What is Impact Investing?
Ludovic Siouffi - Jul 07, 2021
Impact investing seems to be the new buzz word, but what does it actually mean?
Socially Responsible Investing (SRI), Sustainable Investing, Impact Investing or any other term you want to use is simply when your money is placed where it will have both a financial and ethical impact. In essence, it will ‘do no harm’.
An ethical impact can mean many different things, but for us it means positively affecting the present and future of humanity and our planet. We look for companies that treat all employees well, give back to local communities, produce products/services that improve people’s lives, and more. In doing so they also focus on reducing their carbon footprint or actively innovating to optimize the use of natural resources.
This is also known as including environmental, social and governance (ESG) factors in our investment selection and management. Environmental issues include climate change and resource depletion; social factors involve human rights, people management and consumer protection; and governance refers to the responsibility and accountability of company management.
Think clean energy, smarter cities and the next generation.
It was only a half-century ago that Nobel-winning economist Milton Friedman championed the concept of maximizing shareholder wealth: “There is one and only one social responsibility of business: to engage in activities designed to increase its profits.” Today, the tides have turned.
With growing unrest due to economic, social and environmental concerns, a movement towards “moral capitalism” has emerged. Prior to the pandemic, the Business Roundtable, a consortium of CEOs from 181 of the largest corporations, declared a shift in corporate attitude and a new social consciousness in serving all stakeholders including employees, communities and the environment.
Canadian assets under management using ESG factors are in excess of $2 trillion and are, regardless of asset class, far less volatile in the market1,2. As SRI continues to grow, so do certain perceptions.
Here are four common myths, debunked.
SRI strategies underperform conventional strategies.
It has been argued that investing with SRI strategies reduces the number of investment opportunities, thereby lowering an investor’s potential returns. However, companies that wisely manage ESG risks and opportunities may actually show improvements to certain financial metrics, potentially enhancing profitability and/or share prices. There is evidence to suggest that correlations exist between strong sustainability practices and company performance.3 One of the reasons may be because corporations that apply ESG factors across their organizations can reduce various business risks.
CASE STUDY: BP
“The explosion of BP’s Deepwater Horizon oil rig provides a striking example of how considering ESG factors can help investors reduce their exposure to risks. In 2010, the Deepwater Horizon oil rig exploded, killing 11 crewmen and causing the largest oil spill ever recorded in U.S. waters. This was a human tragedy and environmental catastrophe, but it was also a major problem for shareholders as BP’s share price plummeted by 55% following the explosion.
How could an investor foresee something like this? In the three years leading up to the explosion, regulators had cited BP for a staggering 760 “willful, egregious” safety violations. To put that into perspective, the next highest numbers were 8 (Sunoco and Conoco-Phillips), 2 (Citgo) and 1 (Exxon), In other words, BP was responsible for 97% of these severe violations.
So, the warning signs were there. But in order to see the warning signs, you had to look at the company’s health and safety record rather than just the financial statements. In other words, you needed to consider ESG factors to see that potential risk.”
-Responsible Investment Canada
SRI mainly involves screening out “sin” stocks.
In the past, many SRI methodologies focused on exclusion based investing, with the purpose of avoiding companies that were considered to be in sin industries like tobacco, gambling, or alcohol. However, as SRI has grown in popularity, there has been a distinct move towards screening investments using inclusionary factors, such as focusing on those companies who are better at managing sustainability-related issues.
SRI is limited to equity investments.
While SRI was initially focused on equity investing, over recent years there has been a growing movement in SRI across all asset classes. For example, in the fixed income market, municipal “green bonds” have grown in popularity. These bonds are used to finance climate and environmentally friendly projects, such as clean-tech. In 2019, global green bond issuance rose by 51 percent (as compared to 2018), raising over US$250 billion.4 While Canada remains a small player in the global green bond market, it is expected that positive investor interest will help to drive continued growth in this segment of the market. Alternative investments, such as real estate and private equity, have also been increasingly integrating ESG factors into their investing practices. SRI is a “fad.”
Many industry observers believe that a long-term structural shift to socially responsible investing is taking place. Sustainability is quickly becoming a standard. In January, the world’s largest fund manager announced sweeping changes to help position itself as a leader in sustainable investing. It will now assess ESG factors in its investments “with the same rigor that it analyzes traditional measures such as credit and liquidity risk.”5 This demonstrates just one of many significant commitments by industry players to support SRI.
How Can I Help?
Most of us want to do good for the world. Impact Investing gives you the opportunity to actively invest in and contribute to a better tomorrow.
The more money each investor pours into socially responsible businesses, the more they can grow and the less money there is leftover for less-than-responsible businesses.
We vote with our dollars. By purchasing shares and products of ethical companies, we are communicating where our values lie and that we are willing to pay for them. Since businesses need customers in order to succeed, the economy will grow wherever the money is.
An ethical portfolio can improve your financial future while doing good for the world. If you’re interested in learning more about ESG values or our Impact Portfolio, please give us a call or email. We would be happy to provide support and clarity.
All the best,
Ludovic Siouffi, MBA, CIM, RIAC
Canaccord Genuity Corp.
3. tiaa.org/public/pdf/ri_delivering_competitive_performance.pdf; forbes.com/just-companies/#2ea3f1c82bf0; Gunnar Friede, Busch & Bassen, “ESG and financial performance”, Journal of Sustainable Finance & Investment, 2015;
5. https://www.theglobeandmail.com/investing/markets/ inside-the-market/article-blackrocks-eco-investing-strategy-is-not-a-moral-awakening/