At its core, ESG investing is a strategy that focuses on environmental, social and governance criteria. Companies are rated on how well they operate under these principles, and issued an ESG score potential investors can use to compare them.<\/p>\n\n\n\n
Environmental criteria may include:<\/strong><\/p>\n\n\n\n Social criteria may include:<\/strong><\/p>\n\n\n\n Governance criteria may include:<\/strong><\/p>\n\n\n\n There is no standard evaluation system for rating companies when it comes to ESG. MSCI and Sustainalytics are two major independent ESG risk rating companies, and each uses different criteria to come up with their scores.<\/p>\n\n\n\n For example, Sustainalytics uses a scale of 0 to 100. The lower the number, the less exposure the company has to industry-specific ESG risks.<\/p>\n\n\n\n MSCI uses a scale of AAA to CCC. Companies with AAA or AA ratings are considered industry “leaders” with limited risks, A, BBB, and BBB companies are “average,” and those with CCC or B ratings are defined as \u201claggards.\u201d<\/p>\n\n\n\n Since rating systems vary, you\u2019ll want to make sure you understand what\u2019s included before relying on a particular score to make an investment decision.<\/p>\n\n\n\n Although many companies say they prioritize ESG practices, it can be difficult to verify that their claims are accurate.<\/p>\n\n\n\n Many large institutional investors in Canada have called on corporations to provide more detailed information on their ESG claims, such as by adopting the Sustainability Accounting Standards Board, or SASB, standards and the Task Force on Climate-Related Financial Disclosures, or TCFD, framework.<\/p>\n\n\n\n When a company discloses this information, investors can better see how it performs against ESG standards, compare it with other companies in the same industry and evaluate whether it has developed a credible plan to achieve its stated goals.<\/p>\n\n\n\n ESG rating systems can help you see which companies are performing better than others against the included criteria. However, you\u2019ll need to consider your values to determine what\u2019s most important to you as an investor.<\/p>\n\n\n\n Some people will avoid investing in companies that produce items such as tobacco, alcohol, and firearms, for example. Others might prefer to support a company with a higher ESG rating than its competitors in a given sector, like climate change policies, to potentially incentivize more companies to prioritize ESG reforms.<\/p>\n\n\n\n If you want to do your own research about the ESG policies of certain companies and funds, and are comfortable trading on your own, you may prefer to take a DIY approach when building your ESG investment portfolio. To do so, you\u2019ll need a brokerage account, and time to conduct the necessary research.<\/p>\n\n\n\n If you prefer a hand\u2019s off approach, you could choose to work with a human investment advisor or even a robo-advisor that will manage a portfolio based on your risk tolerance and preferences. Robo-advisors that offer ESG investments in Canada include Wealthsimple, CI Direct Investing and Questwealth.<\/p>\n\n\n\n The right ESG assets for you will depend on how much control you\u2019d like to have over the process, the returns you expect and your risk tolerance.<\/p>\n\n\n\n One option is to purchase individual stocks, which may provide dividends and accelerated growth opportunities. You can review a company\u2019s policies in detail and determine if its values and performance align with your priorities. Investing in stocks<\/a> typically carries more risk than funds, however, and there may be trading fees to consider. To hedge against risk, you\u2019ll want to do a fair amount of homework on past performance as well as predictions for growth.<\/p>\n\n\n\n To avoid having to research and choose individual ESG stocks, you may invest in ESG-focused exchange traded funds, or ETFs, instead. These funds offer access to dozens or even hundreds of ESG companies. Although you won\u2019t choose each individual company, buying shares of an ESG ETF can help you invest according to your values more efficiently. Be aware that some ETFs charge management fees, sometimes called expense ratios.<\/p>\n\n\n\n Similarly, ESG mutual funds<\/a> can also be a good option for investors who prefer to invest via a financial advisor or robo-advisor. The advisor can recommend and select funds based on your budget and financial goals. However, it\u2019s important to consider the expense ratios and possible account minimums imposed by mutual funds.<\/p>\n\n\n\n There\u2019s no easy answer to this question, as investment performance is never guaranteed. While some people might worry that companies with good ESG practices may not perform as well financially, research shows this isn\u2019t the case.<\/p>\n\n\n\n A 2019 report published by Royal Bank of Canada\u2019s asset management division examined the findings of over 35 empirical studies on socially-responsible portfolio performance. The conclusion? \u201cSocially responsible investing does not result in lower investment returns.”<\/p>\n\n\n\n Likewise, research published in 2020 by Morningstar concluded that holding ESG funds does not affect risk. In other words, ESG investing doesn\u2019t typically mean opening your portfolio up to more risk than you might have with non-ESG traditional stocks or funds.<\/p>\n\n\n\n Barry Choi is a freelance personal finance and travel expert. His website moneywehave.com is one of Canada's most trusted sites when it comes to all things related to money and…<\/p>\n\t\t\t\t\t\t\t\t\t\t\t\t\n\t\t\t\t\t\t\tRead more about Barry Choi and explore their articles<\/span>\n\t\t\t\t\t\t<\/a>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t<\/div>\n\t\t\t<\/div>\n<\/div>\n\n\n\n\t Start investing in Canada by reviewing your finances, exploring your account options and learning how to compare brokerages.<\/p>\n\t<\/div>\n\n\t Both RRSPs and TFSAs have tax advantages. To decide where to stash your savings, consider your income, tax bracket and existing savings.<\/p>\n\t<\/div>\n\n\t Have you ever wondered what inheritance tax is? Or whether your moving expenses are tax deductible? Get answers to those and other common tax questions.<\/p>\n\t<\/div>\n\n\t\n
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2. How are companies rated on ESG performance?<\/h2>\n\n\n\n
3. Is the company transparent about ESG practices?<\/h2>\n\n\n\n
4. What ESG criteria are most important to me?<\/h2>\n\n\n\n
5. Should I be a DIY ESG investor or get help?<\/h2>\n\n\n\n
6. ESG stocks, mutual funds or ETFs?<\/h2>\n\n\n\n
7. Will ESG investing affect my portfolio\u2019s performance?<\/h2>\n\n\n\n
\n\t\t\tAbout the Author\t\t<\/h4>\n\n\t\t\t\t\t
\n\t\t\t\tDIVE EVEN DEEPER\t\t\t<\/h4>\n\t\t\n\t\t
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\t<\/a>\n\t\t\t\n\t\n\t\tHow to Start Investing: 6 Steps for Beginners\t<\/a>\n<\/h4>\n\n\t
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Shannon Terrell<\/a>\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>\n\t<\/div>\n<\/div>\n<\/div>![\"Should](\"https:\/\/www.nerdwallet.com\/ca\/wp-content\/uploads\/sites\/2\/2022\/02\/GettyImages-825154794-e1644961213815-460x198.jpg\")
\t<\/a>\n\t\t\t\n\t\n\t\tShould You Stash Cash in an RRSP or TFSA?\t<\/a>\n<\/h4>\n\n\t
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Nora Dunn<\/a>\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>\n\t<\/div>\n<\/div>\n<\/div>![\"Quick](\"https:\/\/www.nerdwallet.com\/ca\/wp-content\/uploads\/sites\/2\/2022\/02\/10-tax-questions-e1644001244985-460x191.jpg\")
\t<\/a>\n\t\t\t\n\t\n\t\tQuick Answers to 10 Common Tax Questions\t<\/a>\n<\/h4>\n\n\t
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Sandra MacGregor<\/a>\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>\n\t<\/div>\n<\/div>\n<\/div>![\"6](\"https:\/\/www.nerdwallet.com\/ca\/wp-content\/uploads\/sites\/2\/2022\/04\/GettyImages-1061010298-e1649957379197-460x198.jpg\")
\t<\/a>\n\t\t\t![\"\"](\"https:\/\/www.nerdwallet.com\/ca\/wp-content\/uploads\/sites\/2\/2021\/07\/BarryChoi-e1626212860872-40x40.jpg\")
Barry Choi<\/a>\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t<\/div>\n\t\t<\/div>\n\t<\/div>\n<\/div>\n<\/div>\t\t<\/div>\n\t<\/section>\n\n","protected":false},"excerpt":{"rendered":"