Many investors want their money to make a clear impact on clean energy, health, diversity and other environmental and social issues.iStock
The idea of impact investing has gained traction among many Canadians, despite the concept leaving lots of room for interpretation.
According to the Global Impact Investing Network, impact investments are made with the intention to generate positive, measurable social and environmental impact, alongside a financial return.
There is a high degree of overlap between the terms impact investing, sustainable investing, socially responsible investing, and investing with an environmental, social and governance (ESG) focus.
“All these categories are subjective, and the whole space is ambiguous,” says Mike Dragosits, portfolio manager at Harvest ETFs in Oakville, Ontario.
It doesn’t help that industry professionals and investors can use these terms interchangeably, even though there are distinctions.
For investors, it can be best to forget the labels and hone in on the kind of difference they want to make to determine what investments are worthy of their financial support.
Choosing impact investments that align with your goals
Looking at ESG criteria can be part of evaluating any company in any sector, including their performance, risks and opportunities around energy consumption, climate change, waste, diversity, labour practices, transparency, etc.
Some investors and funds tack on an exclusionary approach, avoiding companies in sectors such as alcohol, tobacco, weapons and fossil fuels.
Others think of impact investing as inclusionary, encompassing companies regardless of the sector as long as they produce a concrete social good.
For example, last year, five of Canada’s biggest pension managers significantly increased their investments in companies in Alberta’s oil sands, based on plans to green those operations by reducing greenhouse gas (GHG) emissions. While this approach to impact investing suits some, it isn’t appropriate for investors who want to exclude fossil fuels entirely.
Many investments can produce a clear, beneficial impact, says Derek Deutsch, a portfolio manager with ClearBridge Investments in New York (part of Franklin Templeton), which manages a pair of Canadian-based sustainable funds. His company invests in companies that fall into two categories.
First, there are companies offering products and services with a positive impact in areas like climate change, sustainable food, diversity, and human health and well-being. Then, you have companies that operate with a sustainable mindset, even though their products and services might not directly address a global challenge.
In theory, both types of companies can have a positive impact. For example, Mr. Deutsch cites Microsoft, which produces technology that enables business to better monitor and manage their environment footprint. The tech giant also plans to be carbon negative by 2030, and by 2050 aims to remove from the environment all the carbon they’ve emitted (directly or by electrical consumption) since they launched in 1975.
Sustainable bonds offer promise
The Responsible Investment Association reports that assets in impact investments in Canada have shot up dramatically over the last decade, from $3.8-billion in 2012, to $9.2-billion in 2015, $14.8-billion in 2017, and $20.3-billion in 2019.
Impact investors can invest in several asset classes, including stocks, mutual funds, ETFs, venture capital and private equity. In particular, the sustainable bonds category has developed intriguing offerings in the last few years.
Several banks and telcos, for instance, are taking steps to address environmental, social and economic sustainability through their bonds.
In 2021, BMO Financial Group issued a $750-million Women in Business Bond. Proceeds are allocated toward women-owned enterprises (as defined in BMO’s Sustainable Financing Framework); many of these micro-, small- and medium-sized businesses often face systemic barriers in their pursuit of growth and financing.
Three years ago, the National Bank of Canada issued a US$750-million sustainable bond to finance projects in a broad range of green and social assets, including hydro power and social housing.
Earlier this year, Telus Corporation closed its offering of US$900-million in senior unsecured sustainability-linked notes tied to reducing GHG emissions. And in 2021, Bell Inc. issued $500-million in medium-term notes to finance green and social investments.
Also last year, the MaRS Centre for Impact Investing issued what’s believed to be Canada’s first social impact bond in health. Toronto-based MaRS, which brings together the innovation community to help solve big challenges, has partnered with the Heart and Stroke Foundation and Public Health Agency of Canada to launch a program to help at-risk seniors lower their risk of cardiovascular disease. The $4-million program will be funded by the social impact bond.
In March, the Government of Canada issued its inaugural 7.5-year, $5-billion green bond, which was announced in the 2021 federal budget. The federal government will use this bond to finance investments in green infrastructure and other projects that will help fight climate change and protect the environment.
The government reported that 72 per cent of bond buyers were environmentally and socially responsible investors, and that the final order book for the bond offering came to more than $11 billion.
Regardless of the labels for investment products, people should think carefully about whether the impacts of their investments, and the companies behind those impacts, fit with their overall values.
As with any investing approach, returns are never guaranteed with impact investing. However, Mr. Deutsch says that several studies show that impact investing can actually outperform traditional portfolios.
Mr. Dragosits adds that for investors, “if the impact they want to make is aligned with a serious long-term megatrend, such as renewable energy, they can be ahead of the investment curve.”