A Better World

When Melanie Adams was just 11 years old, she was already thinking about big-picture impact when deciding what to do with her money. “I had a club with a friend where we raised money through lemonade stands and craft sales to sponsor an acre of rainforest,” she remembers.

Fast-forward and Adams has made a career out of what we now call responsible investment. As the head of RBC Global Asset Management's responsible investment operations, she continues to draw on those early days for inspiration.

“Responsible investment is something that I do truly believe in. I don't think you can be in this space and only do it partway,” she says. With climate change top of mind globally, responsible investment has been gaining traction in recent years. We sat down with Adams to find out what this means for investors.

Q. What does investing responsibly really mean?

A. We consider responsible investment as an umbrella term. Under that fall three broad categories: ESG (environmental, social and governance) integration, socially responsible investing and impact investing.

Q. Can you tell me more about the three responsible investment categories?

A. Sure. With ESG integration, you look at how a particular company is managing the risks and opportunities related to each of these three factors and whether or not this is reflected in the share price. This is done to help inform the investment decision. Some ESG considerations include:

• Environmental factors, which include climate change, water and wastewater management, and biodiversity.
• Social factors, which include how a company treats employees, customers and the communities that it operates in.
• Governance factors, which include areas such as executive pay, board diversity and board independence.

Socially responsible investing, on the other hand, is when you're aligning your values with how you invest, screening out companies or sectors that don't match your beliefs. Alternatively, some investors screen in certain sectors such as renewable energy. Some common negative screens include military weapons, alcohol, gambling and tobacco.

Finally, impact investing means investing for a measurable social or environmental impact as well as a financial return. An example might be investing in an organization that provides low-income housing to families in need.

Q. Why do you think there is an increased focus on responsible investing?

A. Investors are increasingly understanding that non-financial factors can have an impact on a company's financial performance. Studies show that companies with good governance, and that manage their environmental and social risks, will perform better financially. There have also been studies that show women and millennials are a large part of the driving force behind investors caring more about responsible investing.

Q. What kinds of questions should investors be asking?

A. With ESG specifically, it really depends on what's relevant to the company and the industry it operates in. If you're looking at a food and beverage company, for example, you would want to look at water usage and wastewater management. Or in the case of oil and gas companies, are they investing in clean technology or research and development? One way to get a real sense of what companies are doing is to compare them against their peers. You also want to determine if a company has good governance over its ESG factors. That means checking to see if they have robust policies and procedures in place to address material issues that may arise, which could be anything from environmental contamination to employee health and safety matters.

Q. How can individual investors do their own research?

A. Investors can visit a company's website to look at annual reports and other corporate reports. For example, investors can review the board of directors to see if there's the appropriate level of gender diversity. Or, do they have a plan to deal with the impacts of climate change on the business? Many companies are starting to come out with specific ESG reports. You can also find other great resources online, such as Canada's Responsible Investment Association, the United Nations–supported Principles for Responsible Investment (PRI), and the Sustainability Accounting Standards Board (SASB).

Q. Who is responsible investing for?

A. I think all investors should be thinking about ESG factors. It used to be that earnings were the most important factor in assessing a company's value, but now we know that non-financial factors make up a greater proportion of a company's value. That may be due in part to the internet and social media, which allow quick public reactions that can impact share prices. It's important to remember that it can be challenging to measure these non-financial factors, which include ESG risks and opportunities. As an investor, you need to give yourself the time to do the research and talk to knowledgeable people to get more comfortable in the space, but responsible investors agree that it's well worth the effort.

This article was featured in our special issue, as seen in the Globe and Mail. Download the full magazine HERE.