Responsible Investing and Charitable Giving
These insights from Kait provide financial advisors a real opportunity to provide greater value to clients by understanding their motivations
ARTICLE
BY
Kait Moreau
Former BlackRock CIO Tariq Fancy’s recent commentary outlining the failings of responsible investments (RI) in contributing to social impact offers a moment of pause for the industry. However, at Environics Research, listening to Canadian investors and advisors reveals a more nuanced landscape. Responsible investing is an umbrella category for a complex series of investments, further complicated by a lack of consistent investment approaches and a proliferation of available products. Despite these growing pains, responsible investing does have positive aspects for investors.
There are still myths that exist around RI that many have received considerable attention as RI rises in popularity. One that we at Environics Research repeatedly hear when interviewing financial advisors is the idea that responsible investing equates to an act of charity. An investor may initiate a discussion with their advisor about the possibility of adding responsible investments to their portfolio, only to be met with the suggestion that rather than RI, the investor should stay the course with conventional investment products and then donate the profits from those investments to charity. However, empirical data reveal that responsible investments and charitable donations are not interchangeable. Pushing this idea can confuse investors and misunderstands the investor’s intent in exploring RI.
We find that responsible investing allows Canadian to align their personal values with their financial future.
Recent academic research examines why investors hold socially responsible mutual funds
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. A key finding is that investors interested in responsible funds are primarily motivated by social concerns rather than performance. Notably, investors who hold socially responsible investments (SRI) donated to charity 41% more often than non-socially responsible investors, rejecting the hypothesis that SRI and charity donations are interchangeable. Instead, these findings suggest that responsible investing and charity donations are complimentary tools for investors wanting to connect their holdings to their personal values. Environics Research recently asked Canadians about their interest in responsible investment as well as the amount of money they donate to charities each year. Our results confirm that Canadians view purchasing responsible investments and donating to charity as two separate actions as well.
Social Values
Since 1983, social values research conducted by Environics has tracked changing mindsets and norms in Canada, and analyzed how these views influence brand perceptions, product preferences and purchasing behaviours. Environics interviews thousands of Canadians each year and in 2021, we found that Canadians who give to charities, on average, donate $1,120 per year. These individuals are more likely to be retired and affluent. They own their homes and feel confident in their long-term financial health. Canadians who are donating to charities are highly engaged with their investments, following them frequently, and are more likely to be working with an independent financial advisor. They are also more likely to have taken more action to fight climate change and reduce their own personal carbon footprint over the course of the pandemic. These Canadians are also very likely to say they either currently own or have seriously considered responsible investments. Our research reveals that the top reason responsible investments appeal to Canadian investors is because they believe these products can have a positive impact on the world. RI makes them feel better about the kinds of investments they are invested in and provides a way to incorporate personal values into their investments. Canadian investors take social action multiple ways through donating to charities, paying more for environmentally friendly products, and exploring other areas of their lives where they can have an impact, including RI.
Environmental Impact
Investor intuition that RI products can be a vehicle for social action is supported by in-depth analyses of investment portfolios. One concern for prospective responsible investors is environmental impact. Many Canadians may be surprised that investment portfolios have an enormous carbon footprint. For example, the MSCI World Index carbon intensity score of 133 tons of CO2 emissions per $1M in sales is more than double the MSCI World Low Carbon Leaders Index
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. For the individual investor, the annual carbon footprint of an average investment portfolio is larger than the combined yearly emissions of raising a child, taking multiple round-trip flights and driving a car. Sources like FossilFreeFunds.org calculate the carbon footprint of individual mutual funds so investors can compare and select investments with reduced footprints. Investment manufacturers in Canada are now offering low carbon investments which can decrease the carbon footprint of an investment anywhere between 50% to 70%. While Fancy may have a point that these products could be better, it is possible to reduce a portfolio’s carbon footprint and satisfy an investor’s urge to take social action beyond traditional charitable giving.
Opportunities
Investors say the most important reason they would invest in responsible investments is to have a positive impact on the world. However, there are many other reasons why Canadians are interested in RI and this interest should not be confused with an act of charity. These insights provide financial advisors a real opportunity to provide greater value to clients by understanding their motivations and working with them to explore the multitude of investment options available to help achieve both financial and personal goals.
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Arno Riedl & Paul Smeets, 2017. “Why Do Investors Hold Socially Responsible Mutual Funds?” Journal of Finance, American Finance Association, vol. 72(6), pages 2505-2550, December.
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MSCI Index Carbon Footprint Metrics. Carbon footprint of flagship MSCI Indexes as of June 30, 2021