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INVESTMENT INSIGHTS FROM OUR EXPERTS

  • Writer's picturePatricia A. Stewart | CFA

Eco-Friendly Retirement: Investing in Sustainable and Ethical Funds

When it comes to creating an investing portfolio, Canadians need to choose a strategy that fits their portfolio objectives, risk/reward trade-offs, and values. Environmental, social, and governance (ESG) investing allows Canadians to align their retirement funds with a moral framework.


What Is ESG Investing?


ESG investing is not a new idea. Although the acronym ESG has only been around since 2005, it began in the 1960s with socially responsible investors opting to exclude individual stocks or entire industries and sectors from their portfolio because the way those companies made money didn’t align with their world view.


This meant excluding companies that operated in the tobacco, alcohol, military, oil and gas, and gambling industries. It also excludes companies with operations in countries with dubious political records.


Global ESG investing is growing fast. In 2018, inflows to sustainable funds hit $5 billion; by 2022, global ESG assets surpassed $30 trillion and currently account for around 36% of assets under management (AUM). By 2030, that number is expected to top $40 trillion.


ESG investing is surging because of investor demand. One recent study found that the vast majority of investors (85%) believe that ESG leads to better returns, diversified portfolios, and enhanced fundamental analysis.



ESG Investing


What Kind of Stocks Are ESG?


Advocating for ESG-focused companies that align with your values is important, the portfolio must perform well too. There’s no one-size-fits-all approach to ESG investing.


Different investors follow different trends. Where one ESG investor may be focused on the environment and look at alternative energy and green companies, other investors may seek out firms that promote human rights issues.


ESG investing has evolved over the years and is less narrow in its focus. It’s about investing in companies that address broader challenges, such as population growth, resource scarcity, and environmental stewardship.


Today’s ESG investors could consider an oil sands company that developed a technology that allows it to use the least amount of water per barrel. They could also ignore an electric vehicle (EV) company because it has operations in countries with oppressive regimes.


From a more technical level, it’s also important to consider valuation. Trendy ESG stocks could be wildly overvalued. The fact is, there’s a lot to consider when integrating ESG into an investing strategy, although studies show it’s a worthwhile investing strategy.


A full 90% of asset managers believe that adopting ESG into their investing strategy improves overall returns. A majority (60%) of institutional investors say that ESG investing has outperformed non-ESG equivalents.


How Do Sustainable and Ethical Funds Perform?


Approximately 30% of investors say they struggle to find the right ESG opportunities. That’s why it’s a good idea to work with a certified retirement portfolio manager.


Not only can a financial manager help with ESG strategies, but a financial advisor also takes a big-picture approach to their client’s financial goals. This includes helping create a unique ESG strategy that aligns with their near and long-term investing goals.


In 2023, sustainable funds generated median returns of 12.6%, which is significantly higher than the 8.6% returns from traditional funds. What does that look like on a practical level? Investing $100 into a sustainable fund in late 2018 would have returned profits of 35% if it had returned the median for each of the last five years. For traditional funds, the investment would have returned 25%.


Sharp Asset Management – Helping You Reach Your Financial Goals


If you live in Toronto, Mississauga, or anywhere in the GTA and want your investment portfolio to align with your beliefs and make a positive impact on the world, speak with the certified wealth management and retirement investment professionals at Sharp Asset Management.


Sharp Asset Management is an asset management firm that is 100% owner-operated. Our retirement planning professionals are not affiliated with any financial institution, securities firm, or mutual fund company, and our investment decisions are unbiased. We also do not earn any commissions or fees on investments we choose on behalf of our clients.


All of our investment counsellors are charter financial analysts, have the highest level of achievement, and have over 10 years of experience managing portfolios. To learn more about how Sharp Asset Management can help you with your retirement planning, contact us today.

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