10 years ago, “Ethical Investing” followed a few simple rules. No investing in Tobacco, Weaponry, or Nuclear Power. These were the basic “Socially Responsible Investing” (SRI) exclusions.
“ESG” was buried in the background, trying to filter out companies with poor Environmental, Social, or Governance practices. The theory behind ESG is companies that are more environmentally friendly, socially conscious, and ethically operated would outperform and/or have less risk over the long run than those that weren’t.
Fast forward to today, and “Responsible Investing” still has the same basic exclusions of the original Ethical Investing movement, but has gone more mainstream, and is far more complicated. There is much more of a focus on ESG, and far more factors going into ESG ratings, which are now a legitimate thing. Multiple different organizations provide ESG ratings on publicly traded companies, as well as mutual funds and ETFs. Different rating agencies score different investments differently, making it hard to find a clear-cut “most ethical” stock/fund/ETF.
To further complicate things, these ESG ratings can be scored on as many as 300 different factors, including:
carbon footprint, water usage, packaging and waste, worker health + safety, data privacy + security, business ethics, community relations
Some mutual funds naturally will exclude most non-SRI companies due to their investment strategy. For example, a Technology fund wouldn’t usually invest in a Tobacco or Gun company. Also, some mutual funds without an SRI mandate score as well or better in ESG ratings than some funds with a “Responsible Investing” label, and/or may have many of the same underlying holdings as “SRI-approved” investments. So, you may already be investing in a socially responsible manner without even knowing it or trying to (or paying additional fees to screen out the “offending” companies).
Fossil Fuel Free investing is a separate option that is available if you want to specifically avoid investing in traditional oil and gas companies. However, some SRI funds will invest in traditional oil companies so they can have a vote at shareholder meetings and try as shareholders to pressure the company to take on more sustainable practices.
Electric Vehicles (EV’s) are becoming much more popular and are being seen as a way to decrease emissions and help fight climate change, but EV’s aren’t perfect and have some serious drawbacks of their own. Unfortunately, a lot of electricity that powers EVs is generated from burning coal, which is obviously not environmentally friendly. The production of EV batteries also requires a great deal of metals that need to be mined like lithium, cobalt and nickel. Aside from the environmental impact of this mining, a significant amount of this mining happens in areas with poor human rights practices, and unfortunately sometimes involving child labour in hazardous conditions. There is also the issue of disposal of the batteries at the end of their life, but there are companies currently working on technology to be able to recycle them, so this may not be as much of a concern in the future.
Regarding the typical SRI exclusions, not too many people are going to defend the tobacco industry, and for good reason. However, nuclear power has become cleaner over the past few decades, with increased safeguards in place, and is a much more efficient and lower emission source of energy than fossil fuels. Recent breakthroughs in nuclear fusion (current nuclear power plants are based on nuclear fission) could allow for small but powerful generators in the future that could be a real answer to our energy needs, but the technology may not be able to fully develop if it doesn’t receive further funding and investment.
Most people are also against investing in guns and weaponry companies, for obvious and well-justified reasons. However, someone I spoke with recently pointed out that while they are against bombs and automatic rifles, they felt differently when it came to citizens of a country using weapons to repel an aggressive invading nation, like we’re seeing with Russia’s invasion of Ukraine. These can be complex and complicated issues when all factors are taken into account, and we need to determine if the positives outweigh the negatives when deciding if these are factors that should affect your investment choice.
Another option gaining popularity are “Green Bonds”. These are bonds issued by governments and companies, where the funds raised are used to finance climate or environmental-related projects. The Government of Canada issued their inaugural green bonds earlier this year, raising $5 billion, although there was demand for much more. These bonds are an innovative solution to raising funds that will help develop “green infrastructure”, and they will likely be increasingly used as more government projects are announced.
Whether you feel that “Responsible Investing” can actually make a difference on our society and climate or not, there could be a very legitimate investment opportunity as countries start to shift away from reliance on fossil fuels. For example, mass adoption of electric vehicles will require an entirely new network of vehicle charging stations, and that network of charging stations could also require increasing the overall capacity of the existing electrical grid. Industries with high expected growth rates and significant government funding could stand to be big winners over the long run.
For one, the boundaries between “Socially Responsible Investing” and traditional investing have been blurred to a great extent over the past few years, to the point where they might not be relevant anymore. As well, if you want to invest based on your values, prepare to clearly define what those values are, and what is acceptable to you and what is not. Also, prepare to do some research on the subject, and/or find an advisor who can help you find investments that are compatible with your values, as well as having the ability to offer those specific investments at their firm.
Ultimately, take “Socially Responsible Investing” with a grain of salt. While it sounds nice in theory and has good intentions, there may be hidden downsides, and the ultimate effectiveness of it is difficult to quantify.
If you are interested in discussing how “Responsible Investing” can fit into your portfolio, I’d be happy to speak with you. I hold my Responsible Investment Specialist designation, and have access to a wide range of Responsible Investing solutions from multiple different investment providers.
- DennisRubeniuk, Investment Advisor
Dennis Rubeniuk is an Investment Advisor at Endeavour Wealth Management with iA Private Wealth Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Dennis Rubeniuk who is an Investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.
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