Guide to socially responsible investing

Question

My husband and I want to take more control of our investments. We want to invest in ethical and local companies, but we are having trouble finding them. We want to know if there are any resources that will help us identify which Canadian funds or stocks to invest in and help us determine if they are ethical (which, we know, is a large, broad term, but one we feel we have our own definition for). Can you help?

Answer

It turns out that you can have your vegan cake and eat it too. Investing in a way that is both ethical and profitable is possible—it just takes more work. But you’re probably used to that if social consciousness is a priority in other areas of your life already. Here are some tips on the work you need to do to invest in a way that will pay off for you and for the world we live in.

Do research on socially responsible investing

There are a number of great resources and investment products that cater to socially responsible investing for Canadian investors. Here are a few places to start your search:

Sustainalytics, now merged with Janzi Research, provides research on companies and countries and you’ll be able to learn about its approach to see if it is consistent with yours.

The Social Investment Organization is the national non-profit association for socially responsible investing (SRI). It’s website has information on SRI funds and lists financial advisers who utilize this approach.

Corporate Knights is a magazine that bills itself as the “company for clean capitalism.” Its website archives articles that cover the best and worst ideas in SRI, including special reports on cities, provinces and corporate citizens.

SRI Monitor focuses on news in the socially responsible investing arena. It uses a simple blog format, aggregating articles from a number of sources, and providing original content.

Some mutual fund companies offer specific products that might work for you. For example, Ethical Funds, Phillips, Hager & North, and IA Clarington all have ethical offerings. Some of these products are available for purchase through a discount broker and others require you to use a financial adviser.

One of the more interesting products out there is the Janzi Social Index Fund, from iShares. It is an exchange traded fund that passively follows the performance of an index and costs less than a traditional mutual fund.

For any of the products above you should look at the prospectus to see if the companies they hold fit your definition of socially responsible. You can find this information on the fund company’s websites or on Sedar.com. There will likely be a few that will have you debating into the night, like pipeline operator Enbridge. It is in the Janzi Fund, but recently received a thumbs down from B.C.’s largest credit union, Vancity.

Don’t sacrifice investment returns

Remember when environmental cleaning products first came out? You felt good buying them because you were doing the right thing for the environment, but the product itself was more expensive and inferior in quality. For a lot of people the trade-off was too great, until the product improved and the price came down. Financial products that enable the average person to invest in a way that is consistent with their values have also improved and come down in price. But it is critical to be aware of the trade-offs. For example, take the Ethical Growth fund. It has underperformed its benchmark index since its inception. If you invested $100,000 in this fund in January of 2000, you would have $129,620 today. But if you put that same amount into the S&P/TSX index you would have $189,050 today, a whopping 46% or $60,000 difference. That trade-off is much more significant than using crappy cleaning products in the early 90s. This is where the “more work” comes in. Most people just analyze the investment to decide for themselves if it will give them the returns they seek. You have the added challenge of determining whether it is also socially responsible. The key thing is to judge the company or fund as an investment first and not get so enamoured by its environmental record that you can’t see it is over-priced.

Cover off the basics, first

I applaud your commitment to investing in a way that is consistent with your values. But remember the basics about investing in general.

Manage your asset allocation carefully: Ensure the balance between equity and fixed income fits with your risk tolerance and what the money is for. For instance, you don’t want your RESP to be 100% in equities when your child is 16-years-old.
Keep a close eye on costs: High fees can eat more of your portfolio than underperforming markets. Understand how much you’re paying and whether it is worth it.
Keep it simple: A super simple, low-cost portfolio that matches the performance of the benchmark will put you ahead of almost everyone else.

Become an activist investor

One more suggestion that is contrarian in nature: Buy a few shares in companies that you believe represent the antithesis of socially responsible investing. Then show up at their Annual General Meetings and ask some really tough questions. Sometimes the best way to make change happen is from the inside. And besides it would be kinda fun.