There’s a wide range of investment options on the market for Canadians who want to make a difference in the world. At RBC InvestEase, we offer Responsible Investing (RI) portfolios to help investors meet their financial goals in a way that aligns with their conscience.
‘Responsible Investing’ is often used interchangeably with socially responsible investing (SRI) and impact investing but there are important differences. Let’s explore these approaches and how they differ from one another, as well as why RBC InvestEase has chosen to offer RI portfolios.
Responsible Investing generally describes an investment approach that measures how companies (or issuers) manage their environmental, social and governance (ESG) risks. Environmental risks can relate to carbon emissions, waste disposal or water management; Social risks can include workplace health and safety, labour management and privacy/data security; and Governance risks include tax transparency, board independence and composition and ownership matters.
Integrating ESG into an investment approach should help uncover business risks that could impact a company’s performance in the future. But the impact of managing these types of risk goes beyond just dollars and sense and can be a force of positive impact on society by directing investment dollars to those companies that effectively steward these risks at the expense of those that do not.
The Responsible Investing approach used in our RBC InvestEase portfolios focuses on companies that score highest on a wide range of ESG factors. The investment process also draws on some elements of socially responsible investing by excluding companies involved in the business of tobacco, controversial weapons, and civilian firearms while also omitting companies involved in severe controversies are also excluded.
Socially Responsible Investing refers to an investment approach that determines the inclusion or exclusion of specific companies in a portfolio primarily on moral grounds. This approach is also often described as negative or positive screening. Negative screening might mean excluding all companies within certain industries (e.g. oil and gas), while positive screening could favour companies with certain business practices, such as a preference for contractors that use unionized labour.
There are a few challenges with building a portfolio that relies exclusively on a socially responsible investing approach. For example, investors would likely have to settle for lower returns over the long term if an investment approach dramatically shrank the investable universe as a result of negative or positive screening. Further, investors in a socially responsible investing portfolio may sacrifice the benefits of diversification by excluding industries that comprise a large portion of a particular market. Finally, each individual has a different moral compass, which makes the construction of an SRI portfolio in a cost-efficient manner difficult.
The Responsible Investing approach used in our RBC InvestEase portfolios focuses on companies that score the highest on identified ESG factors after applying certain exclusions (companies involved in the business of tobacco, controversial weapons, and civilian firearms and companies involved in severe controversies) that we believe does not materially impact the diversification of the portfolio.
Our approach to Responsible Investing that we believe should not result in lower returns after fees versus a standard portfolio over the long term.
Responsible Investing, like the portfolios offered by RBC InvestEase, assesses the Environmental, Social, and Governance risks of a company in the construction of a portfolio. Companies that effectively manage these risks should, over the long-term, achieve superior financial results versus their less-effective peers. Examples of how such companies could record favourable financial results over the long term include limiting fines and penalties from waste-management policies (environmental), acquiring clients at a faster rate than peers due to superior talent management (social), and benefiting from a higher valuation in the marketplace due to a commitment to an independent board and an effective management structure (governance).
In contrast, SRI is predicated on building a portfolio primarily through negative or positive screening, which could result in the exclusion of large industries, on a moral basis. Long-term portfolio returns could be lower, and portfolio risk higher, due to the exclusion of industries that could represent a large portion of the index without any consideration of future financial performance. Unlike RI, SRI is generally not based on a framework that takes into consideration the potential future financial impact of how a management team runs its operations.
Our Responsible Investing portfolio will appeal to people who want their investment dollars to make a difference in the world. We’ve selected an investment approach to Responsible Investing that we believe should not result in lower returns after fees versus a standard portfolio over the long term.
The investment process behind our portfolios begins by excluding companies involved in the business of tobacco, controversial weapons, and civilian firearms. In addition, companies involved in severe controversies are also excluded. Our Responsible Investing portfolio emphasizes companies that best manage these risks at the expense of companies that score lower after completion of the investment process. You can dig in further to explore the investment process we use in greater detail here. We believe the investment approach to Responsible Investing we’ve selected should not result in lower returns after fees versus a standard portfolio over the long term.