Socially responsible investing is becoming a significant theme for institutional investors. Terms like ESG and SRI are making their way into headlines:

• The Biggest ESG Funds are Beating the Market, from Bloomberg

• Two-thirds of Canadian Investors are Interested in Starting or Building their Portfolio of Responsible Investment, from Ipsos Research

But what do these terms mean? To help our clients, we've put together a summary of socially responsible investment (SRI) terms that relate to investments today. 

Socially Responsible Investing (SRI) also known as sustainable or "ethical" investing is the blanket term for all investing that aims to achieve positive and sustainable goals, as well as competitive return.

Socially responsible investing is an approach that considers the social and environmental consequences of investing. SRI investors ask: Is this portfolio helping fund positive change?

In our image below we show how socially responsible investing is used as an umbrella term, under which fossil-fuel free, ESG, positive and negative screens fall. 

Positive and Negative Screens

The first step in reviewing an SRI product is to distinguish between positive and negative screens. "Screens" are filters for investment. Negative screens are filters that exclude potential investments relating to certain activities. A fossil-fuel free fund is an example of a negative screen, as all fossil-fuel related investment are excluded. Positive screens seek to include potential investments relating to certain activities. Targeting investments that pursue the Sustainable Development Goals (SDGs) is an example of a positive screen.

Sustainable Investing Terms

ESG considers the environmental and social impact of an investment, as well as the governance of the entity being invested in. These are three factors involved with measuring sustainability, but how much weight is given to each varies greatly. Some investments marked "ESG" have a genuine commitment to sustainability, but some do not.

Fossil-fuel free refers to investing strategies that avoid fossil fuels. Since fossil fuels are involved in every aspect of modern life, most "fossil-fuel free" labels avoid entities that make fossil fuels a central part of their business model, and allow for some use of fossil fuels to make operating possible. For example, a pipeline company would likely not be eligible for a fossil-fuel free fund, but a company that uses diesel trucks in the process of servicing its wind farms likely would.

We can relate the difference between a negative screen approach and a full SRI strategy to the example of an organic farmer (negative and positive screens) and a farmer who does not use pesticides (negative screen). Not using pesticides is certainly a part of organic farming, but a pesticides-free farmer can do any number of things that an organic farmer would find inexcusable. Similarly, not investing in fossil fuels is part of socially responsible investing, but a fossil-fuel free fund can include investments that would not be included in an SRI fund.

In each case, it's crucial to look into how fossil-fuel free and ESG are defined. Ask yourself: Does this investment offer a sincere, proven commitment to sustainability?

Greens Bonds (a positive screen) are bonds with proceeds earmarked for climate-related projects. There is no universal standard for what is and is not a green bond. Again, this situation is broadly analogous to the early days of organic farming, when all that was needed for a farmer to label their product as "organic" was a label-maker.

It's important to vet each green bond before investing. Does the issuer have a record of using proceeds for projects that actually reduce carbon dioxide production? Or is the issuer trying to take advantage of the more favorable terms green bonds offer?

Responsible Investment Association (RIA) is an industry organization of Canadian organizations and individuals that integrate ESG factors into the selection and management of investments. 

The Cash Management Group has been a supporting member of the RIA since 2015. 

Investing Today

Interested in socially responsible investments? We offer our clients a full suite of SRI options, including IMPACT GICs. 

We developed IMPACT GICs from the ground up to meet the needs of our clients. IMPACT GICs go through both negative and positive screening. Deposits from these GICs directly support business activity across Canada that aligns with one or more of the UN's Sustainable Development Goals. 

We have engaged the services of Rhiza Capital to confirm loan activity and provide transparent quarterly reports to our clients. Rhiza Capital is a market-leading consultant firm who is passionate about supporting impactful investing. 

Available with participating credit unions: 

If you would like to integrate socially responsible investments in your organization's portfolio, please contact us for a complimentary review. 

Disclaimer: Canaccord Genuity Corp. is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF). The comments and opinions expressed in this commentary are solely the work of the Cash Management Group and Andrew Johns.