These days, many people are looking for more than just financial returns from their investments – they also want to align their investments with their values and help improve the world.
Evidence of this can be found in the growth of the divestment movement. Since 2012 thousands of institutions and individuals have divested from fossil fuels, totaling an estimated $8 trillion USD in withdrawn assets, according to 350.org.
Here are a couple of examples of popular approaches to sustainable investing.
The Divestment Movement:
Given the expanding concerns around climate change, many investors are now saying they don’t want their capital financing this problem. Additionally, there is growing apprehension about future investment results. Essentially, if we’re to meet the carbon reduction targets set out in the United Nations IPCC report, significant fossil fuel reserves may be stranded underground and this could have a substantial impact on share prices.
There is also growing evidence that divesting as an investment strategy can pay off. The Genus Divestment Report found that for the five-year period ending July 31, 2018, a well-designed portfolio had potential to outperform Canadian, U.S. and International stock markets.
The diagram below shows the long-term fossil free backtest from August 31, 1998 to July 31, 2018, from Genus’ 2018 Divestment Report:
Figure 1: This shows long-term fossil free backtest from August 31, 1998 to July 31, 2018, from Genus’ 2018 Divestment Report. The benchmark is 35% Canada S&P/TSX Composite Total Return Index and 65% MSCI World Total Return Index CAD. Backtest results and analysis do not guarantee of future results because they are derived through hypothetical modeling techniques.
Divesting can go beyond fossil fuel divestment as well. For instance, some investors like the idea of avoiding companies whose products and services harm people or the environment such as weapons and tobacco. In fact, there’s a huge range of environmental, social and governance (ESG) factors which can be considered. Furthermore, many leading institutional investors now believe ESG factors are financially material and can help lower investment risks and add returns. Here are some of the issues that can be examined:
- Environmental risks – does the company’s operations negatively impact land, water or air?
- Social risks – does the company impact worker safety or human rights
- Governance risks – how does the company manage executive compensation and diversity?
While some investment approaches avoid the “bad stuff” according to values, risks or returns, impact investing seeks to focus only on the “good stuff”. Essentially, impact investing aims to achieve both financial and sustainability goals by supporting financing for companies helping to improve the world through social and environmental products and services. For example, impactful companies would be ones producing things such as clean energy and sustainable agriculture solutions. The Responsible Investment Association’s latest report shows that impact investing has grown by 81 per cent over two years, from $8.15 billion to $14.75 billion.
This is an exclusive benefit for CEBC members. If you’re interested in learning more, Clean Energy BC has partnered with Genus to bring fossil free and impact investment solutions to its members. Contact Anitra (firstname.lastname@example.org) for more information.