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It's changing the way we invest. Here's how and why.

The following article was first published on RBC Global Asset Management’s Learn & Plan content hub.

Responsible investment (RI) has been around in one form or another for more than 30 years. But interest has boomed in recent years. Climate change, corruption, cyber security and a lack of gender diversity in companies are some of the concerns prompting many investors to think about changing the way they invest.

Data shows that more than US$30.7 trillion was invested in RI around the world at the start of 2018 — a 34 per cent increase in two years. In Canada, half of all professionally managed money is in responsible investments.1

So what is responsible investment?

RI is an umbrella term, used to describe three different investment strategies.

1. ESG integration

In investing, not everything that counts can be counted. With ESG integration, investors consider more than traditional financial measures. They consider the intangibles of a company’s environmental, social and governance (ESG) practices. This approach has the potential to add value by enhancing long-term performance for investors.

Examples of ESG factors

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Environmental
  • climate change
  • greenhouse gas (GHG) emissions
  • resource depletion, including water
  • deforestation
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Social
  • working conditions, including slavery and child labour
  • impact on local communities, including indigenous communities
  • conflict
  • health and safety
  • employee relations and diversity
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Governance
  • executive pay
  • bribery and corruption
  • political lobbying and donations
  • board diversity and structure
  • tax strategy

2. Socially responsible investing (SRI)

This is often referred to as investing in line with your values. Investors screen companies in or out of a portfolio based on set criteria. Today, more than US$19 trillion in assets around the world include SRI strategies — more than 30 per cent since 2016.2

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Positive screening

Using ESG measurements to select specific companies or sectors

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Sustainability themed

Building portfolios that only include investments that meet specific ESG criteria

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Exclusionary screening

Using ESG measurements to exclude specific companies or sectors

3. Impact investing

Impact investing focuses on investing in companies and projects that seek to generate a measurable positive social or environmental impact — alongside a financial return. For example, an investor seeking returns could invest their capital in a project that assists underserved communities through support for low- and moderate-income home buyers, affordable rental housing units, small business administration loans and economic development.

Responsible investment is trending

Of all the generations of investors, young people are at the forefront of RI, according to a 2019 report by the Responsible Investment Association.3 This trend might signal a bright future for responsible investment. Millennials’ incomes are rising, and they are poised to inherit US$30 trillion in the decades ahead. As they begin to invest that wealth, they might also fuel the growth of RI.

To learn more about responsible investment, visit the Global Asset Management website.

1. Global Sustainable Investment Alliance, Global Sustainable Investment Review, 2018
2. Global Sustainable Investment Alliance, Global Sustainable Investment Review, 2018
3. Responsible Investment Association, Investor Opinion Survey, 2019