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Responsible investment is an umbrella term for the different ways people can support certain positive business practices when they invest. One of these approaches is ESG integration. It’s a way of judging a company by things other than its financial performance.

ESG integration is about seeing the whole picture when you invest.

Traditionally, a portfolio manager chooses to invest in companies based largely on their financial reports. They might look at things like earnings, profit margins and debt levels. But in recent years, there has been a growing focus on looking beyond the balance sheet. When you integrate ESG factors into the investment decision-making process, you can assess many other kinds of risks a company faces. For example, portfolio managers or investors may ask:

Environmental

Is the company’s business subject to increasing risks as a result of climate change?

Social

Does the company monitor its supply chain for potential human rights violations or health and safety issues?

Governance

What is the structure of executive compensation, and what measures do they have in place to combat corruption?

When you integrate ESG factors into your decision-making process, you can gain a deeper understanding of companies before you invest. This includes insight into how the company will likely perform and the value it may add to a portfolio. Research indicates that companies with strong ESG-related practices have produced:1

  • lower risks
  • lower cost of capital
  • better operational performance
  • better share price performance over the longer term.

Here are some examples of strong versus weak ESG practices:

Chart of strong and weak ESG practices
Company FocusStrong ESGWeak ESG
Employees Engagement, strong culture, innovation Lack of training, unsafe conditions, high turnover rate
Customers Responsiveness, availability, dispute resolution No returns policy, poor labelling, over-charging
Suppliers Timely payment, good production planning Reputational risk, lack of audit, lack of quality control
Environment              Emissions control, sustainable sourcing, renewable energy Pollution, high cost carbon

Source: RBC GAM June 2017

Integrating ESG does not involve negative screening or values-based judgments about a particular security or sector. These strategies are used in socially responsible investing (SRI) funds – another approach to responsible investment. 

ESG, on the other hand, is not about excluding firms. For example, a fund that integrates ESG factors may continue to hold companies with high ESG risks or poor ESG practices. But the fund will be able to better identify and understand those risks and then engage with those companies to improve their ESG-related policies and practices.

Learn more about our approach to responsible investment or explore our socially responsible investment options

1Does socially responsible investing hurt investment returns? RBC Global Asset Management. July 2019.

Disclosure

Last updated: September 2021
This has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when provided. Information obtained from third parties is believed to be reliable but RBC GAM and its affiliates assume no responsibility for any errors or omissions or for any loss or damage suffered. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the information. What is ESG?

What ESG is and isn’t