Foreword written by John Li, Regional Sales Director (BC), Desjardins Wealth with misconceptions addressed by Deborah Debas, Senior Responsible Investment Specialist, Desjardins Wealth.
In December 2021 my family welcomed our baby daughter into this world, weighing in at a little over three kilograms and a week early. I remember sitting with her in the stillness of the hospital room, in part due to sleep deprivation, and also in awe of this awesome new life that my wife and I would now be responsible to care for and nurture. Over the next several months, I recognized that becoming a father also impacted how I view our world, investments and the opportunities I would like for her to have as a new member of planet Earth.
According to latest projections from the United Nations, the global population could grow to 9.7 billion by 2050, when my daughter becomes 28 years old. If our current consumption patterns don’t change, we would need the equivalent of almost three planet Earths to sustain life as we know it now.
Economic and social progress over the last century has been accompanied by environmental degradation that is endangering the very systems on which our future development – indeed, our very survival – depends. Extreme weather events, which caused over $145 billion in economic damage in North America alone last year have served as very recent reminders. The human cost borne by families and communities has been truly devastating. [1]
There is the growing recognition the benefits of economic growth, which are crucial for enabling social progress remain out of reach for many. Sustainable development is no longer a niche topic as global citizens recognize the status quo cannot continue in our finite world – our one and only planet Earth.
Similarly, businesses are beginning to adapt their practices to seriously consider environment, social and governance issues as part of their ethos and operations.
As consumers make more sustainable choices for themselves, they demand the same from business and government. Investors making the decision of where to allocate their capital to compound for the long term are also increasingly choosing to align their portfolios with sustainability, and this approach is addressed by responsible investment.
Supply chain and commodity related shortages this year have cast doubts on the benefits of responsible investment and ESG. Without a common industry definition of ESG, confusion has increased as to exactly how this investment approach works. Our cooperative, Desjardins has been a pioneer in responsible investment since 1990 and we’d like to share our perspective.
My colleague, Deborah Debas, Senior Responsible Investment Specialist and ESG expert examines the common misconceptions she’s encountered over the years – read on to see her response.
First, what is Responsible Investment?
Responsible investment is a financial strategy that incorporates environmental, social and governance (ESG) factors to identify risks and opportunities. It’s an approach that goes beyond traditional financial analysis. Through worldwide crisis and turmoil, RI has proven its worth and its popularity is set to grow.
RI Portfolio Managers and ESG Criteria
The acronym “ESG” stands for Environmental, Social and Governance. ESG factors include a set of challenges that companies may face. It’s an additional layer of data, analysis, and understand that, coupled with fundamental traditional analysis, helps portfolio managers make better investment decisions.
- Prudent use of natural resources
- Use of renewable energy
- Respect of human rights
- Fair labour practices
- Occupational health and safety
- Indigenous people’s rights
- Composition and independence of the board of directors
- Executive compensation aligned to long-term sustainable growth of business
There are many misconceptions about RI. Let’s look at what they are and why they are untrue.
MISCONCEPTION #1: RI means sacrificing performance
FACT: RI funds are proven to perform as well as or better than traditionally managed funds.
The biggest misconception about RI is the poor performance of the fund due to ESG practices. However, the historical track record of RI funds in Canada doesn’t support this myth. In fact, ESG can enhance returns in comparison to traditional mutual funds based on data provided by the Responsible Investment Association.
MISCONCEPTION #2: RI is a niche area or a fad.
FACT: RI has gone mainstream.
In recent years, RI has gained momentum to comprise most of the Canadian investment industry. RI assets accounted for approximately 60% of all Canadian professionally managed assets in 2020, up from about 50% two years ago.* Institutional investors like pension funds hold most of those RI assets and were some of the first to recognize the potential for ESG integration to help manage portfolio risk and increase investment opportunities.[2]
Sustainability as the New Normal
Climate change is a major source of economic disruption. The transition to more sustainable economic activities has introduced attractive investment opportunities driven by:
- Changes in consumer demand, like the rise in electric vehicle sales, support for locally made products, the ban on plastic straws and the popularity of plant-based protein.
- Legislative/public policy changes, such as governments that have pledged to reduce their carbon emissions and/or introduce carbon taxes, ban single-use plastics and invest in clean energy infrastructure.
These changes present potential opportunities for investors to achieve returns by investing in sustainability.
MISCONCEPTION #3: RI funds are narrowly focused, and choice is limited.
FACT: Today’s RI funds offer quality and breadth.
Historically, the range of RI funds encompassed few options and didn’t always meet investors’ needs. RI tended to focus on applying rudimentary screening to stocks to exclude specific sectors and business activities.
Contrary to popular belief, today’s RI strategies are much more sophisticated and the RI process is both more demanding and more inclusive. Demanding because investors ask more of the companies within it from an ESG perspective. Inclusive because it integrates all asset classes and most sectors of the economy, which broadens RI’s positive impact on the market. Investors now have more and better choices than ever with RI, including the flexibility to build a complete and diversified portfolio for any risk profile.
MISCONCEPTION #4: RI really doesn’t have an impact.
FACT: Shareholders have a voice—and that voice is being heard.
RI allows for investment in companies that actively work on solving environmental and social issues. Through voting rights, shareholders have opportunities to influence a company’s ESG practices. This engagement has the potential to drive companies in all sectors to reduce their environmental footprint and support the communities in which they operate.
Capitalizing on RI’s Potential
As Canada and the world transition to a low-carbon economy, investors no longer have to choose between the planet, people or profits. With responsible investment, investors can do well while doing good.
Know the facts, make a difference.
It’s a good opportunity for investors to explore with their advisor the topic of responsible investment and how they can meet their financial goals while making a positive impact. It’s not 2050 yet, and the next 28 years will be pivotal for the direction of us all on this one Earth.
Legal notice
The Desjardins Funds are not guaranteed, their value fluctuates frequently, and their past performance is not indicative of their future returns. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The Desjardins Funds are offered by registered dealers.
