How Does Socially Responsible Investing Work? - YouTube

Socially Responsible Investing or SRI has been growing in popularity in recent years

and it’s easy to see why.

You get to invest your money, build wealth, and do good by aligning your investments with

your personal values.

But what exactly is Socially Responsible Investing and how can you be sure that you’re investing

in an ethical way?

I’m Peter Guay and in today’s episode, I’m going to talk about how you can do well

by doing good.

Socially Responsible Investing is any investment strategy that considers both financial return

and social good to bring about a social change.

We all know about financial return but you’re probably thinking, “what is a social good?”

That varies depending on each person’s own values, but is most commonly categorized in

the investment industry by Environmental, Social and Governance or ESG.

Environmental factors consider a companies’ impact on air quality, land, water and human health.

Social factors consider companies’ human rights records and support for the communities

in which they operate, and finally Governance factors consider executive compensation practices,

board diversity and corporate risk management.

So let’s look at the numbers.

As I said, SRI is growing in popularity and a lot of growth is being driven by millennial investors,

who are more likely than Baby Boomers to consider ESG factors in their investing.

They look for companies dedicated to solving environmental and social challenges.

According to the Responsible Investment Association’s 2016 trend report, there is approximately

$1.5 trillion dollars in assets that are part of a responsible investing strategy in Canada.

The report also says that responsible investing represents 38 per cent of the Canadian investment

industry and I expect that to increase, particularly since the Ontario Pension Benefits Act now

requires pension plans to have a statement on Socially Responsible Investing as part

of their Investment Policies.

So how can you implement a socially responsible portfolio for your investments?

Well, there are a few ways to approach this.

The first is what’s known as negative screening.

That’s where you exclude companies and industries involved in practices and behaviours that

go against your values.

Some may avoid investing in tobacco, alcohol or cannabis products while others may avoid

investing in companies that are considered environmentally and socially unfriendly.

For instance, the recent movement in the US around gun control, or lack thereof, has many

investors asking about the exposure to gun manufacturers in their portfolio, and how

to eliminate that exposure.

Another approach takes ESG ratings into consideration.

Several indexes screen and rank companies on their ESG practices.

This determines the weight of each company in an index as a function of the company’s ranking.

Now there isn’t one overall ESG report that scores all public companies, but there are

several indexes offered by third-party providers.

As you'd expect, the methodologies can be different, so the best way to find investments

that work for you is to work with an advisor you trust.

I like to use the ETFs based on the MSCI ESG rating system, for which I’ll provide a link below.

The growing popularity of indexes like these sends a message to public companies that if

they want to raise funds in public markets, good ESG behaviour will make it easier for

them to attract more investor dollars.

The last way to express your views that I’ll discuss in this video, is called Impact Investing,

where financial returns aren’t necessarily the main goal.

Instead you invest in projects that might earn below market financial returns , but that

complement your environmental or social objectives.

Some good examples are financing clean water projects, or lending to small businesses in

underdeveloped countries.

It’s important to understand that socially responsible or ESG investing won’t necessarily

mean higher returns on your portfolio.

I’m not aware of any conclusive research that says as much.

If you know of any, please let me know!

That said, if it’s important to you to express your views and values through your investing,

you may be willing to give up a little on the financial return in exchange for a clear

conscience and the knowledge that you’re doing good for the planet and for others.

As always, I’ll put some links below if you want to read more about SRI, ESG or Impact Investing.

Please leave me a comment if you have any questions about this episode or if you want

to get in touch with me.

Don’t forget to subscribe to my channel if you want more information like this.

Thanks so much for watching!