MARKET COMMENTARY

Sorting Out Sustainable Investing Options

What’s the difference among ESG, Impact Investing and SRI? Dave Cieslowski shares his thoughts. You may be surprised by the familiar themes found in new strategies.

01.29.2021 - Fiduciary Trust Canada

Today, words like ethical, sustainable, green, impact, socially responsible are frequently tied to investing. But what do they mean and how do you distinguish the differences? Vice president and private wealth counsellor, David Cieslowski shares his thoughts.

Q: How do you start making sense of the increasing range of terms and techniques?

David Cieslowski: I would begin with the most familiar approaches such as ESG, SRI and Impact Investing. Bear in mind that, as with any other investment-related decision, your choices should be driven by basics such as your individual situation, risk tolerance, values and goals. It is also important to understand the potential ripple effects of certain strategies on your portfolio and overall wealth management plan. Ensure that you understand the potential upsides and downsides to your decisions. Longtime clients may be struck by the fact that, within the “newness” of some options, various things sound familiar.

Take Impact Investing, for instance, which generally focuses on smaller, private companies and community groups working to solve a social or environmental problem. This is a highly tailored approach, where individuals make direct investments that typically carry considerable risks. It can be akin to funding a startup. Helping clients make a direct, positive impact on the world is something we have been doing for years, but in a different way. Historically, philanthropy and tools such as private family foundations or trusts have been used to support positive change.

SRI or Socially Responsible Investing translates personal values by including or excluding specific companies, countries or sectors in one’s portfolio. This tailored, screening approach should involve a thorough examination of its potential effects on diversification and risk. In our view, the goal is to balance a client’s social concerns with the financial integrity of the portfolio.

It is worth noting that in the 1950s, Sir John Templeton weeded out companies whose activities conflicted with his personal ethics or those of his clients. His track record of conscientious investing was reflected in the success of Templeton Growth Fund, which he founded. That same Fund launched the growth of Franklin Templeton’s worldwide investment platform. Sir John’s process has grown, matured and is reflected in our integrated ESG approach and culture.

Q: How so?

David Cieslowski: ESG stands for Environmental, Social, Governance. Very briefly, this multi-faceted process looks to measure and answer questions such as: How does a company manage its impact on the environment and how does that affect its profitability? How does a company work with its employees, suppliers, customers and communities? How is a company’s board of directors structured?

As part of their research and analysis of a company, our underlying portfolio managers will take the answers to such questions and combine them with traditional financial analysis as a means of unlocking value and helping to manage risk. This is just one way ESG is embedded within the Franklin Templeton investing process.

We also hold ourselves accountable. For instance, parent company Franklin Resources signed the Principles for Responsible Investment in April 2013. In doing so, the company joined over 2,000 international institutional investors committed to integrating ESG considerations into investment decision-making, ownership practices and reporting.

Investors do have a growing number of options from which to choose. This is a good thing; however, I would suggest pausing to reflect on the substance behind the words. Take the time to learn more.

 

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