There’s a wide range of investment options on the market for Canadians who want to make a difference in the world. At RBC InvestEase, we offer Responsible Investing (RI) portfolios to help investors meet their financial goals in a way that aligns with their values.
‘Responsible Investing’ is often used interchangeably with socially responsible investing (SRI) or impact investing. Generally, responsible investing describes the various ways investors can support positive environmental, social, and governance practices with their investment dollars. Let’s explore what all these terms mean, as well as the approach we’ve chosen for the RBC InvestEase RI portfolios and why.
What is Responsible Investing?
Responsible Investing generally describes a broad range of approaches that incorporate environmental, social and governance (ESG) factors into the investment process. Environmental factors can relate to carbon emissions, waste disposal or water management; Social factors can include workplace health and safety, labour management and privacy/data security; and Governance factors include tax transparency, executive compensation, and business ethics.
Broadly speaking, RI investment approaches includes:
- ESG integration: The consideration of ESG factors is explicitly incorporated into the investment decision-making process, in addition to traditional financial factors. For example, an ESG integration approach may emphasize investment in companies that perform well on the ESG measures deemed important to their industries compared to their peers.
- Socially responsible investing (SRI): Companies (or issuers in the case of bonds) are included or excluded as potential investments based on a defined set of values. This approach is often referred to as negative or positive screening. Negative screening might mean excluding all companies within certain industries (e.g. oil and gas), while positive screening could favour industries that value renewable energy, human rights, social housing and more.
- Impact investing: Investments are chosen for their ability to generate a measurable, positive social or environmental impact while also generating varying levels of financial return. For example, an investor using an impact investing strategy could invest their funds in a project to develop low- to moderate-income housing. The societal benefit generated by the increased supply of affordable housing would be a key measure of the investment’s performance.
What approach to responsible investing does RBC InvestEase use?
The portfolio composition of the RBC InvestEase Responsible Investing (RI) Portfolios aligns with two of the strategies above: ESG integration and socially responsible investing (SRI).
Our Portfolio Advisor team chose to build our RI portfolios using iShares ESG Aware exchange-traded funds (ETFs) managed by BlackRock Canada. For portfolios that have exposure to global government bonds, the iShares Global Government Bond Index ETF (ticker XGGB) is used.
The ETFs in our RI Portfolios begin with an SRI lens by excluding companies involved in the business of tobacco, controversial weapons, and civilian firearms while also omitting companies involved in severe controversies. We believe these exclusions do not significantly impact the diversification of the resulting portfolios.
An ESG integration approach is then used to assess the remaining companies. The ETFs in our RI portfolios are designed to maximize exposure to companies with higher ESG scores, according to MSCI(opens to external site)1, while maintaining risk and return characteristics similar to the ETFs used in our Standard Portfolios. That means that the RBC InvestEase Responsible Investing Portfolios allow you to invest with your values, without necessarily sacrificing financial returns.
An ESG integration approach can also help uncover factors that could positively or negatively impact a company’s long-term financial results. Companies with positive ESG characteristics may have favourable financial results over the long term by limiting fines and penalties from waste-management policies (environmental), acquiring clients at a faster rate than peers due to superior talent management (social), and benefiting from a higher valuation in the marketplace due to a commitment to an independent board and an effective management structure (governance).
But the impact of integrating ESG factors goes beyond the financial. Responsible investing can be a force of positive impact on society by directing more investment dollars to those companies that perform well on ESG measures at the expense of those that do not.
How is the RBC InvestEase responsible investing approach different than socially responsible investing?
Just like our Standard Portfolios, the Responsible Investing Portfolios offered by RBC InvestEase are focused on maximizing the expected investment returns for each of our portfolio risk levels. That’s why we employed elements of both SRI and ESG integration when designing our RI Portfolios.
By carefully choosing a few industries to exclude as well as tilting the emphasis of our RI portfolios toward higher scoring ESG companies, our RI portfolios is intended to retain the market-like return characteristics of our Standard Portfolios. We believe this approach helps to strike a smart balance between social responsibility and long-term performance.
In contrast, purely socially responsible investing approaches could lead to the exclusion of industries that make up a large portion of the financial markets based on ethical guidelines. Long-term expected portfolio returns could be lower, and portfolio risk higher if an SRI approach results in lack of consideration for future financial performance and the benefits of diversification. In addition, SRI is generally not based on a framework that evaluates the potential future financial impact of how a management team runs its operations. Finally, each individual may have a different moral compass, which makes it hard to build an SRI portfolio that fits any one individual’s values.
You can dig in to further explore the process behind the RBC InvestEase Responsible Investing portfolios here (article: How We Construct Your Responsible Investing Portfolio).
