SaltWire E-Edition

‘Not all investments are created equal’

What can you expect from ethical investments based on environmental concerns, social impact, governance?

BY COLIN WHITE, PORTFOLIO MANAGER

The words ‘ethical’ and ‘investing’ can be tough to put in the same sentence. We just did.

In order to be more ethical or environmentally sensitive in the investment world, you have to be willing to prioritize social and environmental goals over financial reward to some degree — at least in the short term.

That’s simply because reducing investment choices for noneconomic reasons likely leads to weaker relative investment outcomes. Meeting the goals of your good conscience for the betterment of mother earth and her inhabitants necessitates sacrificing some level of diversification. Anyone who tells you otherwise is doing you a disservice.

On the extreme fringes of ethical investing, there are myriad opportunities to place money with companies that have excellent Environmental, Social and Governance (ESG) credentials ... and absolutely no investment value. Usually cloaked in “new technology “or “about to go to market prototype”-type things. Unfortunately, many incredibly well-intentioned people have lost money this way. You’re better off donating to your favourite charitable organization.

There is an argument to be made that companies and investments that prioritize ESG principles are better positioned for long-term financial success. After all, that’s the direction we should be headed in, for everyone’s sake. However, whenever a company has a strong business case, all investment portfolios will quickly invest in those companies. That means that the options for an ESG portfolio are limited in comparison because it excludes many investment opportunities that do not meet the ESG criteria — while any investor can take advantage of the strongest ESG offerings, regardless of their personal values.

‘OUR GOAL WAS TO FIND A BALANCE’

Some investors are willing to compromise financial goals to accomplish ESG goals, but it’s a matter of degree. For example, on one end of the spectrum, donating to a cause can be an excellent way to support what you believe in, but that action provides no investment value. At the other end, the “thoughts and prayers” approach is not as likely to make an impact.

Our primary role is to help our clients maximize their ability to accomplish financial goals. To do that, we have to understand an individual’s priorities and figure out the most effective way forward, considering any goals the client wants to achieve, whether financial or personal. With increasing frequency, we’ve had clients approach us looking for options that focus on ethical investing. Indeed, over the past couple of years, investors worldwide have been making a solid push for investments developed around themes that reflect an attitude of social responsibility.

Our goal was to find a balance. We wanted a solution that allows clients to accomplish their financial goals and still supports the ESG movement. That solution was elusive until recently.

The maturation of ESG offerings has gradually made it possible for conscientious financial advisors to offer a truly diversified investment portfolio that also genuinely supports ESG investing in a meaningful way. We have watched mutual fund providers, Exchange Traded Fund providers, and the alternative investment space with interest for years. We’ve researched and interviewed all of the top contenders in this space to ensure the offerings are now solid enough and diverse enough to offer investment value.

We’ve put together portfolios with four different risk profiles designed to meet various client goals. Each portfolio is diversified by geography, asset class and style, the same as our regular portfolios. Each receives the same level of due diligence and monitoring as our typical portfolios.

RISK AND REWARD EXPECTATIONS

If you come to us for financial advice, we need to provide advice that includes candid discussions around your expectation of risk and reward. We recognize that making ethical choices is a profoundly personal journey. No solution will satisfy all points of view. Still, it should (and can) allow an additional amount of exposure to investments that have more sensitivity to ESG issues without abandoning your financial goals.

Our challenge becomes managing expectations. What should you expect if you move to an ESG offering? The truth is that, statistically, you should expect a weaker investment outcome if you invest in a smaller universe. A difference of even 1 per cent in annual compounded return can add up over the long haul. You may have times when your account is down while others are up. You may have times when your account is down more than a traditional portfolio.

We also want to avoid the idea that you’re not a good person if you don’t invest in an ESG portfolio. Humanity is trying to get on the same page, working to be better; companies are being rewarded by the markets when they behave in an environmentally sensitive and sustainable way. You don’t have to invest in pure evil to make a return in the market.

“AS YOU CAN TELL BY NOW, WE’RE TERRIBLE SALESPEOPLE, AND ONE THING YOU CAN COUNT ON IS THAT WE HAVE NO DESIRE OR INTENTION TO BECOME BETTER AT IT.”

“As you can tell by now, we’re terrible salespeople, and one thing you can count on is that we have no desire or intention to become better at it.”

It would be far more effective to put out an ESG or Socially Responsible portfolio and tell you how wonderful it is. The problem is ... we like our clients. We value the commitment we made to help them achieve their financial goals. We want to continue to have comfortable and happy conversations with them for years to come — so we feel it’s essential to be transparent and nuanced in our position.

Not all investments are created equal, but we are doing what we can to provide truly ethical options for clients who have prioritized ethically focused investing as a goal in their portfolio.

Investing is not evil. Putting an ESG or SRI label on something does not necessarily make it superior.

If you aren’t sure whether this type of investing is right for you or whether your current ethically focused holdings are truly living up to the hype, I’m happy to provide some insight. We are committed to making a difference for our clients and for anyone who needs a little advice.

At WLWP Wealth Planners, we use the term Ethically Focused Investing because it encompasses our clients’ desire to make a positive impact with their investments; our commitment to maintain complete transparency about how we work to achieve those goals; the investments we choose; and our careful attention to the management of the financial risks associated with that goal. Visit wlwp.ca to learn more.

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2021-05-06T07:00:00.0000000Z

2021-05-06T07:00:00.0000000Z

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