Sustainable investing, the practice of considering environmental, social and governance (ESG) factors in investment decisions, is rapidly gaining traction as a way to drive both positive change and healthy financial returns. Mounting evidence shows that aligning investments with sustainability principles not only mitigates risks, but can lead to outperformance over the long term. A growing body of research indicates that companies with strong ESG practices tend to exhibit better operational efficiency, lower costs, and more innovation – all of which contribute to a stronger bottom line.

What’s more, sustainable investing taps into the swelling demand from consumers, employees and investors for businesses to act as good corporate citizens. By integrating ESG into investment strategies, savvy Canadian investors can get ahead of regulatory and market shifts, while benefiting from the momentum behind this mega-trend. With sustainable investing assets in Canada surging by over 40% in just two years to hit $3.2 trillion in 2020, according to the Responsible Investment Association, the business case for “doing well by doing good” has never been clearer. Far from a passing fad, sustainable investing is cementing itself as a core tenet of intelligent portfolio construction – one that astute investors ignore at their peril.

What is Sustainable Investing?

Sustainable investing, also known as socially responsible investing or impact investing, is a strategy that considers environmental, social, and governance (ESG) factors alongside traditional financial metrics when making investment decisions. Unlike conventional investing, which primarily focuses on maximizing returns, sustainable investing aims to generate both financial gains and positive societal impact.

ESG factors encompass a wide range of issues. Environmental criteria examine how a company performs as a steward of the natural environment, such as its carbon footprint, resource efficiency, and waste management practices. Social factors assess how a company manages relationships with its employees, suppliers, customers, and the communities where it operates, including labor standards, diversity and inclusion, and human rights. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

By incorporating ESG analysis into the investment process, sustainable investors seek to identify companies that are well-positioned to manage risks and opportunities related to these issues. They believe that companies with strong ESG practices are more likely to deliver long-term value creation and outperform their less sustainable peers over time.

Sustainable investing has gained significant momentum in recent years as more investors recognize the importance of aligning their values with their investment portfolios. According to a 2020 report by the Global Sustainable Investment Alliance, sustainable investments reached $35.3 trillion globally, representing more than one-third of all professionally managed assets. In Canada, sustainable investing assets grew by 48% between 2018 and 2020, totaling over $3.2 trillion.

As the demand for sustainable investments continues to rise, an increasing number of Canadian businesses are integrating ESG considerations into their strategies and reporting practices. By doing so, they can attract capital from sustainability-minded investors, enhance their brand reputation, and contribute to a more resilient and equitable economy.

Seedling growing from coins symbolizing sustainable investing profits
Green seedling sprouting from a pile of coins

The Business Case for Sustainability

Risk Reduction

Sustainable companies often face fewer risks compared to their traditional counterparts. By prioritizing environmental and social responsibility, these businesses are better positioned to navigate evolving regulations and avoid costly penalties. As consumer preferences shift towards eco-friendly products and services, sustainable companies can maintain a positive reputation and build brand loyalty. Moreover, by fostering ethical supply chain practices and investing in resilient infrastructure, these organizations are less vulnerable to disruptions caused by climate change or social unrest. Canadian companies like Brookfield Renewable Partners and Algonquin Power & Utilities Corp. exemplify how prioritizing sustainability can lead to stable, long-term growth. As Mark Wiseman, former CEO of the Canada Pension Plan Investment Board, emphasizes, “Companies that manage environmental, social, and governance risks effectively are more likely to create sustainable value over the long term.” By mitigating potential risks, sustainable companies can attract investors seeking reliable returns and contribute to a more resilient economy.

Operational Efficiency

Implementing sustainable practices can have a significant positive impact on a company’s bottom line. By reducing waste, conserving energy, and optimizing resource use, businesses can lower their operating costs and improve efficiency. For example, a manufacturing facility that invests in energy-efficient equipment and adopts lean production methods can cut electricity bills and minimize raw material waste. Similarly, an office building that uses smart thermostats, LED lighting, and paperless systems can reduce utility expenses and supply costs. These savings can add up over time, boosting profitability and competitiveness. Moreover, by demonstrating a commitment to sustainability, companies can attract environmentally conscious customers and investors, further enhancing their financial performance. As more Canadian businesses recognize the economic benefits of going green, sustainable practices are becoming an increasingly important driver of operational efficiency and long-term success.

Innovation Opportunities

Sustainability is a powerful catalyst for innovation, driving companies to develop groundbreaking products, services, and business models that align with evolving consumer values and regulatory requirements. By embracing sustainable practices, businesses can tap into new growth opportunities and drive innovation across industries. From renewable energy and green transportation to eco-friendly packaging and circular economy solutions, the possibilities for sustainable innovation are vast. As more investors recognize the long-term value of sustainability-driven companies, those that prioritize innovation in this space are well-positioned to attract capital, expand their market share, and build resilient, future-proof businesses.

The Performance of Sustainable Investments

Sustainable Fund Returns

Comparing the returns of leading sustainable mutual funds and ETFs to market indices reveals that sustainable investing can indeed be profitable. For instance, the iShares ESG Aware MSCI Canada Index ETF (XESG), which focuses on Canadian companies with strong environmental, social, and governance practices, has outperformed the broader S&P/TSX Composite Index over the past three years. Similarly, the NEI Environmental Leaders Fund, which invests in companies providing solutions to environmental challenges, has delivered competitive returns compared to its benchmark. It’s important to note that while some sustainable funds may slightly underperform in the short-term due to their more selective approach, they often exhibit lower volatility and better risk-adjusted returns over the long run. As more investors recognize the potential of sustainable investing, the demand for these products is expected to grow, further bolstering their performance. Ultimately, the data suggests that aligning investments with sustainability principles does not necessarily come at the cost of financial returns, making it an attractive option for both values-driven and profit-seeking investors.

Sustainable Stock Examples

Several Canadian companies have demonstrated that sustainable practices can drive impressive financial returns. For example, Brookfield Renewable Partners, a leading developer of hydroelectric, wind, and solar energy projects, has delivered a total return of over 400% to shareholders since its inception in 2011. Another standout performer is Nutrien, the world’s largest provider of crop nutrients, which has integrated sustainability into its core operations. The company’s focus on efficient nutrient management and innovative agricultural solutions has contributed to its strong financial performance, with a total shareholder return of 55% over the past five years. Sustainable companies like Maple Leaf Foods, a carbon-neutral food producer, and Algonquin Power & Utilities, a diversified renewable energy company, have also generated solid returns while reducing their environmental impact. These real-world examples provide compelling evidence that investing in sustainability can be a profitable strategy for businesses and investors alike. As more companies recognize the financial benefits of going green, the case for sustainable investing in Canada continues to strengthen.

Growing Demand for Sustainable Investments

The demand for sustainable investments has been on a steep upward trajectory in recent years, driven by a confluence of factors reshaping the investment landscape. Shifting consumer preferences are a key catalyst, with a growing number of Canadians seeking to align their investments with their values and support companies that prioritize environmental, social, and governance (ESG) considerations. Kathy Bostjancic, Chief US Economist at Oxford Economics, notes that “consumer surveys show that sustainability has become a top priority, especially for younger generations who are poised to inherit trillions in wealth.”

Employee expectations are also evolving, with workers increasingly favoring employers that demonstrate a genuine commitment to sustainability. This trend is prompting companies to enhance their ESG practices to attract and retain top talent. Furthermore, policy changes at both the federal and provincial levels are accelerating the shift towards sustainable investing. Canada’s Expert Panel on Sustainable Finance has recommended a series of measures to scale up sustainable finance, including clearer ESG disclosure requirements and support for green infrastructure projects.

The confluence of these factors has fueled a surge in sustainable investing. According to the 2020 Canadian Responsible Investment Trends Report, assets in Canada managed using responsible investment strategies grew from $2.1 trillion in 2017 to $3.2 trillion in 2019, a 48% increase in just two years. This rapid growth underscores the mounting demand for sustainable investment options and the pivotal role they will play in shaping Canada’s economic future. As more investors, consumers, and policymakers prioritize sustainability, the momentum behind responsible investing is set to accelerate further, presenting significant opportunities for forward-thinking Canadian businesses and investors.

Examples of sustainable industries and products
Collage of renewable energy, electric cars, and eco-friendly products

In conclusion, sustainable investing presents a compelling opportunity for Canadian investors and businesses to align their financial goals with positive social and environmental impact. As demonstrated by the growing body of research and real-world examples, companies that prioritize sustainability tend to outperform their peers financially over the long term. By integrating ESG factors into investment decisions, investors can mitigate risks, identify new growth opportunities, and meet the rising demand for responsible investment products. For business owners and entrepreneurs, embracing sustainable practices can lead to cost savings, improved brand reputation, and a competitive edge in attracting top talent and customers. As Canada continues to build a more resilient and inclusive economy, now is the time to seize the opportunities presented by sustainable investing. Whether you are an individual investor, a corporate leader, or a policy maker, you have a role to play in accelerating the transition to a more sustainable future. By educating yourself on ESG investing, setting clear sustainability goals, and collaborating with like-minded stakeholders, you can help drive positive change while positioning yourself for long-term financial success. The path to a thriving, sustainable economy starts with the decisions we make today.

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