How socially responsible investing can make the world a better place

'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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