Responsible investing is a term that financial institutions have been using more and more. The term came about in acknowledgement of the fact that an increasing number of investors want to invest their money into companies that are actually doing good in the world… or at least not making things worse. But the term is still fresh, and many people don’t know what it actually means. This has led to some pretty crazy misconceptions out there. Here, we’ll look at some of the biggest myths, and cover off what responsible investing really is.
Myth #1: Responsible investing sacrifices performance for purpose.
Truth: Companies that are leaders in Environmental, Social and Governance (ESG) actually generate market-beating returns, historically-speaking. Just take a look at this chart from Responsible Investing Canada, which shows the 15-year performance of responsibly-run companies, versus the aggregate average:
I don’t know where this myth came from. Maybe it’s like organic food: it’s either better for you and expensive, or worse for you and cheaper – you can’t have your cake and eat it too. Well, when it comes to investing, it turns out that, yeah, you can. You can do good within society, and do good with your investments at the same time. Here’s another article with a different body of research that came to the same conclusion, just in case you need more convincing!
Oh and by the way, responsible investing doesn’t only apply to stocks. There are other types of investments, like bonds, that also focus on ESG leaders.
Myth #2: Responsible investing is only about the environment.
Truth: Sure, the environment is a big component of responsible investing – it’s kinda the biggest challenge facing humanity at the moment – but it isn’t the only one. There’s an “S” and a “G” in the acronym, too.
“Social” refers to the impact the company’s operations have on society. For example, what charities does the company give to? How does it help make the societies it serves and operates in better places to live?
Governance is a little trickier. It refers to how the company is run; its policies and procedures, leadership and selection process, and so on. The thinking here is that a well-run company is more likely to behave ethically, and to hold its vendors and supply chain partners accountable as well. For example, a company with strict internal audit procedures is less likely to have major cases of fraud and falsification.
It may be a little harder to understand what governance is, but the connection between good governance and good investment performance is clear as day.
Myth #3: Responsible Investing is only for Millennials and hippies.
Truth: Remember what I was saying up there about better investment performance? Is better investment performance for you? Is a better society, and a cleaner planet for you? Then responsible investing is for you, plain and simple.
You don’t have to take my word for it, either. According to research from Morningstar back in 2019, over 70% of surveyed Americans had at least some interest in responsible investing. In Canada, assets invested in sustainable funds almost doubled in 2021 compared to a year earlier, reaching over $30 billion total. The trend is growing, and it doesn’t look like it’s going anywhere any time soon.
Wrapping it Up
Responsible investing is nothing more than being mindful of the companies you choose to invest your money in, and giving a damn about whether you’re making things better for society, or worse with how your dollars are being put to use.
I’ve read plenty of articles that talk about how people want to help solve the climate change problem, and other issues that plague society, but they don’t want to inconvenience themselves in any way in order to do so. Hopefully by reading today’s post, I’ve helped you realize that responsible investing might just be exactly the silver bullet you’ve been waiting for.
