BMO Family Office
As we navigate through life, we know our actions impact on the world around us — and this, of course, includes how we invest our money. You may have heard there’s a growing movement among investors called socially responsible investing. As investing is a key component of financial planning, you may want to consider this value-driven investment route, as it will have you looking for more than just a solid financial return, but also help you feel good about the impact you’re making in the world.
Understanding responsible investing
Socially responsible investing not only considers investment returns, but also – and often more importantly – the social and/or environmental implications of those investments. The goal in this style of investing is to help foster positive change in the world through the lens of your specific values, by allocating a certain percentage of your investment dollars toward a cause that is near and dear to you. This could include investing in companies or funds that strive to improve human rights, promote racial justice or gender diversity, further consumer protections, or combat environmental concerns.
As well, you may utilize these value-driven types of investments by choosing to avoid investments in companies or funds that are believed to have a negative impact on society, such as industries like tobacco, gambling, or weapon development.
Socially responsible investing is an umbrella term that’s used to describe many different types of investing. For example, when you make a responsible investment, you might do so by excluding specific companies because of their products or behaviors, or by selecting those that have positive Environmental, Social, and Governance (“ESG”) attributes. Alternatively, you might choose to invest with a specific theme in mind. As Jon Finney, director of traditional research at BMO Family Office, explains, no matter how investors choose to define it, “The common thread through all these words and phrases is that we understand our clients expect a financial return on their investment alongside a set of positive and measurable social and/or environmental outcomes.”
Measuring responsible investments
ESG Integration: According to the Financial Times, ESG is “a generic term used in capital markets and used by investors to evaluate corporate behavior and to determine the future financial performance of companies.”
When you evaluate an investment on its ESG criteria, you go beyond the overall financial picture of the entity or the fund, and evaluate its environmental, social, and governance metrics. This could mean looking at things like water usage or carbon emissions, the management of its workforce, how health and safety protocols are maintained, or how effective a company’s board is. As Finney explains, “The benefit of the adoption of these three broad categories is that it has streamlined an otherwise complicated and complex universe of global challenges needing resolution. We have found tremendous value in using these three criteria as a starting point in conversations with clients about their intentions for their investments.”
Sustainable Investing: Often, sustainable opportunities go a step further and specifically look at companies that offer products or services that address a specific sustainability challenge. At BMO, we start by utilizing the United Nations Sustainable Development Goals (“SDGs”) as a qualitative guide to define sustainability challenges. From there, we work collaboratively with clients to understand their unique interests in certain SDGs and identify whether philanthropy, market rate investing, or a combination is the best fit.
Ethical Investing: What makes an investment ethical is different for everyone and depends on your personal views, values, and beliefs. In general, ethical investments tend to be more personal since they typically involve religious or political affiliations.
Choosing responsible investments
Companies with the environment at the forefront of their operation can be considered the fastest-growing area of sustainable investing. Currently, environmental factors are the most significant consideration in North American investment portfolios. Green investing is considered a “mega-trend,” although based on its success, environmentally sustainable investing may become the norm.
When building an ESG portfolio, investors may wish to invest in funds dedicated to either broad or more targeted themes, like renewable energy or clean water. Apart from environmental themes like these, investors may want to support women in leadership or fund positive community relations. There are countless options to choose from, so it’s important to consider what causes you’d most like to support before making these decisions.
The importance of responsible investing
Responsible investing can be one of the most effective ways to bring about social and cultural change, and can be valuable in helping to improve society and promote innovation. It’s also a source of opportunity, as financial investment is one of the most critical components in moving a project, industry, trend, or innovation forward. Further, when we view investing through a multi-dimensional lens and put our money toward causes we believe in, we allow companies to tackle problems in their own way — giving them opportunities to be creative and harness technology, so that they can find solutions. By investing in your values, you’re voting with your wallet and can feel good about making a real impact in the areas that are most important to you.
Responsible investing often requires you to consider environmental, social, and governance factors. In addition to helping investors support ethically minded companies, an ESG analysis can be used to identify long-term risks, which might not be evident in financial statements alone. For example, an ESG analysis might show that a company’s physical assets are at risk due to a wildfire or a flood. It could also expose that a company has a poor corporate culture or has trouble attaining talent.
ESG analysis can illuminate opportunities, too. Many sectors and industries are set to experience drastic change, and an ESG evaluation could highlight themes that are becoming more important to consumers, which tends to coincide with increased demand and Earnings Per Share (“EPS”) growth. This is already happening with renewable power and is likely to impact other responsible investments as well.
Identifying responsible investors
As Carol Schleif, deputy investment officer at BMO Family Office, states, “Largely, responsible investors include both women and younger generations, but entire families can join in on the practice.” She says, “Women are often more patient investors, and tend to make fewer trades and be more averse to risk. They realize that success doesn’t always happen overnight but is rather a result of all the little things that have been done well over a long period of time with consistency.”
For younger generations, issues surrounding climate change and social justice really resonate. Because of this, they’re likely to make a substantial impact by translating their awareness of these issues into responsible investments.
Responsible investing is still a relatively new concept, meaning the data around it is still being gathered and evaluated. Given that there are many different definitions and styles of responsible investing, there’s a lot to consider when deciding. As Schleif points out, “Risks can come from being too restrictive and excluding everything that’s potentially offensive. A portfolio that’s too narrow has potential to lead to choppy performance, both in short and intermediate time frames. Being wary of greenwashing and businesses that try to appear socially responsible, but without implementing the right actions, is important too. Just because a company says it’s environmentally friendly or supports women, doesn’t mean their actions meet their words.”
Finney agrees and notes, “Those who take the time to understand the landscape of this market segment and the motivations and skills of its participants are likely to advance with higher conviction when implementing responsible investments into their portfolio. At BMO Wealth Management, we’ve been actively involved in this style of investing for decades, providing us with a unique perspective toward the marketplace and its risks and opportunities.”
Investing in a company based on ESG criteria can help keep the business afloat by giving them the means to expand their reach and build their business. With the right funding from investors, businesses can create more programs that address global concerns. According to a 2021 article from The Motley Fool, “ESG stocks generate comparable or superior financial results compared with their non-ESG-focused peers,” and are also deemed less volatile.
As Finney explains, “This manner of investing has the potential to be effective and transformative. That said, investors in this space need to accept their role as trailblazers in changing historical perspectives that achieving strong financial returns and addressing globally systematic challenges are not mutually exclusive. Once that has occurred, all investors will have the ability to acknowledge there is something effective occurring with this use of capital.”
If you’re considering socially responsible investing, it’s likely because you care deeply about the wellbeing of the world and society as a whole, and you desire to make an impact with value-driven investing. However, if you feel unsure about whether responsible investing is for you, take some time to explore your priorities. There is no need to rush into an ESG investment, as you want to make sure your investments truly align with your values. Each investor has a different risk profile and considers investments in their own way. As such, it’s important to have a clear understanding of your goals before you get started.
To help you discover your ESG investor personality, we created a quiz called My ESG to determine your next steps. The quiz will tell you if you are ESG Motivated, ESG Ready, ESG Pragmatic, or ESG Skeptic. From there, you can decide if you are ready for an ESG-branded product, and whether or not it should make up a core part of your portfolio. If you’re not ready to take that step, just dipping your toe in the water or seeking out more information is a better course of action for you.
If you want to invest responsibly, look for investments that match your personal values. It can be hard and time-consuming to do all the research on your own, so it’s worthwhile to work with a BMO financial professional. They will help you establish your investor profile, create a roster of companies to explore, and help you make the best decisions for where to put your money. Our proven record in responsible investing has helped create solutions and funds across the world — so you’re in good hands.
For more information, speak with your BMO financial professional.
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