Although investing is typically about growing your portfolio, where investor money is headed has changed over the years. Many Canadians are now looking for ethical investment opportunities, which is why sustainable investing has emerged as a powerful financial strategy.
Whether you're an experienced investor or just starting out, this guide will show you the essentials of sustainable investing and explore its principles.
What is sustainable investing?
Sustainable investing involves allocating your money to companies, funds, or projects prioritizing environmental, social, and governance (ESG) factors while providing competitive financial returns.
While many investors choose to focus on profits, sustainable investors are more interested in things such as:
● How does this company impact the environment?
● How does it support its employees and communities?
● Is the leadership accountable and ethical?
For example, a sustainable investor may be interested in companies that minimize waste for the public, rather than in companies that produce products potentially harmful to the environment.
What is ESG?
When it comes to investing sustainably, one term that will often come up is ESG. This acronym stands for Environmental, Social, and Governance. Independent ratings agencies evaluate a company’s overall responsibility and sustainability, and assign it an ESG score based on the following:
Environmental (E)
● Energy efficiency
● Water and air pollution
● Carbon footprint
● Waste management
● Climate change strategies
Social (S)
● Employee compensation and rights
● Diversity and inclusion
● Programs helping the poor and underserved
● Community relations and customer service
● Data and privacy policies
Governance (G)
● Executive and board diversity
● Financial transparency
● Anti-corruption policies
● Regulatory compliance
● Ethical business practices
The higher the ESG score, the more sustainable the company is supposed to be.
Why should you be a sustainable investor?
There are many reasons why you might choose to be a sustainable investor. Some individuals pursue sustainable investing because they want their funds to support companies that actively protect the planet, treat workers fairly, and uphold ethical standards.
Additionally, investing sustainably allows you to back companies that align with your values and divert capital away from industries that do not, such as tobacco and firearms.
Furthermore, studies have demonstrated that ESG-aligned funds perform just as well as traditional funds over the long term. This means your overall portfolio wouldn’t necessarily decline if you concentrated on companies with high ESG scores.
How to invest in ESG assets
Sustainable investing is more accessible than ever. Here are some ways to get started:
● Mutual funds and ETFs: Many investment firms offer ESG-focused mutual funds and ETFs. Both mutual funds and ETFs are baskets of stocks combined into a single asset, so you can get instant diversification with a focus on sustainability.
● Robo-advisors: Many robo-advisors provide ESG or socially responsible portfolios for hands-off investors. They're perfect if you seek a stress-free method to align your portfolio with your values.
● Self-directed investing: Those seeking full control over their portfolio can opt for the self-directed route. By utilizing ESG rating tools, you can research individual companies before making a purchase. This approach enables you to customize your portfolio according to what matters most to you.
● Impact investing and green bonds: If you're looking for measurable impact, consider green bonds or funds that invest directly in renewable energy or sustainable infrastructure. These options are ideal for investors who wish to see direct environmental or social outcomes from their money while getting similar returns to government or corporate bonds.
The future of ESG investing
ESG investing was once viewed as a trend, but it has now become the standard for many younger Canadians looking to make a positive impact on their financial future.
That said, since ESG has gained popularity, some companies have resorted to greenwashing, exaggerating their working environments to achieve a higher ESG score. This is why ESG investors must dive deeper into companies before investing in them.
No one disputes the significance of ESG, but companies and governments have been slow to adopt and uphold ESG policies. Nevertheless, the hope is that if ESG becomes the standard for investors, future generations will reap the benefits.
Final thoughts
Sustainable investing isn’t merely a financial decision - it reflects the future you desire for yourself and future generations. Whether you're concerned about climate change or the need for corporate responsibility, aligning your investments with your values can make a difference.
Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog
Money We Have is one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.