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Socially responsible investing, sometimes called ethical investing or SRI, has been on the financial scene now for the past 20 years. Fuelled by the heightened public awareness of issues such as corporate governance and global warming, SRI is now surging in popularity. More than $503 billion of financial assets were invested in SRI financial products as of June 2006, up from $65.5 billion in June 2004, an executive director of the Social Investment Organization explained.
Gordon Warrenchuk says he won't invest in companies that make armaments of have poor records on human rights and pollution.Gord Warrenchuk feels strongly about where his investment dollars go.
"When I finally had money to invest, I decided I needed to be looking at the companies I was putting it into," says the 61-year-old Victoria, B.C., computer programmer. "It's all part of my attempt to make a better world: I give to 15 different charities, I use my car as little as possible, and I won't invest in companies that make armaments, that have bad emissions records or bad human rights records." |
That's an increase of almost tenfold in just two years, and that $503 billion is 20 per cent of all assets under management, compared with just four per cent in 2004.
An increasing number of Investors want to back companies that are good corporate citizens. Respondents to a survey of ‘attitudes’ on corporate social responsibility (CSR) conducted on public opinion says the five most important socially responsible actions for corporations are protecting the environment (29 per cent), displaying social concern (18 per cent), treating employees fairly (14 per cent), giving back to the community (13 per cent) and being trustworthy and transparent (eight per cent).
Sixty-seven per cent of those surveyed strongly agreed that a company's chief executive and board should monitor a company's CSR performance, while 27 per cent somewhat agreed. And 35 per cent of respondents strongly agreed that good CSR performance was an important factor in deciding to invest in a company, while 36 per cent somewhat agreed.
The survey found ethical investors tend to be university graduates between the ages of 55 and 64 and many live in urban areas but this trend is changing to younger citizens as people become more aware and realise the benefits to our world of supporting SRI..
The survey attributes part of the reason for the big jump in SRI assets is that some pension funds have started investing their assets in socially responsible vehicles. And the banks are also getting into the action.
"Last year, Banks launched a trio of SRI funds, TD Bank launched its first SRI fund, TD Global Sustainability Fund, and BMO Nesbitt Burns announced an SRI managed account program,". "We're winning the argument that SRI makes social and financial sense." they say.
Investors do not have to sacrifice investment returns for their social conscience. In the U.S., the Domini 400 Social Index -- a broad index of 400 companies with good corporate responsibility, human rights and environmental records -- has outperformed the benchmark S&P 500 since its inception in 1990. And, in Canada, the Jantzi Social Index, a large-cap index of 60 companies that meet sustainability standards, has outperformed the S&P/TSX 60 since its inception in January 2000. From Jan. 1, 2000, through Nov. 30, 2007, the JSI achieved an annualized return of 8.53 per cent, while the S&P/TSX Composite and the S&P/TSX 60 had annualized returns of 8.24 per cent and 8.03 per cent, respectively, over the same period.
While the jury is still out on whether socially responsible companies -- often called "sustainable" companies -- pose less risk to investors, they argue that it makes sense to invest in these businesses "because they'll be ahead of the curve in corporate governance, codes of conduct in the communities in which they operate and on greenhouse gas emissions."
"Poor corporate governance and a bad environmental record will eventually undermine a company's business and affect its stock price performance," adds Dan McClure, Toronto-based co-manager of Investor Group's 20-year-old Investors Summa SRI Fund and manager of the new Investors Summa Global Environmental Leaders Fund.
With portfolio managers evaluating companies' financial performance and sustainability researchers looking at CSR, "this double due diligence really helps mitigate the risk for investors," says Elaine McHarg, chief marketing officer at Ethical Funds Co. in Vancouver. "We know the companies in which we invest in ways conventional fund firms don't."
Sustainable companies will be profitable over the long run, Ellmen says, although there are periods when SRI may not perform well.
"One of these was immediately after the events of Sept. 11, 2001," he says, "because SRI stocks and funds are underweight in or have zero tolerance for defence stocks. And when oil and mineral prices are high, SRI products tend not to do well in the U.S. However, SRI is not hit as hard in Canada because we often use best-of-sector screens here."
Many ethical investors shun companies that deal in armaments, tobacco products, gambling, alcohol, nuclear power, pornography or non-renewable resources. Anne Glover, a 51-year-old children's entertainer in Victoria, is adverse to tobacco companies and firms that are involved in nuclear energy, and relies on her financial advisers at The Pinch Group to steer her away from them.
"We structure our clients' investments to reflect their concerns," says adviser Brian Pinch. "Some of our clients are peace activists who don't want their money going to support war efforts. I won't invest in tobacco companies or companies with bad environmental records."
Some SRI fund managers emphasize "sin" screens to weed out companies with negative records, others apply positive screens to select companies with outstanding social and environmental performances. A third method of screening, the best-of-sector approach, looks for the best companies in each sector, even though the sector may not pass other screening methods.
"The idea is to reward companies with progressive social and environmental initiatives, and create an incentive for other companies to improve their records," Pinch says.
Some SRI fund managers rely on the Jantzi Social Index, developed by Toronto-based Jantzi Research Inc., as a template for their portfolios. Others, like McClure at Investors Group use a combination of third-party research and their own.
"The ultimate decision rests with us," McClure says. "We invested in [Calgary-based oil-and-gas giant] EnCana Corp. before it was on the Jantzi list. We did our own due diligence and decided it had a progressive track record."
Ethical Funds Co., the major SRI player in Canada with 16 funds and $2.7 billion in assets under management, does all its own screening with a team of 11 researchers.
"We've developed our own score-carding methodology," says McHarg. "We automatically exclude tobacco, military and nuclear companies, although we review them every year. Then we evaluate every other company on the TSX index and any international companies our portfolio managers want to invest in.
"We have a different score card for every sector," she adds. "We don't expect a mining company to perform like a bank. Depending on the sector, we look at between 100 and 140 different factors. We look at a company's information and what is on the public record. Then we get back to the company with questions. We want a company to demonstrate what it does, not just tell us what it does."
Once Ethical decides to invest in a company, it then considers whether it needs to engage in "corporate dialogue" to help the firm improve in certain areas. "This is to make good companies better," says McHarg. "Sustainability is a long gig; it doesn't happen overnight."
Ethical currently invests in about 400 companies, and is engaged in dialogue with 50 of them.
"Our engagement process is where we really make a difference," McHarg says. "Through it, for example, banks have come to understand that their commercial lending practices have a big impact on sustainability because in evaluating the business plan of a company that is applying for a loan, the bank can consider the company's record on social, business and environmental practices."
As time goes on no doubt this issue will get bigger and bigger and form part of the investment communities considerations into the future. |
