ESG - SRI

Responsible Investing (RI) or Sustainable Investing involves investing in companies who meet criteria set under the ESG  target guidelines. Ethically-minded investors may not feel comfortable investing in certain areas such as tobacco, fossil fuels and weapons. The term ESG stands for  environmental (E) , social (S), and governance (G) issues. How companies perform in these areas determines whether or not RI fund companies will invest in them. The goal of these funds is to hold companies accountable on social issues as well as aiming to minimize their environmental impact.

Environmental - includes conservation of natural resources,  climate change impact, and water scarcity from overuse.

• Climate-related risk such as a company's carbon footprint can help measure how a company is performing in regards to emissions and whether they are taking steps to reduce these emissions.

• Single-Use plastics aren't easy to dispose of and changing government regulations may pressure companies to find other alternatives or face rising costs from reduced supply. Consumer sentiment may also pressure change.

• Water issues have come to the forefront recently with drought concerns worldwide. A company's overuse of a limited water supply may put a negative spotlight on the company as well as if there is perceived or real waste of water in the business operation. 

Social - includes issues related to diversity and inclusion, as well as human rights

• Diversity and inclusion disclosures by companies help investors to measure whether companies have made change a priority and have created a diverse management team or if they have fallen behind their peers

• Community involvement is important to be a good corporate citizen. Showing that you integrate and help in the community can help build goodwill.

Governance - issues related to processes and standards in how a company operates in areas such as gender and racial representation in management roles as well as levels of executive compensation

• Executive compensation is a always a lightning rod for companies. Negative attention from seeing executives receiving bonuses while non-management employees go without raises for years brings the issue of social inequality to the forefront.

• Board composition of a firm in regards to female representation is another part of governance criteria. Regulations regarding company transparency on composition have started to be implemented to provide investors insight into how a company addresses this issue.

Responsible Investing (ESG) takes into account a number of different criteria to determine if the investment is worthwhile. While the goal is financial returns, some strategies are aimed at change in the short-term and financial in the long-term. Not every fund manager or fund will use the same strategies every time but a mix can be used to build out a portfolio.

• Positive Screening aims to reward those companies making change and including them in the portfolio as leaders in their industry. The process involves analytics and metrics to determine who excels versus their peers.

• Negative Screening excludes those that don't meet the standards of the fund. It can be sector, company or even country related. As examples, countries with poor human rights records,  fossil fuel or tobacco related companies, and underperformers in their sector might be excluded.

• ESG Integration looks at both financial performance and ESG data to determine if the company is a fit. Whether it is pollution issues or human rights violations of suppliers, the perceived value of the company may decrease impacting whether it is a good investment. Conversely, a company with positive ESG data may be undervalued and present an opportunity.

• ESG Themed involves investing in companies that follow a similar theme. This could include themes such as clean technology or  women in leadership where there is a strong presence of women in senior management or board roles. This coupled with financial performance would build out a portfolio of best in class. 

• Shareholder Engagement can move a company's ESG ratings forward by having more influence as a large shareholder through a number of ways to used to engage that company;

1. Direct communication with company management allows for better understanding on the extent of focus on ESG by the company and at the same time the investor can make management aware of shortfalls or changes needed to  meet ESG targets.

2. Shareholder resolutions can filed to be voted on at the company's annual general meeting. One investor or a group of investors can file to pressure the company to adopt new practices to improve ESG compliance and increase shareholder value.

3. Proxy votes are sent to shareholders ahead of the AGM (Annual General Meeting) to list what will be covered and voted on at the meeting. Voting rights by shareholders allow for ESG friendly proposals to get pushed through to move towards ESG compliance

• Impact Investing looks to find companies that are making a difference by directly helping to solve environmental or social issues. This can include areas such as affordable housing, renewable energy or youth employment.