Today, more and more wealthy investors are giving importance to aligning their investments with their values rather than the pursuit of profits. This form of investing is referred to as responsible investing and can be categorized into three main categories; Socially-Responsible Investing (SRI), Impact Investing, and Environmental, Social, and Governance (ESG) investing.
Responsible investing is a trend that has been growing rapidly in recent years and many people are wanting to learn more about it. Well, you are in luck, as in this article, we will look at the different types of responsible investing in more detail and how such investments can help high-net-worth-individuals build an impactful and diversified investment portfolio that are aligned with their investment goals.
What Is Responsible Investing? How Is It Different From Traditional Investing?
ESG investing can be referred to by several names. This includes, sustainable investing, responsible investing, impact investing, and/or socially responsible investing. Essentially, all these forms of investments fall under responsible investing but the type you choose can serve different purposes.
For example, SRI and impact investing are ideal for philanthropists looking to express their institution’s ethical, religious, or moral values through a process of negative screening. ESG investing on the other hand, takes broader factors into account and is aimed at improving investment performance.
Unlike traditional investing, which heavily relies on financial data for investment decisions, responsible investing boils down to putting your money in companies that are environmentally responsible, run by corporate citizens and accountable leaders, and display a Corporate Social Responsibility (CSR) when it comes to promoting ethical and socially conscious themes and initiatives.
For example, for a company to be listed as ESG compliant, it has to fulfill the ESG criteria first, which includes a broad range of behaviors and policies that investors look at. The criteria are broken down into three broad categories; environmental, social, and governance.
ESG investors will look to put their money in companies that have a positive environmental impact when conducting operations or in companies that are working on limiting common environmental issues prevalent in their industry.
ESG investors will also take into consideration various initiatives such as:
- • How a company is reducing its carbon footprint?
- • What corporate policies it is incorporating to combat climate change?
- • Is it limiting harmful pollutants and chemicals?
- • Does it use renewable energy sources for power generation?
- • How efficient is it at conserving natural resources?
- • Does it reduce waste and lower greenhouse gas emissions?
Companies that answer yes to these questions and demonstrate environmental sustainability are most likely to pass this first criterion. Ultimately, lowering the investment risk exposure to regulatory cost burdens.
The second thing an ESG investor looks at is how a company manages its social relationships with internal and external stakeholders including employees, the local community, suppliers, and customers. This includes looking at whether a company:
- • Sources its raw materials from ethical suppliers
- • Treats its employees well and offers equal opportunities
- • Has a positive impact on the communities it operates in
If a company is being socially responsible and adhering to its Corporate Social Responsibility (CSR) it’ll have a lower risk of social misconduct and brand damage increasing return on investment both monetarily and socially.
The final criterion refers to how ethical, transparent, and accountable an organization is when it comes to its accounting methods, leadership considerations, and conduct.
ESG investors will take into consideration a company’s history when it comes to determining governance. Investors will look into whether a company has ever engaged in any illegal conduct in the past. Has it used preferential treatment when it comes to selecting board members and senior executives? Or whether it has pursued meritocracy and integrity when it comes to hiring staff and appointing leaders.
Answers to these questions and more will dictate whether a company passes this third criterion and whether it is considered ESG compliant.
Aligning Your Values & Interests With Your Investments
The growing awareness of social and environmental challenges is in line with many values and self-interests of high-net-worth individuals and philanthropists who want to use their wealth to build a better world.
This is why, although still new to Canada, responsible investing is growing in popularity, especially with the rise of social entrepreneurs that are seeking to make a difference with new and innovative products and services.
Many investors are also finding that wealth creation through responsible investing is doubly rewarding, as apart from the financial gains, the positive benefits that the investment provides are helping a company build a better, more sustainable future for future generations.
By aligning your investments to match your interests and values, investors can get a much better picture of their returns and contributions to impacts annually. This is why the first step towards creating an investment portfolio is to first clearly define investment goals.
How To Build An Impact Portfolio?
It is apparent our world faces increasingly new challenges and without sustainable development, we could be putting our future generations at considerable environmental risks.
This is why more and more wealthy individuals are looking to build an impact portfolio that aligns with their values and promotes social and environmental good.
The first step toward building an impact portfolio is setting up your investment goals and objectives to formulate your impact investing plan. Any investment opportunity that doesn’t align with your values can be screened out.
Investors should also set aside impact preferences to help them further narrow down opportunities that are most in line with their institutional mission, personal preferences, risk tolerance levels, investment ability, and return expectations.
Creating an Investment Policy Statement (IPS) can also be hugely beneficial when it comes to creating a sound impact portfolio. An IPS will take into account how much capital you can invest toward a portfolio, what asset classes you want to invest in, what kind of time horizon you are looking at, and what financial risks, impacts, and returns can be expected.
Explore Impact Investment Opportunities With Eastport Financial Group!
Thus, consulting with a financial advisory firm, such as Eastport Financial Group Inc, would be the best way to determine what form of responsible investing best aligns with your investment goals, balances financial needs, and brings about the positive change you seek.
To learn more about our services visit our website or call us at +1 902 474 5433.