We're increasingly aware that our consumer dollars express our values: buying locally to cut down on greenhouse gas emissions; choosing fair trade to ensure a better deal for the producer in a developing country; or not using products manufactured in countries with poor human rights records. You know how powerful your money is, but have you considered how your investment dollars can make a statement about your values?
Investing with a conscience
Lisa Ashcroft, a single mom in Whistler, B.C., thought about it for the first time when she made the leap to socially responsible investing (SRI) seven years ago, and half of her investment portfolio is now SRI. "Every little bit helps," says Lisa, 42. "Ethical investing is a way for people to express their values and how they want to change the world through their money," says Elaine McHarg, chief marketing officer at The Ethical Funds Company, the largest Canadian retail investment firm in the growing SRI market.
Lisa's values include sustaining the environment, and she has always done her part by donating to charities and taking out the recycling. "If I'm going to be making money from my investments, it's nice to feel good about it," says Lisa, a presentation manager for Club Intrawest. Her financial adviser suggested she consider SRI, which means Lisa will profit from her investments while ensuring they are put to positive social purposes. She thought, That's right up my alley, and became one of the approximately 400,000 ethical investors in Canada. Turns out Lisa made a lucky turn when she chose her adviser.
A survey presented to the Canadian Social Investment Conference in 2005 by GlobeScan Inc., a public opinion firm, revealed that just eight per cent of advisers in Canada bring up the option of SRI with their clients. In the vast majority of cases, SRI never enters into the discussion of how or where we'll invest our money, even though ethical funds have been available to Canadians for more than 20 years. Eugene Ellmen, executive director of the Social Investment Organization (SIO), says there has been a recent explosion in SRI. The Canadian Socially Responsible Investment Review 2006, published by SIO, reports assets invested according to socially responsible guidelines have increased from $65.46 billion in 2004 to $503.61 billion as of June 2006. But it's been a long haul.
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'Don't put all your eggs in one basket'
To understand the naysayers, you need to go back – maybe way back – to your business textbooks and the principle of modern portfolio theory, which says that reducing the range of eligible investments increases risk and reduces return. In short, don’t put all your eggs in one basket. With SRI, you’re reducing your pool of available investments for all sorts of nonfinancial reasons, such as human rights. And Ellmen says that adds up just fine. "Choosing where to invest your money based on socially responsible criteria makes sense because you're actually applying a higher layer of analysis and looking at companies through a different microscope than simple risk and return," he says.
That microscope includes negative and positive screening, which is carried out by institutional investors, such as mutual fund managers, and individuals, such as investment advisers or retail investors (that's you!). They use ethical considerations to choose from the mutual funds, stock portfolios, corporate and government bonds and income trusts available to Canadians. "There's a growing international consensus on what social responsibility means," says Ellmen. Negative screens exclude certain companies; most commonly tobacco, weapons development and nuclear. Positive screens identify companies you want to include in your portfolio, either because they're involved in ethical practices, such as having an exemplary human rights record, or you're concerned about a specific issue and want to have a say in the practices of companies in that field.
The power of the shareholder
"Money is energy," says McHarg. "You can create better companies by being inside them rather than being outside them. As shareholders, you have powers and rights and can expect open dialogue." Ethical Funds, for example, offers 15 SRI mutual funds (more than 70 are available in Canada). The first step they take in choosing a company is making sure that it’s investment-worthy from a financial perspective. The second step is applying a sector-specific score card they've developed to grade each company on its environmental, social and governance (ESG) practices. "It's not just short-term," says McHarg. "We want to see sustainable change."
A third screening method, known as best in industry or best in class, looks at the most promising companies in a particular field. Ethical Funds recently produced a report, for example, about climate change and Canada’s oil and gas sector. They determined that out of all the Canadian companies working in the oil sands, only two – Shell Canada and Suncor – were making an effort to improve their environmental impact. So while it makes good money sense to invest in oil and gas because large portions of the Canadian investment market are tied up in this industry, you can also use your money to offer kudos to the companies that are putting their best ethical foot forward and encourage further improvements.
Delivering results for their investors
"The companies that are socially responsible and sustainable over the long term are also going to deliver sustainable, long-term returns for their investors," says Ellmen. The Jantzi Social Index (JSI) consists of 60 Canadian companies evaluated on ESG criteria. On an average annualized basis, the JSI has beat the S&P/TSX 60, its comparable conventional (non-screened) index, by 0.77 per cent. On a cumulative basis since inception in 2000, the JSI has grown by 93.05 per cent, whereas the S&P/TSX 60 has grown by 83.1 per cent.
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'Put your money where your mouth is'
Now that you know you can put your money where your mouth is while pleasing your wallet, too, start by identifying the values that mean the most to you and researching the companies that affirm your values. A conversation with your financial adviser is the next step in making sure your money works for you – and the world around you.
Several major pension funds in Canada, such as the Canadian Pension Plan Investment Board, Caisse de dépôt et placement du Québec and the British Columbia Investment Management Corp., have adopted SRI. If you're wondering about your pension fund and have a defined contribution pension plan, go to your employer and ask to see all the options available. If SRI options don't exist, put in a request to your human resources department and ask that the manager of the plan add some SRI options.
Get in the SRI game
• Choose your cause. In his book The Ethical Investor: A Guide to Socially Responsible Investing in Canada (Stoddart, 2001), David Skinner writes: "Ethical investing is simply applying your values and interests to the process of investment. It's using those values and concerns that give your life meaning to give your savings meaning." When it comes to investments, broader is better. Some common concerns include human rights, environment, international operations and labour standards and practices.
• Do your homework. SRI funds in Canada have websites and practise the same transparent behaviour they expect from the companies they invest in. A good place to
begin is Jantzi Research, which evaluates companies' environmental, social and governance performance. Pick up reading material at commercial banks; RBC recently became the first bank-owned mutual fund family to offer SRI products, and more SRI offerings at financial institutions are in the works, including one from TD Asset Management.
• Go to your adviser. Any investment adviser, independent or not, is able to invest your money in the full range of SRI funds. Tell your adviser that you're wondering where it fits in your portfolio. "You want to know the outcomes from a financial point of view and from an ethical perspective," says Elaine McHarg of Ethical Funds. You can have 10 per cent participation to 100 per cent of your portfolio; McHarg says the average is 25 per cent.
• Now that you've made your wishes clear, two situations may unfold. Behind Door No. 1: Your adviser supports your decision and is ready to convert your conventional investments to SRI. If she doesn't know where to start, she can turn to the Social Investment Organization (SIO) for more information about SRI. Behind Door No. 2: Your adviser says no. "Be persistent and don't take no for an answer," says Eugene Ellmen of the SIO. "If your adviser says it's not possible, fire your adviser and transfer your account to someone who will [invest for you]." Find a list of SRI advisers in Canada at www.socialinvestment.ca/Canadadirectory.htm.
Click here to read what it's like to give away $500, 000
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