policies
Many fund managers release reports on their sustainable investment approach or policies.
Be careful!
Although such investment approach reports or policies can be sources of additional information, they are not subject to any regulation. The reports and policies are completely voluntary. The information they contain may not have undergone the same controls as regulatory documents. Some of them can be overly promotional in tone and only provide positive information about the ESG factors considered by the fund.
End of the warningListed companies are required to file various disclosure documents on SEDAR+ This link will open in a new window, including prospectuses, management discussions and analyses (MD&As), annual information forms and information circulars. The documents contain a number of ESG disclosures to enable investors to make informed decisions.
Here is an overview.
Prospectuses
When a security is issued, a prospectusA prospectus is a detailed information document that a company must prepare to be able to sell securities (such as shares) to the public.
It must provide full, true and plain disclosure of all material facts likely to affect the value or market price of the security in question. must contain full, true and plain disclosure of all material facts relating to the security. For example, when a “green bond” is issued (i.e., a bond whose proceeds are used to fund environmentally friendly projects), the prospectus must clearly indicate how the funds obtained will be used.
News releases and material change reports
If a material change occurs in the affairs of a company, the company must immediately issue and file a news release that describes the change. It must also file a material change report. The change may be related to ESG factors.
Specific ESG disclosures companies are required to provide
The following tables summarize the disclosures companies are required to provide for each of the three categories of factors, where to find them, and the related regulations and guidance (click on the corresponding plus sign or heading).
Environmental factors (E)
The table below summarizes the disclosures companies are required to provide regarding environmental factors.
| Required disclosure | Where to find the disclosure | Regulatory reference and applicable guidelines |
|---|---|---|
| Known commitments, events, risks or uncertainties that may have a material effect on the company’s performance (these may be environmental in nature) |
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| The effects of environmental protection requirements on the capital expenditures, profit or loss and competitive position of the company in the current year and in future years (applicable to non-venture issuersSimply put, a non-venture issuer is a reporting issuer that has at least one of its securities listed or quoted on a major stock exchange, such as the Toronto Stock Exchange. only) |
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| The environmental policies implemented by the company and that are fundamental to its operations (applicable to non-venture issuersSimply put, a non-venture issuer is a reporting issuer that has at least one of its securities listed or quoted on a major stock exchange, such as the Toronto Stock Exchange. only) |
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| The environmental aspects of mineral projects |
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| Disclosure of risks and opportunities of climate-related matters (governance, strategy, risk management, measures and targets) |
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Social factors (S)
The table below summarizes the disclosures companies are required to provide regarding social factors.
| Required disclosure | Where to find the disclosure | Regulatory reference and applicable guidelines |
|---|---|---|
| Known commitments, events, risks or uncertainties that may have a material effect on the company’s performance (these may be social in nature) |
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| The social policies implemented by the company and that are fundamental to its operations (applicable to non-venture issuersSimply put, a non-venture issuer is a reporting issuer that has at least one of its securities listed or quoted on a major stock exchange, such as the Toronto Stock Exchange. only) |
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| The representation of women on the board and in executive officer positions (number of women, policies, targets, etc.) (applicable to non-venture issuers only) |
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| The social aspects of mineral projects |
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| Payments made to certain governments, municipalities and Native nations in relation to exploration for or development of mineral substances or hydrocarbons, e.g., royalties and production entitlements |
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Governance factors (G)
The table below summarizes the disclosures companies are required to provide regarding governance factors.
| Required disclosure | Where to find the disclosure | Regulatory reference and applicable guidelines |
|---|---|---|
| Corporate governance practices (including matters such as the independence of directors, compensation, ethical business conduct, etc.) |
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| Executive compensation |
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| The representation of women on the board and in executive officer positions (number of women, policies, targets, etc.) (applicable to non-venture issuersSimply put, a non-venture issuer is a reporting issuer that has at least one of its securities listed or quoted on a major stock exchange, such as the Toronto Stock Exchange. only) |
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Social and environmental responsibility reports and sustainability reports
Increasingly, companies are releasing “social and environmental responsibility”, “sustainability” or similarly titled reports.
Be careful! Although such reports can be a source of additional information, they are not subject to any regulation. The reports are completely voluntary and comply or purportedly comply with various voluntary standards (SASB, GRI, IIRC, etc.). They are generally not certified by senior management and the information presented in them may not have undergone the same controls as other disclosure documents. Some reports can be overly promotional in tone and only provide positive information about the topics that are dealt with.
End of the warning