How to make your RRSP or TFSA sustainable
ESG investing (or sustainable investing) means money is invested in assets that rank well on environmental, social and governance criteria. That can mean investments that avoid high-polluting sectors, or those that do society harm, such as weapons or tobacco. Or it may mean investments that are limited to companies that make a positive contribution to society or the environment.
Do you know how your retirement savings are invested?
If you don’t, it’s not necessarily a reason to worry. Rules for retirement plans these days mean that you should not be invested in assets that are inappropriate for you.
Increasingly, however, another consideration is entering investors’ minds: are their retirement savings invested in a way that is sustainable for the world?
As a retirement saver, whether in a workplace plan or a personal plan such as an RRSP or TFSA, you may be able to request that your retirement savings be invested with ESG principles in mind. If that’s of interest to you, here are some things to consider.
Sustainable investing doesn’t have to mean lower returns.
ESG investing may mean some assets, such as weapons manufacturers, tobacco producers or fossil fuels, for example, are off limits. Restricting your investment universe like this has the potential to put some assets out of reach, which could hurt returns. However, recent evidence suggests various approaches to ESG investing, including exclusionary strategies, can outperform non-ESG assets.
This makes some sense when you consider that one of the tenets of ESG investing is that long-term sustainable companies – which are not over-consuming finite fossil fuels, for example, or running reputational risk through unethical practices – are likely to prove better long-term investments.
That has been shown to be the case since the emergence of the COVID-19 pandemic more than a year ago. After the initial drop in markets in February and March 2020, Fidelity examined company performance during the period. We found that companies with high sustainability ratings performed better than their peers as markets fell.* This supported the theory that companies with good sustainability characteristics have more prudent management and will demonstrate greater resilience in a crisis.
What is the best investment for an RRSP? There is no one standard of what counts as ESG, which means that different ESG funds can use different principles. If you’re looking for sustainable investing options for your retirement, you need to understand how your chosen investments apply their ESG principles.
Some funds will take a relatively light-handed approach, simply filtering out some sectors, such as fossil fuels, weapons or tobacco, to ensure the least sustainable companies are avoided. Some funds that are branded as sustainable may not even filter for fossil fuels or weapons.
Other funds are more discerning and will apply more hands-on analysis to ensure the companies invested in meet stricter standards on polluting levels or other social considerations. This type of fund makes it more likely that your investments meet certain sustainability standards.
Finally, the strictest ESG funds will only invest in assets the managers consider to be actively bringing about positive environmental or social change, rather than simply filtering out offending companies. That might mean they look to renewable energy companies, or technology firms that seek out solutions to reduce harm.
Whichever flavour of ESG you believe suits your aims, bear in mind that any given approach may not meet your own personal standards exactly – but some will get closer than others.
ESG in a workplace retirement plan
The investment choices you can make inside a workplace retirement plan will be limited by what your plan offers. The extra interest in ESG means that retirement plan providers are increasingly offering ESG options, and you should be able to find details of what your plan offers by contacting them. Many plans will provide online access to view options and change your investment choices.
If your plan doesn’t yet offer ESG options, you should indicate your interest to your employer, who can explore ways to expand the investment choice in its plan.
How to make your RRSP or TFSA sustainable
If you are investing for your retirement via a self-directed plan, such as an RRSP or TFSA, your investment options should be much wider.
Want to learn more about sustainable funds? Check out the following funds from Fidelity:
ESG Strategy: Best-in-class and exclusionary screening
Fidelity Sustainable World ETF and Mutual Fund is a global multi-factor equity strategy designed to provide strong risk-adjusted returns by investing in companies with favourable environmental, social and governance characteristics.
ESG Strategy: ESG Integration and thematic
Fidelity Women’s Leadership Fund is a core U.S. equity strategy that aims to deliver strong risk-adjusted returns by investing primarily in companies that prioritize and advance women’s leadership and development across their organization.