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A Beginner's Guide To Socially Responsible Investing

investing Jan 08, 2020

A Beginner's Guide To Socially Responsible Investing

A few months ago, I attended an event that featured all female-owned businesses that influence positive social impact with the goods and services they sold. The feel-good vibe in the room was contagious and left me sitting in a deep state of reflection in the days that followed.  Was I making the right choices with my purchases?  Was my power as a consumer being directed to the right areas?

As a consumer, you likely already filter your daily purchases to align with things that matter most to you, like buying clothing from a company that uses renewable energy or purchasing organic food because you want the healthiest and safest foods for your family.  These choices are important to you because they align with your values.  It feels good, right?

Retail consumers have long known the power of the purse, and as more of us want to see companies do more good in the world, it may be time to look not just at where you spend your money, but how you invest it as well.   Investors can make an extremely powerful statement when they support and invest in companies that focus on making a positive impact.

What is Socially Responsible Investing?

Sustainable, Responsible, and Impact Investing (SRI) or ethical investing is the idea of investing to support your financial goals, while also seeking social or environmental change. In the last couple of years, this smaller “niche” type of investing has gone mainstream as more people align their values with companies who are share their beliefs. 

The good news is there are many companies paying attention to the demands of the investor and have changed how they operate to adhere to certain measures of sustainability. But as SRI has increased in popularity, there are still some grey areas and it can get murky as you try to figure out what companies are actually “green” and who’s just pay lip service.

Unless you want to dig through heaps of corporate financial reports, it can be difficult to decide what companies are following through with their promises.  The best way around this?  Invest in a mutual fund or ETF (Exchange Traded Fund) that holds responsible funds.  With these types of products, it’s the asset managers that do the research on your behalf and determine which companies meet the criteria worthy of investment. 

Great, right? Well, sort of.  As an investor, you should understand the differences between the types of investments you can choose from.  With so many investment companies bringing SRI funds to the market, you don’t want to get taken for a ride and invest in a fund that doesn’t fulfill its research promises. Let’s break down the basics to help you get started.

Creating a positive impact on the world through investment choice

When I visited Thailand years ago, there was a saying the locals had: “same same, but different”.  This is how I think about SRI, because there is a range of criteria used to categorize different investments for different outcomes.  Yes, at the end of the day, they are all working towards long-term social impact goals, but in different ways.

Many words are used interchangeably when it comes to describing the way in which companies measure their social impact. “Ethical” investing, “socially responsible” investing, and “impact” investing are just a few that you may already be familiar with.  The reason there are so many names to describe it is because there isn’t any industry-agreed standard put in place to measure it.

There are, however, layers of screens put in place to rank companies.  When you invest in a sustainable company, you should be aware of the layer or “level” of measures they’ve put in place.  

ESG – Environmental, Social, and Governance

ESG is the first level of responsible investing used to measure the business practices of companies committed to going green.  When a company is measured against this criterion, it helps determine the future financial performance of the company.  In theory, the higher the ESG score, the better the return.   Asset managers and financial institutions use ESG ratings to asses and measure a company’s performance. 

Here’s a quick table that shows some of the popular categories used to measure impact:

Environmental (how it treats the environment)

Social (how it treats it employees)

Governance (how it governs itself)

-          Climate change

-          Pollution

-          Greenhouse gas emissions

-          Sustainability

-          Human Rights

-          Working conditions

-          Impact on local communities

-          Diversity

-          Executive pay

-          Management structure

-          Political lobbying and donations

-          Corruption


SRI – Socially Responsible Investing

Once ESG factors have been applied, SRI goes one step further.  SRI screens out or actively eliminates companies who participate in activity that is deemed to be negative.  For some, this is important because it helps select companies that align with your values.

Some examples of this negative activity screening include:

  • Production of weapons and defense tools
  • Tobacco and alcohol
  • Terrorist affiliations
  • Human rights and labour violations
  • Gambling

If you’re investing in an ETF or mutual fund, you can check the prospectus or marketing brochures to see what screens are applied.  For example, AGF’s AGFiQ Enhanced Global ESG Factors ETF (ticker: QEF) clearly states that “companies with severe ESG controversies are explicitly excluded, tobacco and defensive industries are also excluded”.

Impact Investing

Just as you can eliminate negative factors through SRI, you can include positive factors with Impact Investing. It is also known as “thematic” investing.  Think of it as an upgrade to traditional philanthropy – funding is provided for companies that have specific goals they seek to achieve that will positively impact the environment or society in some way.  It can include for-profit and non-profit companies. Impact investing may also mean that a financial trade-off may be required in order to achieve the sustainable targets put in place.

How do you get started?

Ready to start aligning your values with your investments?  Here are 4 ways to help you get started with investing in what you care about:

  1. Be clear about what you want to support. Are you more interested in environmental causes or do you want to back firms that support gender equality?  If you’re not sure, reflect on your values and what’s most important to you.  Take some time to think about your health and food choices, as well as your general interests and causes you support and you may find some clues.
  2. What type of investment do you want to make? Decide if you want to invest in hand-picked companies or if you’d prefer to invest in a mutual fund or ETF which would hold a diversified group of companies.
  3. Do your research. If this is new to you, take some time to learn more about the investment funds or companies you’re interested in. If you’re already investing, check to see what holdings of what you currently own and see how they align with your values. 
  4. Start small and diversify. The adage “don’t put all your eggs into one basket” applies here. Like any type of investment, there is risk involved.  Be aware of your tolerance level and expectations for returns. 

If you already invest with a financial advisor, you should still complete steps 1-3 before speaking with your financial advisor and telling them about your interest in SRI.  They should be willing to work with your interests and help you include SRI as a part of your investment strategy.

As an investor, be aware that SRI fund fees will be slightly higher than a regular investment fund.  The reason is attributed to the additional research that’s required to ensure that the companies are meeting the strict guidelines to remain included in the fund.   Investing in companies that will improve the environment and sustain our planet is important to me.  It has a positive impact and gives me a feel-good vibe when it comes to my money. 

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