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Wealth Is Making Your Money Work For You And A Better World

Fossil-free investment portfolios perform as well or better than their carbon-heavy counterparts.

The world around us is changing rapidly. Climate change is no longer a problem in our distant future — we see its effects all around us with sea levels rising, mass migration and the increased frequency and severity of tropical storms and hurricanes. Movements for gun control and social justice are on the rise.

More and more, investors are asking questions about what their money is funding, and young investors are seeking out ways they can put their money to work for them without funding climate change.

Socially and environmentally conscious portfolios are top-of-mind for young investors.
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Socially and environmentally conscious portfolios are top-of-mind for young investors.

Prevailing opinion used to hold that investing in at least a little bit of the "bad" stuff (fossil fuels, tobacco, arms manufacturing) was necessary to generate strong returns, and many investment managers still nudge clients toward these controversial industries. However, studies show those kinds of investments aren't needed for good performance. Accumulating wealth for you and your family's future is wonderful, but if doing so means investing in projects that accelerate climate change, oppress people in developing countries, or that the investor otherwise doesn't want to support, are they really helping future generations flourish?

Building a portfolio that is socially and environmentally conscious hasn't traditionally been a consideration for older investors, but it is top-of-mind for younger ones. A study commissioned by the Responsible Investment Association found millennials were twice as likely as Boomers to seek out out investments that address environmental or social issues. In a recent Globe and Mail article, one financial advisor noted that clients of all ages had concerns about the impacts of their investments on the world, but younger clients discussed it more.

Define your values

Once you've resolved to start investing, determine what your priorities are. What causes do you support? What are your biggest concerns about the future? The United Nations Sustainable Development Goals (UN SDGs) provide an excellent framework for measuring impact. The 17 SDGs are geared broadly toward fighting global inequality, poverty and climate change, and tackle specific issues like ocean pollution and acidification (Life Below Water), consumption and industrial waste (Responsible Consumption and Production) and infrastructure (Industry Innovation and Infrastructure). Almost all the SDGs are investable — when considering an investment, ask an advisor about how impact is measured.

Divestment makes good business sense

A little bit of background on values-aligned divesting might be helpful: divestment means getting rid of financial assets issued by companies or industries that you don't support. Major banks and institutions all over the world (the Catholic Church, Norges Bank, New York City) are divesting or planning to divest from fossil fuels, among other industries, both for values-based reasons and to avoid the risk of stranded assets as the world transitions to a low-carbon economy.

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Divestment makes good business sense. In an economy like Canada's that is highly correlated with fossil fuels, investing in energy means doubling down in a single sector. In addition, having fossil fuels in a portfolio exposes investors to additional risks such as increasing government regulation, carbon taxes and litigation from communities affected by climate change.

Fossil-free portfolios performed as well or better than their carbon-heavy counterparts.

Skeptics argue that divestment isn't financially sound, but in our Divestment Report, my firm studied the data for fossil free and traditional portfolios over the past 20 years and found that the fossil-free portfolios performed as well or better than their carbon-heavy counterparts. The same report included a seven-year study on sustainable portfolios (those without tobacco, gambling, arms manufacturing and other controversial industries) and determined that they also outperform their non-sustainable counterparts. A University of Waterloo study found that after divesting fossil fuel investments, portfolio value continued to grow, leading to better performance.

What will your financial legacy be?

Financial legacy involves understanding how your choices will impact the world both now and when you're gone. Employing your own socially conscious investment strategy can lead to enlightening conversations with family members who might not be thinking about how their investments are harming the world, and what they stand to gain from divesting — divesting from fossil fuels helps reduce harmful emissions and improve air quality, by helping to speed up the transition to a low-carbon economy. Divesting from tobacco companies, whose products are still very prevalent in developing countries, could reduce the number of people harmed by their products in the future. Investing in health care innovations could eradicate certain diseases and save lives.

The fact that you've read this far is a testament to the fact that investors are keen to learn about socially conscious portfolio options. The good news is, the investment industry is listening. Decide what your priorities are as an investor, reach out to an advisor for help, and when you find one who clearly understands your values, start making money and putting your money to work for good.

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