Socially responsible investing

Julie Maltby strives to leave a light footprint on the planet. The 43-year-old communications and alumnae relations officer at Brescia University College in London, Ont., recycles and composts. She nixed grass for her yard in favour of low-maintenance landscaping that “doesn’t deplete water resources.” And she doesn’t wear anything that has been tested on animals.

But when Maltby took a look at her investment portfolio a few years back, she admits she knew very little about the companies she had invested in. Did they have good human resources practices and make products that were safe and environmentally friendly? She had no idea. “That didn’t sit right with me,” she says. “I want to invest in companies that agree, as I do, that we all have to be socially responsible in everything we do. It’s not okay to wear the banner sometimes and not others, according to whether it suits you.”

When Maltby’s financial planner seemed uninterested in dealing with her concerns, she switched, opting to go with London, Ont.-based financial planner Johnny Fansher, who specializes in what is called SRI (or socially responsible investing). Basically, it involves rating companies not just on their financial performance, but on ethical considerations as well. “I thought it was important to put my money where my mouth is,” says Maltby.

Ethics and investing?

A growing number of people agree. Spurred on by concerns over everything from climate change to international development, the SRI industry is booming, according to the Toronto-based Social Investment Organization (SIO). In fact, from 2004 to 2006, the amount of assets invested using socially responsible guidelines grew from about $65.4 billion to a hefty $503.6 billion, with massive pensions funds such as CPP Investment Board, Caisse de dépôt et placement du Québec and British Columbia Investment Management coming on board. Even the big banks are beginning to add ethical funds to their offerings — a sure sign that such investments have hit the mainstream. Says Eugene Ellmen, executive director of SIO: “It took awhile to get the message out. But I think people are starting to realize that when they invest in a company, they are effectively endorsing what it does.”

The only problem: Deciding to invest with your conscience adds another level of complexity. Now, quite apart from taking into account whether a stock or mutual fund is going to speed you on your way to a cushy retirement, you’re forced to also consider social, environmental and/or governance issues. Here’s what to keep in mind to build a portfolio that truly reflects your beliefs…and doesn’t cause you to lose your organic cotton shirt in the process.

Not all SRI funds are created ethically equal. Most of them refuse to invest in tobacco companies and manufacturers of land mines and other instruments of war, for example. But after that, what is, or is not, considered an acceptable investment is wide open. You might be surprised to learn that mining, chemical and oil and gas stocks are represented in some SRI funds. Others include companies with ties to gambling or alcohol, but screen out those with problematic employee relations or social justice issues. If you’re going to go to the trouble of investing in an ethical fund, you probably want to make sure those screens jive with your general moral code.

What’s in your house of ethics?

Prius-driving Toronto theatrical agent and SRI investor Shari Caldwell refuses to hold any mining stocks, for example. “I have no doubt that some are more environmentally conscious than others,” she says, “but I don’t want to have anything to do with any of them.” Maltby has different concerns. “I don’t smoke,” she says. “And I wouldn’t be happy to invest in tobacco companies or companies that employ slave labour in under-developed countries. In fact, infractions on human rights are probably the most important to me.”

To determine what sort of screens a specific socially responsible fund uses, turn to its prospectus. But your best source of information on SRI funds and stocks is probably an informed financial adviser — if you can find one. Sucheta Rajagopal, a financial adviser with Hampton Securities in Toronto and a specialist in SRI, uses a questionnaire to suss out her clients’ moral sensitivities, and then suggests investments accordingly. “It really comes down to what you think is harmful,” she says. “If you have a couple of drinks yourself, then you probably don’t believe there’s anything wrong with holding an alcohol stock.”

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.”

Fran Goldberg, a 55-year-old fee-based financial planner and president of Sage Planning in Vancouver, contends that if your main focus is simply getting the best rate of return, SRI may not be for you. Goldberg has about 70 per cent of her own assets in SRI funds — mainly within her RRSP — while her non-RRSP investments are more aggressively held. “SRI feels consistent with retirement and long-term planning,” she says. “I don’t want surprises. But I tend to take more risk outside my RRSPs.”

Goldberg points out that SRI isn’t an all or nothing proposition. Some of her clients hold only socially responsible investments, others have a portion of their assets invested in the category, and still others have none at all. “My job as an adviser is to meet the client’s goals and objectives,” she says. “Whatever they are.”

Her own goals have both a social and a financial component. “I live across from my office by choice. I shop in my neighbourhood. I was recycling before recycling was popular, and using cloth bags before everyone else. SRI is just a natural extension of who I am. It really is about supporting people who are trying to make a difference.”

Don’t lose sight of the bottom line

Fortunately, she and other ethical investors won’t have to give up a comfortable retirement to fuel their convictions. Although critics of SRI often tout lacklustre returns as one reason to stay away from it, the evidence doesn’t bear them out. From its inception on Jan. 1, 2000, through March 31, 2008, the Jantzi Social Index (a bundle of socially and environmentally screened stocks) reaped an annualized return of 7.91 per cent, compared to 7.80 per cent for the S&P/TSX 60 and 7.94 per cent for the S&P/TSX Composite. Not all SRI funds are world-beaters, but most stack up very well against funds without ethical screens. “There’s no need to sacrifice returns,” says SIO’s Ellmen. “This is one of those situations where investors can have it all.”

What’s more, he contends, there’s an argument to be made that SRI is innately more investment-worthy. Companies that have good labour relations should have lower levels of absenteeism and higher levels of job satisfaction, Ellmen points out. And oil and gas companies that work to reduce their greenhouse gas emissions and invest in renewable energy will be less vulnerable when carbon credits start being traded. “Having a social conscience can often make good financial sense,” he says.

Ultimately, though, the selling point of SRI for most investors has more to do with the world they want to live in than a half-percentage of return either way on investment. As Meritas CEO Gary Hawton once asked: “If you’re saving for your future so that maybe some day you can retire to your cottage by the lake — do you want to be able to swim in the lake or not?”

Where to begin

There are more than 100 mutual funds available in Canada that are screened using ethical criteria. To explore further, check out the following resources:

• The Social Investment Organization’s website has a listing of investment funds and indexes that specialize in socially responsible investing (SRI), as well as a “Find a financial adviser” feature, with links to SRI-savvy advisers across the country.
• Big players in the SRI industry include the Ethical Funds Co., Meritas Mutual Funds and Inhance Investment Management.
• A growing number of large financial institutions have begun to offer SRI alternatives, among them Acuity Investment Management (four funds), Phillips, Hager & North (four funds), RBC Asset Management (three funds), Barclays Global Investors (one fund) and TD Asset Management (one fund).
• Jantzi Research is an independent investment research firm that evaluates and monitors stocks using social and environmental criteria.

This article originally appeared in the October 2008 issue of More