Why including ESG factors in investment analysis makes a difference
September 7, 2021
To enact change, more and more investors expect their money managers to hold companies accountable on environmental, social, and governance (ESG) issues. It aligns with a backdrop of social discourse from climate change and carbon emissions to equality and racism, alongside an outspoken, socially conscious, millennial generation that has integrated ESG into investment decisions and client portfolios.
There is a lot of conflicting information about what ESG investing is and why it should matter to investors – not to mention many misconceptions around whether ESG factors help or hinder investment performance.
This article highlights how ESG investing has evolved and what it means today, shares our embrace of ESG factors in decision-making, and shows how to make your investments matter without sacrificing return potential.
How has the concept of ESG investing evolved?
Making investment decisions based on ESG-related factors is not new, although it has evolved significantly over the past 25 years. Early on, many ESG-related investment approaches took an exclusionary stance. They avoided investments in specific industries or companies that were associated with negative environmental or human impacts or had a reputation for poor or dangerous work conditions.
In recent years, such investment approaches have matured and now align with different investors’ unique needs and objectives. At CC&L Private Capital, we typically break ESG-related investment approaches into three categories:
- ESG investing: Considering environmental, social, and governance issues as risk factors and integrating each into our investment process. This analysis and decision-making criteria informs our discipline when evaluating a stock, bond, or alternative investment in order to drive better risk-adjusted returns
- Socially responsible investing (SRI): Use environmental, social, and governance risk factors to screen and filter specific risk exposures. These screening criteria are clearly defined but remain secondary to the primary objective of maximizing risk-adjusted investment returns.
- Impact Investing: An approach that takes the concept of SRI one step further, where all investments have a dual purpose: achieving a positive ESG impact and generating investment returns.
ESG investing, as defined above, should be relevant to all investors because it focuses on value. It is another important tool used to evaluate potential investments and determine return potential.
We embrace ESG factors in decision-making
At CC&L Private Capital, we integrate ESG factors into all of our investment processes, including traditional and alternative asset classes. This process identifies good environmental stewards that pay strong attention to health, safety, and social issues, and are well-governed.
By integrating ESG factors into our investment approach, we indirectly reward companies who embrace good corporate citizenship and provide the impetus to change for those that may be lagging. We are able to hold companies accountable and help them improve their own ESG activities.
We also use a ”positive screen” approach – recognizing the best-in-class players in an industry or sector and encouraging others to make similar changes. For example, we might invest in a leading oil & gas company that takes environmental issues seriously, builds strong relationships with indigenous communities, and embraces diversity within their governance structures.
In a world where ESG issues are growing in importance, we believe in working with clients and discussing an approach that better aligns with their values. It will help to generate improved risk-adjusted investment returns over the long term while contributing to the betterment of Canada and the world.
Making investments that matter
ESG investing does not mean investors must choose between making socially-conscious investments and maximizing return potential. You can achieve both. Research has shown that, all else being equal, companies with sustainable business practices and a strong attention to corporate governance are likely to have less risk and perform better financially than those companies without. Investing in such companies leads to long-term value creation and contribute to building a better world.
Find out more
In today’s investment environment, getting the returns you want can be difficult. To learn how you can build a diversified portfolio that achieves your financial goals while managing risk, please read our Portfolio Guide – Beyond Stocks and Bonds.
If you would like to find out more about our approach to ESG investing or learn how we can help you achieve your investment goals, please contact us.
This post is for information only and is not intended as investment advice. The views expressed are those of the author at the time of publication and are subject to change at any time.