Today, ignoring Environmental, Social, and Governance (ESG) considerations could significantly impact your net investment outcomes. Not just from a "feel-good" perspective, but also from the bottom line.

ESG criteria look at how well a company protects the environment, manages relationships with its employees, suppliers, customers, and communities, and how it handles its internal governance and shareholder rights.

Think about some of the costly mishaps that have hit the headlines. Remember the BP Deepwater Horizon oil spill? That disaster cost shareholders a whopping $65 billion.

Or consider the mining giants Vale and BHP, who were ordered to pay $9.67 billion by a Brazilian court after a catastrophic dam failure at one of their joint ventures, leading to disastrous environmental and social consequences.

And let's not overlook utility giant Pacific Gas and Electric, which had to fork out $45 million due to its part in igniting California’s second-largest wildfire.

ESG investment strategies can therefore be a good fit for investors looking to address catastrophe and governance risks in their portfolio. Here’s what you need to know.

Understanding ESG frameworks

Socially Responsible Investing (SRI) involves choosing investments that balance financial returns with positive ethical, social, or environmental outcomes.

While some SRI strategies may underperform broader market approaches due to the exclusion of certain asset classes or sectors, they align with values-driven investing.

Within SRI, there are two distinct strategies: ESG investing and impact investing.

• ESG investing focuses on Environmental, Social, and Governance factors to evaluate investments. This strategy assesses companies based on their sustainability initiatives, risk management, and governance practices, offering a way to integrate long-term ethical considerations into financial decisions.
• Impact investing, as defined by the Global Impact Investing Network (GIIN), involves making investments aimed at generating measurable positive social or environmental changes alongside financial returns. This approach seeks not just to assess risks, but to actively contribute to meaningful societal or environmental progress.

Institutional Investors and Infrastructure Investments

A growing portion of investments by institutional investors like pension funds, including the Canada Pension Plan (CPP), and university endowments are in infrastructure assets. These investments cover essential services and structures such as roads, bridges, railways, pipelines, utilities, airports, telecommunications, and renewable energy facilities.

Infrastructure is highly valued by institutional investors due to its low long-term correlation with traditional stocks and bonds, offering a stabilizing effect on portfolios. Additionally, infrastructure assets are prized for their resilience to inflation and potential to generate above-average distributable cash flows, which are critical in maintaining real returns over time.

The Rise of Sustainable Infrastructure

There is a growing potential in sustainable infrastructure investments, driven by increasing demand from institutional investors and greater accessibility for retail investors. Green infrastructure projects focus on minimizing environmental and social risks while meeting long-term sustainability goals.

Disasters like oil spills and dam failures highlight the importance of sustainability. These events not only lead to massive financial losses but also cause severe environmental and social harm. By focusing on sustainable infrastructure, investors can mitigate these risks while contributing to broader environmental and social benefits.

Impact Investing

Individual investors can access infrastructure investments through funds that focus on sustainability. These funds often invest in companies with exposure to global infrastructure assets, particularly renewable energy. Companies in these portfolios typically own and operate renewable energy facilities, such as wind, solar, and hydroelectric power plants.

Renewable energy companies within such funds are often leaders in building and operating green infrastructure projects worldwide. This allows retail investors to gain exposure to a growing sector that aligns with sustainability goals while potentially benefiting from steady income and long-term growth.

The Role of Fixed Income in Sustainable Investing

While infrastructure investments play a critical role in diversifying a portfolio, they remain equities and carry risks such as market volatility, regulatory changes, and economic cycles.

For investors seeking additional diversification, lowered volatility, and income, all while maintaining a focus on sustainability, fixed-income options—particularly green bonds—offer a viable alternative.

The Growing Momentum of Green Bonds

Interest in sustainable fixed-income investments surged following the 27th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP27) in November 2022. A significant focus of COP27 was on emerging economies, which, despite contributing less than 2 percent to current atmospheric carbon levels, face disproportionate risks from climate change.

At COP27, developed nations began addressing their financial responsibilities. Denmark pledged 100 million kroner, and Scotland committed 1 million pounds to support climate loss and damage in these vulnerable regions. This marked a turning point for high levels of investment in sustainability projects, many of which are financed through green bonds.

What Are Green Bonds?

Green bonds are debt instruments specifically designed to finance or refinance projects that promote renewable energy, energy efficiency, clean transportation, green buildings, and other environmentally friendly initiatives. These bonds play a vital role in funding large-scale sustainability projects that align with global climate goals.

ESG Investing

For retail investors and advisors, accessing green bonds directly can be challenging due to market complexities and high minimum investment thresholds. Funds that focus on green bonds can bridge this gap, offering diversified access to sustainable fixed-income opportunities.

These funds typically hold bonds issued by governments, government-related entities, and corporations worldwide, prioritizing projects that achieve measurable environmental benefits. By leveraging expert management teams with experience in global rates and credit markets, these funds target issuers with a proven track record of reducing greenhouse gas emissions and addressing critical sustainability challenges.

This makes green bond-focused investments an accessible and impactful way for investors to align their portfolios with sustainability goals while achieving additional diversification.

Learn more about ESG investing

For those interested in exploring socially responsible investment options, resources like CI Direct Investing’s ESG and Impact Portfolios provide accessible avenues to align your investments with your values.

To deepen your understanding of ESG and impact investing strategies, Responsible Investment Association (RIA) Canada also offers comprehensive insights into the methodologies used to integrate ESG factors and sustainability effectively.