As consumers, we have significant power in creating sustainable change in the way we use our money. The most common way is by the choices we make during our regular purchases like food, household goods, vehicles and others. I would define these as direct expenditures. But, we also have an opportunity to encourage sustainable change indirectly by the way we buy assets. Common forms of investment occur when we purchase shares in companies either through a stock exchange or mutual funds.
Investing has historically been defined as a method of generating a financial reward as a result of purchasing an asset-–like shares in companies. Increasingly, it is becoming apparent that this narrow and short term definition does not serve us well. By only focusing on the fiscal side of the return, too much risk is internalized making this sort of investment unsustainable. One of the most common ways we invest is creating a nest egg for our retirement, often in the form of RSPs. These are typically in the form of a Guaranteed Investment Certificate (GIC), Canada Pension Plan (CPP), mutual funds and pension plans offered by our employers.
According to Principles for Responsible Investment (PRI), an international group of investors, ‘responsible investment (RI) is an approach to investment that explicitly acknowledges the relevance to the investor of environmental, social and governance (ESG) factors, and the long-term health and stability of the market as a whole. It requires investors and companies to take a wider view, acknowledging the full spectrum of risks and opportunities facing them, in order to allocate capital in a manner that is aligned with the short and long-term interests of their clients and beneficiaries.’
In other words, RI expands the definition of a successful investment beyond simply the shorter term fiscal results and includes the other legs of the sustainability stool–-environmental and social outcomes.
Some argue that RI is a form of philanthropy-–that returns are lower than conventional investments and that by participating in RI, one is in effect making a donation. Much research has been done in an attempt to answer this question. In 2012, the Royal Bank of Canada released a report that reviewed current research on the matter. It reviewed four distinct areas:
Compared performance of RI indices relative to traditional market indices
Compared performance of RI mutual funds relative to traditional mutual funds
Compared performance of hypothetical RI stock portfolios against conventional portfolios, and
Tried to determine if there is a linkage between RI and improved financial performance
The chief finding of this research is that socially responsible investing does not result in lower investment returns.
The Canadian SRI Review 2012 (http://www.socialinvestment.ca/wp-content/uploads/CSRIR-2012-English.pdf) found that RI assets in Canada grew by 16% between mid 2010 and the end of 2011, more than total assets during the same period. Total assets managed under RI guidelines in Canada during 2012 was $600.9 billion. According to the report, ‘the financial scandals of 2008, as well as the ongoing debate about climate change, are prompting Canadians to look for investment alternatives.’
In addition to selecting investments based on RI principles, Shareholder Engagement is a strategy used to open channels of communication between a shareholder and a company to improve the environmental, social and governance (ESG) performance of the company. Shareholder Engagement occurs when shareholders use their votes to encourage companies to move their operations to more sustainable practices. This strategy can be particularly effective within large pension plan administrators due to their far and strong reach into a wide number of companies. In 2005, the CPP adopted an RI investment policy formalizing shareholder engagement in order to encourage the companies we Canadians are invested in to improve their practices. Shareholder engagement is a strategy that all investors can use. It lets companies know that their investors are paying attention to not only the fiscal returns of the company but also how those returns are coming to be, and provides a venue for investors to encourage change from the inside out.
So, next time you make an investment, either through the purchase of an RRSP, buying stocks or by way of payroll deductions for your employment retirement plan, ask these questions. How are my returns being generated? Are the practices of the companies that I am investing in sustainable? What can I do as a shareholder to push for sustainability?
Karin is passionate about building resilient communities and has worked and volunteered extensively to further this interest. Her formal education includes a B.Sc. from the University of Victoria and a Masters in Environmental Management at Royal Roads University. She has owned her own accounting, consulting and food businesses. She is particularly interested in how businesses can use their reach to encourage and create sustainable change.