Sustainable Investing

What is Sustainable Investing?

The terms sustainable investing and responsible investing have come to be used interchangeably. At the core, sustainable (responsible) investing involves the recognition, consideration and incorporation of (ESG) factors into the investment management process. We provide two examples of definitions that are used below:

RIA Canada: “Responsible investment (RI) refers to the incorporation of environmental, social and governance factors (ESG) into the selection and management of investments.”

UN-Principles for Responsible Investing (PRI): “[The PRI] defines responsible investment as a strategy and practice to incorporate environmental, social and governance (ESG) factors in investment decisions and active ownership.”

ISF Primer Video Series

An introduction to sustainable investing, with Patricia Fletcher

“It’s lovely to see” sustainability reporting “coming online and becoming more and more of a norm.” ISF Chair Sean Cleary interviews Patricia Fletcher, CEO of RIA Canada, about defining sustainable investing, how the practice is developing and becoming more mainstream in Canada and globally, and the most notable strategies for investing responsibly.

Approaches to Sustainable Investing¹

There are several approaches to sustainable investing. These include the following:

Negative/exclusionary screening: the exclusion from a fund or portfolio of certain sectors, companies or practices based on specific ESG criteria.
Positive/best-in-class screening: investment in sectors, companies or projects selected for positive ESG performance relative to industry peers.
Norms-based screening: screening of investments against minimum standards of business practice based on international norms, such as those issued by the OECD, UN, etc.
ESG integration: the systematic and explicit inclusion by investment managers of ESG factors into financial analysis and portfolio management.
Sustainability themed investing: investment in themes or assets specifically related to sustainability (i.e., renewable energy, cleantech, or sustainable agriculture).
Impact investing: targeted investments aimed at addressing social or environmental problems, where capital is specifically directed toward traditionally underserved individuals or communities, as well as financing that is provided to businesses with clear social or environmental purposes.
Corporate engagement and shareholder action: the use of shareholder power to influence corporate behaviour, including through direct corporate engagement (i.e. communicating with senior management and/or boards of companies), filing or co-filing shareholder proposals, and proxy voting that is guided by comprehensive ESG guidelines.

Sustainable Investing in Practice

Most investors that practice responsible investing integrate ESG considerations into their investment management process, and do so in combination with some of the other approaches listed above.

For example, consider the following quotes taken from the recent Sustainability reports and/or company websites of a number of widely known international and Canadian banks, pension funds, and asset management firms:

... our approach to investing sustainably includes exclusion, integration and impact investing.
... built upon ESG integration across all investments, stewardship, screening, ... with allocations to impact, thematic and socially responsible investment opportunities.
... integrate, engage, influence, and evolve.
... shareholder engagement, integration of ESG criteria into investment analysis and decision making, and exclusion. Includes portfolio carbon footprint reduction targets.
... built upon three pillars: fully-integrated ESG, active stewardship and client-driven solutions and reporting.
... integrate ESG factors into investment analysis, and employ engagement and proxy voting.
... provide several alternative investment options to investors that enable them to choose.
... emphasizes ESG integration, thematic and impact investing opportunities, as well as exclusionary screening.

What are the Sources of Sustainable Investing and ESG Information?

There is no doubt that sustainable investing and ESG considerations have become increasingly important. The level of sophistication of those interested in accessing and processing such information varies widely, from those with well-embedded and highly developed approaches to both obtaining and using such information, to those that have barely gotten started.

A recent survey of investors and asset managers by SustainAbility asked respondents to name three sources of information that they found the most helpful.² The survey shows clearly that users of such information typically rely on several sources of information. The top two (55 per cent each) include ESG ratings (from ratings providers)³ and direct engagement with companies, followed closely by corporate sustainability reports (50 per cent) and in-house research (41 per cent). Other sources referenced by respondents include corporate ESG rankings (23 per cent); information in securities filings (18 per cent); and, media (14 per cent).

Clearly many smaller investors and asset managers will be constrained in their ability to pursue direct engagement with companies and conduct in-house research. However, ESG ratings and reports are widely accessible, while corporate sustainability reports are fast becoming the norm for public companies. For example, 90 per cent of S&P 500 companies provided sustainability reports in 2019, versus less than 20 per cent in 2011. According to a 2021 Millani survey, 71 per cent of TSX Index companies prepared a sustainability report in 2020, versus 58 per cent in 2019 and only 36 per cent in 2018.⁴

What's Happening in Canada?

As of Q4, 2021, 4,375 global investors responsible for $121-trillion US in assets were signatories of the UN-PRI, and there are currently over 200 Canadian asset owners and managers that are PRI signatories. A recent report from RIA Canada shows that $3.2-trillion Cdn. in assets were managed in alignment with a “responsible” investment strategy by the end of 2019, more than six times the 2006 figure of $459.5 billion.⁵ The report notes that this represents 61.8 per cent of Canada’s investment industry, up from 50.6 per cent just two years prior.

¹ ISF's "Environmental, Social and Governance Factors in Investing" Primer discusses the dramatic growth in sustainable investing and the underlying factors driving this growth in more detail.
²Source: Rate the Raters 2020.
³ ISF’s “Environmental, Social and Governance Factors in Investing” discusses ratings reports by providers in greater detail.
⁴Source: Millani’s 5th Annual ESG Disclosure Study: A Canadian Perspective, 2021.
⁵ RIA Canada Trends Report, 2020.