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 over 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 that have prompted many of us to think about changing the way we live our lives and how we invest.
In fact, data shows that more than US$35.3 trillion was invested in RI around the world at the start of 2020. That’s a 15 percent increase in two years. And in Canada, RI rose 48 percent between 2018 and 2020. Likewise, in the U.S., RI rose 42 percent. Canada is now the market with the highest proportion of sustainable investment assets.¹
So what is responsible investment?
RI can be used as an umbrella term related to a number of 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 a company’s environmental, social and governance (ESG) practices to identify risks and opportunities. This approach has the potential to add value by enhancing long-term performance for investors.
Examples of ESG factors
Environmental
- climate change
- greenhouse gas (GHG) emissions
- resource depletion, including water
- waste and pollution
- deforestation
Social
- working conditions, including modern slavery and child labour
- impact on local communities, including Indigenous communities
- conflict
- health and safety
- employee relations and diversity
Governance
- executive pay
- bribery and corruption
- political lobbying and donations
- board diversity and structure
- tax strategy
2. ESG screening and exclusion
This may also be referred to as socially responsible investing (SRI) or investing in line with your values. Based on ESG criteria, investors screen specific companies or sectors in (positive screening) or out (exclusionary screening) of a portfolio. As of 2020, almost US$15 trillion in assets around the world were invested into funds employing exclusionary screening.2
3. Thematic ESG investing
This can also fall under ESG screening and exclusion (or SRI) and involves investing in assets related to a particular ESG-related theme or looking to address a specific social or environmental issue such as gender diversity or fossil fuel free.
4. Impact investing
Here the focus is on investing in companies and projects that intend 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
According to a 2021 survey by the Responsible Investment Association, 73% of respondents reported an interest in RI. That’s a jump from 2018, when 60% of respondents expressed interest. Of all the generations of investors, young people (18-35 years old) remain at the forefront of RI, with 80% reporting interest in RI.3 This trend signals a bright future for responsible investment. Millennials’ incomes are rising. And, they are poised to inherit US$30 trillion in the decades ahead.4
To learn more about responsible investment, click here.
1 Global Sustainable Investment Alliance, Global Sustainable Investment Review, 2020
2 Global Sustainable Investment Alliance, Global Sustainable Investment Review, 2020
3 Responsible Investment Association, Investor Opinion Survey, 2020
4 The Globe and Mail, The great generational wealth transfer is under way, March 12, 2021
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
