Many people still believe what’s good for the soul – or society – isn’t good for the portfolio or the bottom line. It’s one of many myths that’s caused some investors to shy away from learning more about responsible investing (RI) (and potentially miss out on opportunities in the process). While investing with a conscience may have been one of the early motives behind RI, the case for it today goes well beyond anyone’s world view.
At its core, RI is a risk-mitigation strategy that also happens to steer investors toward companies at the forefront of a changing economy.
Here’s a closer look at some of the myths around RI:
Myth 1: You have to sacrifice performance
Rather than hurt your returns, RI can be a way to improve performance and lower your risk. Some Environmental, Social and Governance (ESG) indices as well as popular individual ESG strategies have outperformed their traditional benchmarks over the long term, some significantly so.
Regardless of your views on climate change and businesses investing in social impact, these issues represent headline risks that could potentially eat away at a company’s bottom line over time.
Firms with solid ESG policies could attract a premium from investors, especially if corporations and consumers decide they don’t want to buy from businesses that are seen as harming the environment or perceived to have poor social record. As public markets become more transparent, it’s easier for investors to identify the bad actors. Businesses are seeing it in these terms, too. A 2022 survey of small and mid-sized businesses by the BMO Climate Institute found almost a third of U.S. businesses with climate plans have them because they expect it will improve their profitability and/or share value.
Myth 2: Responsible investing means avoiding certain sectors
This can be true, but it’s much more nuanced. ESG is about prioritizing risk mitigation rather than excluding sectors or companies. Rather than avoiding companies, it means utilizing the ESG framework to evaluate the risks and opportunities that a certain company faces.
BMO takes the approach that it’s important to work together with clients and industries, like fossil fuels, to help them lower their carbon emissions. Divestiture only changes who owns these assets, not how they operate. In fact, a study by The Economist found that from 2020-2022, public firms were selling fossil fuel assets to appease ESG considerations, but those assets remained operational – Private Equity firms purchased USD$60 billion worth of fossil fuel assets from 2020-2022.
There is no ‘one-size’ fits all approach in RI. At the end of the day, investing comes down to your personal views and values. RI is one of many inputs that you may wish to use to help decide if you want to invest in a certain sector or company.
Myth 3: It’s just a passing fad
Asset managers are taking ESG integration very seriously. Many are going beyond looking at board structure and taking social and environmental consideration more seriously. The BMO Climate Institute found almost 70% of small and mid-sized businesses expect the physical impacts of climate will disrupt operations at some point over the next five years, and many say severe weather patterns are already creating challenges.
Myth 4: It’s too political
There are very clear global trends that support a well-defined ESG process, regardless of which party is in power. The climate transition is a historic investment opportunity, which is something everyone can get behind. A recent report by BloombergNEF found that global investment in low-carbon energy transition hit a record US$1.8 trillion last year, up 17% over 2022 . If global investment in the energy transition can increase in a year marred by significant geopolitical turbulence, high interest rates and cost inflation, there is little reason to expect politics will slow down the investment opportunities in the future.
As BloombergNEF states in its report, the increased investment shows the resiliency of the clean energy transition. Still, that’s a fraction of what’s needed. That’s important, considering BloombergNEF’s Net Zero Scenario estimates investment in the energy transition needs to increase three-fold to an average of US$4.8 trillion per year between now and 2030.
Myth 5: RI/ESG strategies are all the same
Saying all RI or ESG strategies are the same is like saying all U.S. funds are identical. In Canada, 94% of asset managers say they do some form of ESG integration. But if you want to invest responsibly you have to look closely at the strategy. Some may consider incorporating an MSCI ESG or MSCI Sustainability rating into their process while others may try to integrate ESG into everything they do, looking for tangible steps and measurable results from a company before including it in a strategy.
When talking about these myths, the important takeaway is that there are important subtle distinctions in the RI space. Investors need to get past the buzzwords and the all-encompassing descriptors and look at the value these investments can offer to their portfolios – the scrutiny is healthy and welcomed.
Responsible investing goes far beyond feeling good about where you put your money, it’s also a critical lens you can use to help you manage risk in your portfolio – and that’s no myth.
BMO Private Wealth provides this publication for informational purposes only and it is not and should not be construed as professional advice to any individual. The information contained in this publication is based on material believed to be reliable at the time of publication, but BMO Private Wealth cannot guarantee the information is accurate or complete. Individuals should contact their BMO representative for professional advice regarding their personal circumstances and/or financial position. The comments included in this publication are not intended to be a definitive analysis of tax applicability or trust and estates law. The comments are general in nature and professional advice regarding an individual’s particular tax position should be obtained in respect of any person’s specific circumstances.
