4 steps toward responsible or sustainable investing
Are you concerned about environmental protection, the fair treatment of employees, appropriate executive compensation, and corruption issues? Do you want to invest while taking the principles of responsible or sustainable investing into account? Here’s one way to do that.
1. Know what you’re investing in
ESG stands for the three guiding principles of responsible or sustainable investing, Environmental, Social and Governance. There is currently no consensus on how ESG should be defined.
Don’t fall for an investment simply because it’s called “responsible,” “ESG” or “green”.
The criteria for considering an investment ESG can vary from one issuer to the next. Therefore, even if an investment bears the ESG label, it might not match YOUR ESG criteria. Before you invest, refer to the available disclosure documents for the criteria used.
Don’t limit your reading to promotional material. Read the official documentation. For example, you can refer to information available on the company’s website to see what values the company upholds and how it selects investments. Some disclosure documents will highlight social factors, while others will focus on environmental or governance issues. In the case of green bonds, for example, you should make sure an independent evaluator has produced a second opinion on the “greenness” of the investment.
2. Respect your risk tolerance
You can incorporate the principles of responsible investing into your investment decisions, whatever your risk tolerance. The important thing is to stay within the bounds of your actual level of tolerance. For example, if you want to invest in a mutual fund, you can choose from among conservative, balanced or growth funds that take ESG factors into account. Similar choices are available from firms offering exchange-traded funds (ETFs).
3. Diversify your investments
There are many types of investments that allow you to invest responsibly, including:
- Québec fixed-rate green 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.
- Green bonds
- ETFsAn 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. and 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. using ESG criteria
- SharesA 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. of companies that meet ESG criteria or have sustainable development policies
Whether you want all or only part of your portfolio be held in ESG investments, you can still use various techniques to diversify your holdings by term, sector, security, type of product, and so forth. Here are a few ideas on how to achieve diversification while making ESG investments:
- Instead of holding a green bond, hold one or more green bond funds
- Instead of purchasing shares of one company that has adopted sustainable development policies, buy the shares of several companies with such policies that operate in various sectors, or invest in one or more funds that take ESG criteria into account
- Invest in several ESG funds that match your investor profile
4. Compare fees
As with all types of investments, shop around and compare fees before you invest.
Do you know your investor profile?
A lot of people say they can tolerate a significant drop in the value of their portfolio. They hope that any decreases in value will be reversed over time by an upturn in the markets.
When this situation does occur, however, they may give into the temptation to sell certain investments, resulting in considerable losses.
You can use the AMF’s investor profile calculator to determine your investor profile based on your financial capacity and willingness to take risks. The calculator can also provide explanations of the outcome of this exercise.
4 commonly used approaches to investing that take ESG criteria into account
There are various ways you can incorporate ESG criteria into your investment decisions. Here are four. You can use one or a combination of them. Whatever approach you take, follow the steps toward responsible or sustainable investing.
Use ESG criteria to select investments
Consider ESG criteria to determine an investment’s risk and value.
Invest in companies that do not comply in every respect with ESG criteria in order to try to influence them
Exercise shareholder power—through proxy voting, for example—to influence corporate decisions in an attempt to improve ESG performance.
With this approach, you don’t invest all your money in ESG securities. However, you help improve companies that have poorer ESG records.
Automatically exclude companies that do not meet ESG criteria
Only invest in companies with good ESG records.
Only invest in companies that comply with ESG criteria and that show the resulting positive effects through metrics, monitoring and disclosure
This investment approach considers both of the following objectives at the same time:
- To select investments while taking ESG criteria into account
- To select investments whose positive effects are measured, monitored and disclosed. Metrics used may include CO2 emission reductions, time savings for employees, energy savings, etc.
- Investing in mortgages for cooperatives
- Investing in a sustainable food company
- Financing a public transit system that runs on clean energy
- Financing building retrofits to improve energy efficiency
- Investing in renewable energy
Financial benefits for investors
Responsible investing may allow more risks to be taken into account and managed, including regulatory, environmental, social and reputational risk. By reducing its exposure to such risks, a company can enhance its investor appeal in comparison to companies that fail to do so.
Fraudsters may take advantage of the current enthusiasm for ESG investing to scam investors.
In the specific case of ESG investments, scammers may try to entice you with promises such as:
- “The company will soon be granted a patent for an invention for cleaning up pollution. Its stock will double in value!”
- “The company has developed a revolutionary green technology.”
Beware of unsolicited investment offers, whether you receive them via e-mail, telephone or social media.
Before you invest, follow the five steps to help you avoid financial fraudEnd of the warning