A helpful way to think about the range of approaches is as a spectrum that runs from conventional investing all the way through to philanthropy.
At one end of the spectrum, conventional investing is out of the scope of sustainable investing because it mostly doesn’t consider environmental, social and governance (ESG) issues. At the other end of the spectrum is philanthropy. Philanthropy isn’t considered sustainable investing because it is less about investing and more about giving.
In between conventional investing and philanthropy are five approaches you can consider as a sustainable investor.
1. ESG integration
When investment professionals say that sustainability is a core part of their investment process (as many do these days), what they are really saying is that their analysis includes some assessment of the financial risks of ESG factors to the companies they are considering investing in.
For many Canadian investors who are looking to take a sustainable investing approach, this might feel too close to conventional investing to really meet their needs. What’s at stake here is how aware a company is of the relevant risks to its business, and how well it is managing them. All good stuff. But a company scoring highly in this regard may still be doing things that we don’t feel are “responsible” or “ethical.”
2. Negative screening
This is traditional “ethical” investing. It is about avoiding or excluding companies doing things that are considered “questionable”—things like weapons manufacturing and trading, alcohol and tobacco sales or fossil fuel extraction. Where you draw the line on this list is a matter of your personal values.
Negative screening strategies can also have a risk management dimension. For example, changing values or regulatory shifts may mean that the oil and gas business is in long-term decline. Its cost of capital may rise over time. Many of the reserves booked by energy companies may never be exploited. These are all real financial risks that investors can potentially avoid by using an exclusionary approach. But ultimately, exclusion is most often a moral question.
3. Positive or best-in-class screening
This is the flip side of exclusion. Best-in-class screening involves looking for companies that score well on ESG factors. Again, this can have either a financial or an ethical focus. And increasingly, the evidence is mounting that the two concerns are inseparable.