This column is by Mark Ting, a Foundation Wealth partner that helps clients achieve their financial goals. He can be heard every Thursday at 4:50 p.m. on CBC radio as On the coastThe guide to personal finance.
With “Investing in Our Planet” being the theme for Earth Day 2022, according to EarthDay.Org, many people might be inspired to increase the amount of sustainable offerings in their investment portfolios.
However, the word “sustainable” is very subjective.
For some, it’s about divesting from all industries related to fossil fuel extraction while funding green initiatives, such as renewable energy or carbon capture technology. For others, “sustainable investing” is simply the integration of environmental, social and governance (ESG) screens when making investment decisions.
In their simplest form, ESG filters exclude from investment considerations companies or industries that create products that have a negative impact on society, such as tobacco, gambling or weapons.
A major criticism of ESG or “sustainable” investing is the amount of greenwashing evident within the industry – pretending you are doing things to fight climate change without actually reducing greenhouse gas emissions.
Recently, several investment makers have rebranded their mutual funds by incorporating the word “sustainable” into the title, but while the name has changed, the funds’ holdings and investment strategies have not.
One way to avoid investments that appear to be laundered is to look at their top holdings. For example, if there is a major oil company in the top 10 holdings of a fund that is marketed as “sustainable”, don’t be afraid to ask why – this could be an example of greenwashing, or the inclusion might be warranted.
The oil company might have struggled to pass the “Environment” screen but excelled in the “Social” and “Governance” categories – making its overall score acceptable from an ESG perspective for some fund managers.
Rather than boycotting the company, an activist shareholder fund manager might attempt to improve the company’s environmental track record by being a positive center of influence – essentially, using their stake to put pressure on the company so that it implements policies aimed at reducing its carbon footprint.
Options for those who oppose carbon-intensive industries
Fortunately, for investors who are fundamentally against investing in carbon-intensive industries, there are plenty of options.
Rather than labeling funds being marketed as “sustainable”, look for other keywords such as: “fossil fuel free”, “low carbon”, “climate impact” or “environmental leaders” in the offering mandate of investment. These funds tend to set the bar much higher when it comes to ESG.
If you’re currently investing in a mutual fund and want to know how it stacks up against its peers from a sustainability perspective, the fund ratings website Morningstar has a sustainable investment fund screener.
This tool not only gives each fund a sustainability score, but also shows management fees and its past investment performance. It’s a useful tool because it helps investors find fund managers with similar values and investment return expectations.
Whether durability screens help or hinder returns on investment is still a matter of debate.
However, most studies have concluded that ESG funds outperform over the long term – the theory being that companies whose boards or executives adopt strong ESG policies tend to be forward-looking, long-term planners. To use a hockey analogy: these businesses are seen as “where the puck is going, not where it has been”.
Currently, a lot of investment dollars go to companies with good ESG scores at the expense of companies with poor ESG scores. I believe this trend will continue as investors, corporations and governments have become very selective with whom they partner.
There is plenty of evidence to show that having a high ESG score is not only good for the planet, but also for a company and its shareholders’ results.