Are you hearing more and more about ESG investing lately? We can trace the rise in recent popularity to Canadian’s increasing interest in climate change and human rights. With over a year of staying home and thinking about our individual impact on the world, the pandemic is causing some to prioritize conscientious investing.

Led by Millennial and Gen Z investors, many want their portfolios to serve dual purposes. They want to:

  • Produce positive returns, and
  • Encourage environmental sustainability* and socially-responsible causes.

(*Environmental sustainability happens when we interact with the environment without hurting or destroying its natural resources.)

You can build a portfolio with sustainable investments — also known as ESG— while still gaining solid returns. But first, it’s important to know:

  • The basics of what makes an investment sustainable, and
  • How ESG factors are incorporated

In this article, we’ll answer your top 6 questions about ESG:

  1. What does ESG stand for?
  2. What is ESG integration and why is it important?
  3. How does ESG integration impact investment returns?
  4. What issues are included in the scope of ESG?
  5. What’s the difference between ESG and SRI investments?
  6. Are funds with ESG integration right for your portfolio?
  7. Who can help you invest sustainably?

What does ESG stand for?

ESG refers to the environmental, social, and governance practices of a company.

What is ESG integration and why is it important?

ESG integration refers to the inclusion of these three factors in investment decisions.

Integrating financial and non-financial (ESG) factors into the investment process can help take care of sustainability risks in your investment portfolio.

Traditional investments value companies based on their profitability. Funds that include ESG factors in their investment process also value companies on things like:

  • how well they manage their carbon footprint,
  • social effects such as labour laws and gender equality, and
  • the quality of leadership in the businesses, among other considerations.

How does ESG integration impact investment returns?

Research shows that embedding ESG factors into investment decision-making can have a positive effect on investment returns.

For example, according to investment research firm Morningstar, funds that included ESG factors in their investment approach did take a sudden loss in early 2020 due to the COVID-19 pandemic. But they held up much better than funds that didn’t include sustainability factors. The MSCI Canada ESG Leaders Index outperformed the MSCI Canada Index in 10 of the past 12 years.1

What issues are included in the scope of ESG

Environmental factors look at how the company responds to issues like:

  • climate change,
  • carbon emissions biodiversity,
  • water resources and pollution, and
  • energy resources and management.

Social factors include a company’s response to issues like:

  • human rights,
  • political freedoms,
  • treatment of employees’ health and safety,
  • diversity, equity, and inclusion (DE&I),
  • crime and safety,
  • trust in society and institutions, and
  • social exclusion and poverty or wage disparity.

Governance* refers to how the company operates, which includes factors like:

  • Accounting practices
  • Risk controls
  • Board independence
  • Ethics policies
  • Executive compensation
  • Safeguarding data

(*Governance also refers to whether a company aligns their compensation packages with results and performance. It also notes if a company’s leadership team communicates with their shareholders in a clear, effective, and transparent way.)

Of course, a company’s balance sheets, and profitability are also evaluated within ESG investments.

Larger companies may be benchmarked against the UN’s sustainability goals. Stock exchanges have their own guidelines, such as the Toronto Stock Exchange’s “A Primer for Environmental & Social Disclosure.”

  • Did you know Sun Life is considered one of the most sustainable corporations in the world? Find out more.

What’s the difference between ESG and SRI investments?

As you research ESG investments, you may see another term: SRI investments.

SRI stands for Socially Responsible Investing. It’s one approach to investing in a sustainable way.

SRI funds choose or remove investments based on ethical guidelines due to personal, political or religious beliefs.

SRI investing relies on ESG factors to screen investments. This can remove investments like:

  • tobacco,
  • alcohol,
  • fossil fuels, or
  • firearms.

Other aspects that may get screened out include:

  • weapons and defense industries,
  • gambling and other addictive actions and substances,
  • human rights violations, and
  • investments that may have ties to terrorist groups.

Funds that include or integrate ESG into their process consider these factors as well. But their main goal remains the financial performance of the funds. With SRI investments, however, there’s usually an underlying motive that affects the investor’s decision to choose funds for their portfolio.

Are funds with ESG integration right for your portfolio?

Investments that integrate ESG may be a good choice for those who:

  • have a sustainability mindset,
  • also want a diversified portfolio.

Even during the pandemic, these investments remained strong due to increased social and environmental awareness.

It’s also important to note that many funds integrate ESG already – without having any labels attached.

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.

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This article is meant to only provide general information. 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.

1Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any data contained herein. The index data may not be further redistributed or used as a basis for other indices or any securities of financial products. This report is not approved, reviewed or produced by the index provider. Sun Life makes no representations or warranties about the completeness, reliability, and accuracy of the index source data. Any action you take upon reliance of the index source data is strictly at your own risk.