Responsible investment: Demystifying a maturing industry

04 April 2023 by Chelsea Cavanagh and Philippe Lavigne
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People are emotional creatures. We can be indecisive and prone to expect more from others than we do from ourselves. What if these grey areas—these inconsistencies—are actually our greatest strength? Well, that’s exactly what we think. We believe that very few things are clear-cut and completely unambiguous. Getting informed is the key to understanding.

Let’s talk about a growing wealth management sector: responsible investment. Responsible investors often have many reasons to channel their money into various responsible investment solutions. Are they buying responsible investment products so they can make a difference for the planet? Do they want to support companies that are adopting best practices in diversity and inclusion? Do they want to protect their investments from the impact of climate change?

As you can see, there are many reasons to invest responsibly, and they are all equally valid. The choice could be rooted in personal values or based on stock performance. One thing is certain: this trend will change how portfolios are managed. The portfolio of tomorrow will have to adapt to today's issues to remain competitive.

Why should we change how we manage portfolios?

Not long ago, investment decisions were almost exclusively based on financial criteria. Investors would calculate risks and identify opportunities by looking at a variety of financial and economic metrics. This pragmatic approach can appear reasonable and has certainly proven its worth in the past. But new priorities that go beyond economic considerations have forced investors to review their standards.

The traditional approach, based solely on financial analysis, did nothing to prevent stock market crashes, oil spills, major product recalls, or questionable organizational decisions leading to reputational damage. These events have caused many headaches for executives and have also greatly affected the value of investors' assets.

Companies have grown to understand that they need to adopt a more holistic approach to the consequences of their operations. They're moving to integrate into their corporate strategy factors that go beyond their balance sheets. Environmental and social externalities are now considered as well as good corporate governance.

Consumers have expectations regarding the quality of goods and services a company offers, but also about their role as responsible corporate citizens. A company’s value is inseparable from its image and reputation, especially given how quickly news about bad practices can spread. A company that fails to consider environmental, social and governance (ESG) factors represents a huge risk for investors. Companies must be able to demonstrate their commitment to ESG since responsible investment remains a priority for investors.

Sustainable investment: focusing on the future

Many of today's portfolios are focusing on managing ESG risks. But how will things change in the future? The climate crisis is far from solved and the transition to a low carbon economy is shaking up the energy industry. The fight against poverty and inequality will also trigger significant changes in our society. Financial products will need to account for these trends in the future.

So how can we choose investments that are aligned with this vision? There's no specific definition of responsible investments, and we face a horde of social, economic and environmental issues. That's why NBI has chosen to use an existing framework to guide its decisions.

The United Nations member states have adopted a set of goals and metrics to fight poverty and inequality and address climate and environmental issues, with a target date of 2030. We use the UN’s 17 Sustainable Development Goals to assess how companies are working to build a better world.

NBI offers exchange traded funds (ETFs) and sustainable investment funds composed of securities of companies that play an active role in promoting health, education, public transit, renewable energy, clean water, etc. For example, to help achieve the Clean Energy Sustainable Development Goal, our funds and ETFs might contain securities of a company in the wind energy industry.

How responsible is your investment?

The responsible investment sector wouldn’t be experiencing such strong growth if it wasn’t performing at least as well as traditional investment solutions. There are never any guarantees when buying securities or funds, but investors are increasingly confident in this type of investment. For all the reasons outlined above, it seems likely that the distinction between traditional investments and responsible investments will soon be a thing of the past.

Clients are already asking not if their investments are responsible, but rather how responsible they are. Improvements in data coverage and quality allow for better decision-making when it comes to responsible investing. Water use, GHG emissions and waste management may soon be as commonly used as financial data when making investment decisions. Better disclosure of these metrics will also help combat the risk of greenwashing.

The portfolio of the future will be made up of companies with a sustainable vision of business: tying together environmental, social, and economic aspects. It will also be based on specific frameworks, such as the UN’s Sustainable Development Goals and other standards currently under development. With greater transparency and standardization, it will become easier for investors to understand the real impact of their investments so they can make informed decisions.

Visit the NBI website to learn more about the sustainable funds and ETFs it offers.

Authors

Chelsea Cavanagh is a Chief Analyst on the Responsible Investment team at National Bank Investments (NBI). Before joining NBI, she worked at EY as a non-financial risk management consultant for financial institutions. In this role, she worked on non-financial risks, such as operational risk, compliance, and third-party risk management, with a specialization in climate risk. She has a PhD in neuroscience.

Philippe Lavigne is a Chief Analyst – Responsible Investment at National Bank Investments. For 20 years, he worked for another major Canadian bank as a specialist in global fixed income. Afterwards, he moved to a portfolio management role focused on responsible investment. In this role, he helped develop a strategic plan to manage climate risk and the energy transition. Philippe has a master’s degree in finance, is a CFA and holds the Sustainable Investment Professional Certification (SIPC).

Legal notes

The information and opinions herein are provided for information purposes only and are subject to change without notice. The opinions are not intended as investment advice nor are they provided to promote any particular investments and should in no way form the basis for your investment decisions. National Bank Investments Inc. has taken the necessary measures to ensure the quality and accuracy of the information contained herein at the time of publication. It does not, however, guarantee that the information is accurate or complete, and this communication creates no legal or contractual obligation on the part of National Bank Investments Inc.

NBI Funds and NBI ETFs (the “Funds”) are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus of the Funds before investing. Securities of the Funds are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. The Funds are not guaranteed, their values change frequently, and past performance may not be repeated.

© 2022 National Bank Investments Inc. All rights reserved. Any reproduction, in whole or in part, is strictly prohibited without the prior written consent of National Bank Investments Inc.

® NATIONAL BANK INVESTMENTS is a registered trademark of National Bank of Canada, used under licence by National Bank Investments Inc.

National Bank Investments is a member of Canada’s Responsible Investment Association and a signatory of the United Nations-supported Principles for Responsible Investment.

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