Wealthier Canadians have no shortage of investments to put into their portfolios, but many want those assets to be sustainable. A 2023 study of high net-worth investors (HNWI) by Capgemini found that 40% of respondents say sustainability impacts their investment decisions.
The importance of incorporating environmental, social and governance (ESG) factors into investment decisions also increases with income – 38% of North Americans with a net worth of between US$1 million and US$5 million say that ESG objectives are important when managing wealth, while 62% of those with a net worth of more than US$30 million say the same.
But choosing which sustainable investments make sense for you is easier said than done. There are now hundreds of ESG-focused mutual funds and exchange-traded funds (ETFs), while higher net-worth investors also have opportunities to invest in other alternative assets. Deciding what to invest in can get confusing. Here are some ideas on how to create a more sustainable portfolio.
Understand your motivations
Before choosing any ESG investments, you’ll want to think about what’s motivating you to add sustainability to your portfolio.
Many people invest in ESG to better manage their investment risk. Companies that pay attention to ESG impacts on their business, whether it’s how they manage the risks of climate change on their operations, how they treat their employees or whether they have a diverse executive suite, often face fewer risks to their reputation and their business.
Investors are often motivated by their own personal values, too. Some may not want to invest in fossil fuels, for instance, or they see the devastation of natural disasters like wildfires and floods, and it inspires them to do their part to help decarbonize the planet. Others might care more deeply about women in leadership roles, water scarcity, and the treatment of employees and want to put their money into businesses that consider those issues.
Talk to a professional
The next step is to talk to an advisor who can help you decide what to buy based on their investor profile. Many investors don’t know what areas to consider when it comes to ESG, but a professional can help. For instance, you might tell an advisor you don’t want to invest in tobacco or that you’re interested in clean technology. They can then provide some investment options – both on the public and potentially private company side – that fit with your overall goals and risk tolerance.
Not all advisors are well-versed in sustainability, so you’ll want to work with someone who understands this space and knows what investments are suitable for your portfolio. Working with a sustainability-focused advisor may also open doors to different opportunities, as they may have access to exclusive products, such as public markets investment strategies and private market funds that are typically only directly accessible by large institutional and family office clients.
Choose your investments
Once you get a better sense of the issues that matter to you most, you can start thinking about where to put your money. There are a few different options to choose from.
Mutual funds and exchange-traded funds
There are a growing number of ESG-focused funds that come in both a mutual fund and ETF structure. These securities can hold stocks or bonds, just like any fund would, but they prioritize ESG factors. For instance, the BMO MSCI Canada ESG Leaders Index ETF seeks to replicate the performance of companies that are selected from the MSCI Canada ESG Leaders Index (the Parent Index) based on Environmental, Social and Governance (ESG) criteria. This includes excluding companies that earn significant revenues from tobacco, alcohol, weapons and other controversial areas of the market. Investors can incorporate these into their portfolios just like they would any mutual fund or ETF.
Thematic funds
Investors can also get more granular and buy thematic funds, which focus on very specific parts of the market. The BMO Women in Leadership Fund, for instance, invests in companies with boards that are made up of at least 25% women or have at least one woman in the C-suite. Other thematic funds might invest in specific areas of cleantech, low-carbon solutions or solar or wind turbine technology. While broad-based ESG funds often make up a core part of a portfolio, thematic funds can be good add-ons, especially if you do care about a particular area of ESG.
Managed accounts
Rather than choosing what individual funds to put into your portfolio, you can invest through a managed account, which combines a variety of sustainable investments – both equity and fixed income – in one account. BMO’s Sustainable Portfolios, for instance, are made up of companies that have gone through various layers of analysis, including looking at economic and political events that could impact future growth and ESG factors that might affect individual sectors and/or companies. Typically, with managed portfolios, you can choose between a few options that align with your risk tolerance level, such as an income portfolio, a growth portfolio and other balanced options.
Private equity
Many high-net-worth investors also have access to private company shares. Some might be angel investors funding cleantech startups, or they may use the services of a family office that can invest in more established operations. According to the World Economic Forum (WEF), wealthy individuals are in an ideal position to invest sustainably and influence the energy transition. “(This group) and family offices can be flexible in how they approach investments in terms of size, geographies and asset classes in a way that the average institutional investor may not,” writes the WEF. “They are in a privileged and unique position to leverage private capital to help scale the ESG sector, supporting long-term societal goals and ambitions.”
Other options
High net-worth Canadians can take advantage of other investments, too. Some are buying green real estate, which is in increasingly higher demand from tenants who want to operate out of sustainably-built buildings. They can invest in pooled funds where groups of wealthier investors might come together to buy, say, agricultural lands. There are also debt instruments, such as green bonds, that allow companies to raise money specifically for climate and environmental projects.
Consider risk tolerance and time horizon, too
When choosing what to invest in, don’t forget the usual investment considerations, such as your risk tolerance level, whether you have growth goals or need more income, and your timeline to access money in these investments or retirement. For instance, investing in startups can be riskier than owning a professionally managed mutual fund, but the former could give you more direct access to making change. More significant shareholders in publicly traded companies may also be able to influence the sustainability strategies of the businesses they own through proxy voting and company engagement.
Sustainability isn’t going away. If anything, more investment opportunities will come up as we get closer to 2050, when many countries and companies have pledged to become net-zero carbon emitters. For those who want to incorporate ESG into their investment decisions, now’s the time to do it.
Of course, there’s no one right way to invest in sustainability. You, along with your investment professional, should work together to come up with a plan that addresses your financial needs and how you can best invest in the areas that matter to you most. Remember, before you buy, consider your long-term goals, what kind of ESG metrics you care about and where you think you can make a difference.
Reach out to your BMO Private Wealth investment professional to learn how you can start making a difference with your investments.
