Aim for diversity
Clients sometimes run into trouble, says Rajagopal, when they try to be too selective about the companies in their portfolio. If you’ve invested only in clean tech funds, for example, and there’s a downturn in that sector, you could be hit hard. Many SRI funds use what is called a “best of sector” approach. Rather than excluding all chemical, oil and gas or forestry companies on principle, these funds invest in those that are industry leaders in terms of putting cash into cleaner technology, maintaining good labour relations and minimizing the impact of their operations.
This approach has some distinct advantages, according to financial planner Fansher. First, you’re flexing your buying power to reward companies that are more socially and environmentally responsible — that’s an encouragement to other companies to follow suit. Second, SRI fund managers increasingly use their position as shareholders to push for a higher degree of accountability. “For example,” says Fansher, “back in February, Meritas Mutual Funds filed a shareholder resolution with all five of the big banks in Canada asking for an executive compensation review and explaining that they believed the existing method for compensating bank executives is excessive.” Although the resolution didn’t pass, they garnered a great deal of support and, in the process, shone light on the issue.
Aim for diversity
“In the 1980s,” explains Rajagopal, “SRI was more about boycotting or excluding companies from the portfolio. But we realized that that doesn’t have as much impact as the dialogue you can have as a shareholder. There’s a huge grey area of companies that are doing some good things and some bad things. We want to work from the inside to encourage the good behaviour and try to reduce the bad behaviour.”
For the investor, of course, the best of sector focus allows for the kind of diversity that protects during downturns in the market. “There’s an increasing awareness of the environmental damage the oil sands development is doing,” says Rajagopal. “I’ve had clients tell me, ‘I don’t care about best of sector, I don’t want to be in any of those companies.’” The problem: Canada’s oil and gas industry is a huge part of our economy. “When you leave it out, it’s likely to have an impact on your portfolio’s returns.”
Rajagopal follows up such concerns with a discussion about what the client is willing to give up in terms of performance to meet her specific ethical criteria. Sometimes the client chooses to stick to her guns, and sometimes Rajagopal suggests keeping a sector as a smaller percentage of the portfolio. How much? Ultimately, she points out, “you are investing. It’s not a philanthropic endeavour, and you need diversification.”
