Is ESG Investing Right for You?

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ESG stands for Environmental, Social & Governance. ESG Investing means investing in companies, directly or through funds, which rank well across these three criteria.  Here is an excellent article on ESG Investing basics from Forbes.

Growing numbers of institutional and individual investors are ESG Investing. Major Canadian investment fund providers like RBC/iShares and BMO offer an increasing range of ESG ETFs listed on the TSX and there are hundreds of US listed ESG ETFs. Investors can find ETFs focused on clean energy, electric cars, gender diversity, etc. The list goes on and on.

But some ESG ETFs look a lot like conventional index ETFs. For example, the top stocks held and overall industry weightings of the new RBC/iShares Canadian Equity ESG ETF (XESG) look a lot like those in the long standing RBC/iShares Canadian Equity ETF (XIC). And the ESG ETF holds stocks of oil sands producers like Suncor and CNQ which many would see as contradictory to the "E" in ESG. In fact, it is not unusual to see the oil & gas industry well represented in ESG funds (here is a US listed Vanguard ESG ETF (ESGV) which holds no fossil fuel producers).

Not surprisingly, there is a fair amount of controversy around ESG investing. And I think some investors will be dismayed with the gap between ESG hype and the current reality.

But, if you want to invest based on your own individual values, where do you go from here?

  • Do some research….take time to learn ESG basics
  • Decide which industries/sectors to support and which to avoid
  • Review your portfolio (you may find that many of your current assets would be considered suitable for ESG portfolios)
  • Decide what portion of your portfolio to convert to ESG….consider starting small especially if you are investing on your own
  • Replace some non-ESG stocks and ETFs with ESG stocks and ETFs that largely match your values
  • Ensure your resulting portfolio still provides the right balance of stocks versus bonds and appropriate geographical and sector diversification

Of course, a big question is:  How will ESG investing returns compare to overall market returns? As always, there are experts on all sides of this question. Time will tell.

ESG Investing is a complex topic but I hope this gives you a basic sense of what is happening.

All the best!

Larry

 

Investment Advice for Affluent Canadians

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