ESG vs. Impact Investing – Fifty Shades of Green? Jonathan Sun, Shareholder Series
Recently, Bernard Tan caught up with a friend and shareholder who works in the healthcare industry.
Jonathan Sun is the founder and owner of Evolution Sports Therapy, a multi-disciplinary team of skilled health care professionals focused on injury treatment, rehabilitation and health improvement. Jon and his team have worked with groups such as the Canadian women’s basketball team and Canadian women’s U-18 soccer team.
The following is a conversation between Jon and Bernard on ESG and impact investing.
JS: Bernard, with all this news on climate change, climate strikes and changes in our natural environment, I’ve been thinking of how the rest of my portfolio can make a positive impact while getting a good return. My bank recently pitched me some ESG funds, full of pictures of wind mills and solar panels, and I am wondering if I invested in one of these funds, will that actually help fight climate change?
BT: Well, the answer is, it depends. ESG, at a very high level, is very broad and encompasses many different things. Most ESG fund managers apply different strategies and depending on what you are looking for, can actually help, or do nothing, for climate change.
JS: These ESG funds have a lot of jargon in their titles and descriptions. I think one was called some Low Carbon ESG, and the other one was called some Multifactor Sustainability fund. What does that all mean?
BT: I am probably not qualified to explain what the various strategies mean, but generally, all funds have to disclose their top 10 holdings, so I usually start by looking at what they invest in to figure out what I am buying. Let’s have a look shall we?
JS: In looking at their top 10 holdings, we see that there are 4 big banks, including my own, 1 railway, 1 diversified, 1 REIT, and 3 oil and gas companies. I am no expert but this is definitely not low carbon, and seems like false advertising and greenwashing! I don’t even see the bigger clean energy companies like Brookfield, Innergex or Northland on this list. How is this even possible?
BT: ESG funds can be quite diverse and a lot of them will use ESG in different ways. Some funds will purposely avoid and screen out the “bad stuff” by not investing in tobacco, weapons, fossil fuels, etc. Other ESG funds may actually continue to invest in oil and gas companies because the fund’s role may be to directly engage with the company, or the oil and gas company may own some renewable energy assets or clean technology, or have a strategy to reduce their carbon emissions even as they draw more fossil fuels from the ground.
However, it does not necessarily mean that the ESG fund will actively search for and invest in companies that focus on helping the environment. So, it really comes down to what you are looking for, doing some research and/or having a good advisor to help with the process.
JS: Got it. I can see how diverse ESG can be. It is like when a patient comes in and asks me to make them healthy again; my first step is to diagnose the issue. If the patient lives an unhealthy lifestyle, like smoking or eating bad foods, the first step is to stop anything that causes the unhealthy lifestyle. However, avoiding smoking or eating bad foods will only stop the deterioration in his/her health, but not necessarily improve it.
BT: That is a great analogy.
JS: If I want my portfolio to get healthy again and make a positive impact on climate change, what should I be looking for?
BT: Within the diverse ESG spectrum of investing, there is a segment known as impact investing. Impact investing focuses on making targeted investments that will generate a beneficial environmental and/or social return, alongside a financial return.
Impact investing typically focuses on areas that address an underlying environmental and social issue like climate change, inequality, or affordable housing.
JS: So, impact investing is like when I tell my patients to work on regular and specific targeted exercise to rehabilitate an injury, in order to become healthy again?
BT: Yes, that is a great analogy again. If your intention is to have your portfolio make positive contributions towards fighting climate change, then investments that focus on a more sustainable future like renewable energy or clean technology will make the impact you are looking for.
JS: Thanks, I really want to be making a positive impact on the future for my family and others. As a health professional, my team and I focus on healing and helping others lead a healthier life. The last thing I want is that while I help others in my waking hours, my RRSP or investment portfolio is doing the opposite.
JS: Last question, any recommendations?
BT: Well, other than suggesting to you the self-serving and obvious choice, Jon, the first thing I would advise is to do your own due diligence. There are some useful resources that I typically go to when doing ESG research. There are also a number of practitioners that can help you create a responsible investing and impact focused portfolio.
The Responsible Investment Association website – this is a great starting point in learning about responsible investing, searching for an advisor or looking for an investment product.
Impact Investing Blogs – one of our shareholders also prepared a personal blog detailing their journey to having a 100% impact portfolio.
Disclaimer: This blog post is not investment advice nor is it an investment recommendation, so don’t take it as that and don’t rely on it! Seek independent professional investment advice to find out what works best for you.