September 13, 2022

Ethical Investing Vs ESG Investing: What’s the difference?

By Kristen Mayne

Ethical and ESG investing holds out the possibility of earning investment returns while being guided by your conscience? But do they work – and how?

Assembling a successful investment portfolio doesn’t mean setting aside your social values. Thankfully, your investment strategy and your conscience can work together.

Some investments give you the opportunity to realize financial gains while supporting positive social change. These funds, known as ethical and ESG investments, have been gaining momentum. In fact, according to Bloomberg Intelligence , ESG investments will reach an estimated worldwide value of $50 trillion by 2025.

Interested in ethical investing and want to get started?

A Sun Life advisor can help.

Curious about socially responsible, green or sustainable investment choices? Here are 6 things you should know about them.

1. What is ethical investing?

An ethical investment strategy does not stop at a company’s environmental, social and governance (ESG) standards. Ethical investors actively seek out investments that align with their principles, screening them for both their positive and negative impacts.

This concept, also known as socially responsible investing (SRI), isn’t new. The roots of ethical investing date back to the 19th century. The modern era of SRI developed in the politically charged climate of the 1960s. In the 1990s, SRI evolved to include a more diverse set of issues, such as tobacco and climate change.

And the sustainable investment market continues to grow. As of 2021, more than $11 trillion CAD in assets used at least one responsible investing strategy in Canada. This represents a 48% increase in only 2 years, according to a report by the Responsible Investment Association (RIA).

2. Are ethical investing and ESG the same thing?

Ethical investing and ESG are not the same thing. Here’s how they differ:

ESG investing

ESG are the environmental, social and governance standards by which we assess corporate behaviour. Investments are evaluated based on corporate principles and policies. These standards encourage companies to act responsibly.

Key ESG factors include:

Environmental Social Governance
Climate change  Gender and diversity Accounting practises
Waste management Human rights Ethics policies
Energy resources and management Treatment of employees’ health and safety Executive compensation
Water resources and pollution Community relations Data protection and privacy
Natural resource protection Political freedoms Board independence

Ethical investing

Ethical investing takes it a step further. It’s a strategy where an investor chooses investments based on their personal ethical code. For example, an investor could choose to avoid companies involved in:

  • Weapons production
  • Fossil fuels
  • Tobacco, alcohol or other addictive substances
  • Gambling
  • Human rights and labour violations
  • Environmental damage

3. Why would I want an ethical or ESG investment in my portfolio?

Ethical and ESG investing allows you to invest in ways that reflect your values while advancing your financial goals.

Non-financial returns can include supporting responsible workplace policies and environmental practices.

Certain groups – Gen Z, Millennials and women, for example – find ethical investment strategies particularly attractive. A Sun Life survey found ESG factors are more important for Gen Z and Millennials than they are for older generations. And in a survey by RBC Wealth Management U.S., 74% of women said they were interested in increasing the share of sustainable investments in their portfolio.

4. Will ethical or ESG investing boost my investment returns?

While there is room for debate, many investors have seen competitive returns when investing with morality in mind.

A meta-study by NYU looked at ESG and financial performance in more than 1,000 papers from 2015 – 2020. The analysis found good corporate management of ESG issues typically has a positive impact on a company’s financial performance.

2019 study from Morgan Stanley also has good news. The study gauged 10,723 funds and found no significant difference in returns between ESG-focused and traditional strategies.

Socially conscious funds may in fact offer lower market risk. This means that you can do what you think is right and responsible, and potentially see strong investment returns.

5. Where can I find more information?

Company websites can be a good starting point. But there are many resources to help you determine if your investments actually live up to your ethical criteria.

If you’re a mutual fund investor, for example, you can look at Morningstar’s Sustainability Ratings. Here you can evaluate how well funds meet ESG factors and compare ratings for different funds.

Interested in holding SRI stocks? You may want to skim the Corporate Knights Magazine’s Global 100. This is an annual list of the worlds 100 most sustainable corporations. And in 2022 includes Sun Life Financial for the 13th year in a row. Or consult the FTSE4Good Index for a list of ethical investing stock market indices and their performances.

An advisor can help you make sense of ethical and ESG investment.

Your advisor can help you choose investment options that best suit your needs.

6. Do ethical and ESG investments make a difference?

Your investment choices make a difference. Investment and asset management firms around the world are responding to increased demand for ethical and ESG investments.

The demand for ethical and ESG investing also pushes companies to make more responsible choices.

The Principles for Responsible Investment (PRI) is leading the charge when it comes to responsible investing. This global investor initiative upholds the ideals of socially and environmentally responsible investment. As of August 2022, the PRI has over 5,000 signatories. The ultimate goal? Creating a sustainable global financial system that will benefit the environment and society.

Here’s the bottom line. You can help plan your financial future and support the causes you care about. Ethical and ESG investing can help you do both.

Who can help you invest sustainably?

If you want to learn more about how ESG works, contact your advisor. An advisor can help you make sure you’re investing sustainably. They can also help you figure out which investments can meet your short- and long-term goals. Find a Sun Life advisor today.

Curious about how Sun Life’s commitment to sustainability?

Read: Sun Life’s 2021 Sustainability Report

This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.

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