Father and son play with responsible wind power

June 01, 2020

What is Responsible Investing in the Time of COVID-19

While responsible investing (RI) has been around in one form or another for more than three decades, interest has increased alongside the rise of COVID-19, particularly with individual investors.

The global health and unemployment crisis of 2020, climate change, corruption, cybersecurity and a lack of gender diversity in companies are some of the concerns prompting many people to think about changing the way they invest.

Data shows more than $30.7 trillion was invested in RI around the world at the start of 2018 — a 34 percent increase in two years. In the U.S. alone, $12 trillion total is invested in an RI strategy.

“People are starting to care more about what a company does, and not just what its earnings are," said Kent McClanahan, a senior analyst and a member of RBC Wealth Management's global manager research team.

That sentiment, coupled with the data-backed realization that companies that pay attention to factors beyond their bottom line perform better in the long run, is pushing responsible investing to the top of many investors' minds, he said.

What is responsible investing?

RI is an umbrella term used to describe three different investment strategies, including:

1. Socially responsible investing (SRI). This is often referred to as investing in line with our values. Often SRI is accomplished by withdrawing support from investments that don't align with those values.

Today, more than $19 trillion in assets around the world include SRI strategies — an increase of more than 30 percent since 2016.

“More and more, investors are looking to make a positive change by aligning their personal values with their investment choices," McClanahan said.

SRI involves screening of companies, industries or sectors based on set criteria, such as:

  • Positive screening: Using measurements to select specific companies or sectors, such as water or solar power portfolios.

  • Sustainability themed: Building portfolios that only include investments that meet specific sustainability-related criteria. This could include companies that receive a certain percent of revenue from clean power, or portfolios of companies with a certain level of board diversity.

  • Exclusionary (or negative) screening: Using measurements to exclude specific companies or sectors. As an example, Catholic value funds exclude alcohol, tobacco and contraceptives.

2. ESG integration. This is when investors consider more than traditional financial measures.

They consider the intangibles of a company's environmental, social and governance (ESG) practices and seek industry leaders based on these considerations.

“This approach considers risks that traditional finance might ignore," McClanahan said. “Increasingly, these risks have outsize impacts on the value of investments. Investors who are not considering these threats tend to see increased volatility within their portfolios."

  • Examples of ESG factors include environmental concerns like climate change risk, natural resource consumption, pollution and waste management and water scarcity;

  • There also are governance topics, including accounting practices, board accountability and structure, disclosure practices, executive compensation, corporate ethics, regulatory compliance and transparency;

  • Social issues, including corporate philanthropy, community and government relations, workplace health and safety, human rights and diversity, have increased in popularity over the years.

3. Impact investing. This strategy focuses on companies and projects that proactively seek to generate a measurable positive social or environmental impact — alongside a financial return. These investments are seeking to fund change.

“Every company has a social or environmental impact, whether positive or negative," said McClanahan. “Impact investments attempt to measure this impact and see that they're having a positive influence on society or the environment."

For example, an investor seeking returns could invest their capital in a project that assists underserved communities through support for low- and moderate-income home buyers, affordable rental housing units, small business administration loans and economic development.

Responsible investing is here to stay

Just under half of Baby Boomers and one-third of Millennials align their spending with causes they care about, according to a study of high-net-worth women and men conducted by The Economist Intelligence Unit, commissioned by RBC Wealth Management.

This trend might signal a bright future for responsible investing, especially after the anticipated fallout of the coronavirus pandemic.

Millennials' incomes are rising, and they're poised to inherit $30 trillion in the decades ahead. As they begin to invest that wealth, they might also fuel the growth of RI.

Women, meanwhile, are also rising in influence.

According to RBC Wealth Management's New wealth rising report, women today control more than $72 trillion worldwide (32 percent of all wealth), up from $51 trillion in 2015. Women will inherit 70 percent of the wealth passed down over the next two generations and control two-thirds of household wealth by 2030.

How they choose to invest that wealth will have significant impact, McClanahan said.

“The convergence of these demographic shifts and a growing desire among these influential groups of investors to have a positive impact in their community and broader society is likely the beginning of what will be a surge in interest in responsible investing," said McClanahan.

This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. City National, as a matter of policy, does not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented, taking into account your own particular circumstances. This article is a republication of content originally published by RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC. © 2020, Royal Bank of Canada, used with permission. This article may not be reproduced, distributed or further published by any person without the written consent of RBC Wealth Management. Please cite source when quoting.

Thank you for subscribing!
Error. This is not a valid email address. Please try again.
Error. Please make sure all fields are properly filled out and try again.
Subscribe to Our Newsletter