Equity index funds for the socially responsible

By Dan Bortolotti and Canadian Couch Potato on May 21, 2013
Estimated reading time: 4 minutes

Last week I shared my interview with Timothy Nash, president of Strategic Sustainable Investments, the blogger behind The Sustainable Economist, and an expert in socially responsible investing (SRI). This week I’d like to profile a number of investment products that may be appropriate for Couch Potato investors who are interested in SRI. I’m not endorsing any of these investments: I don’t use any of them myself, and although I’ve made an effort to understand what they have to offer, I haven’t performed any due diligence on them. You’re responsible for thoroughly checking out any investment before adding it to your portfolio.

Canadian equities

The iShares Jantzi Social Index Fund (XEN), launched in 2007, tracks the best-known SRI benchmark in Canada. The Jantzi Social Index excludes companies involved in military contracting, nuclear power and tobacco, as well those involved in “significant controversies” such as environmental spills. The index includes 60 companies and is designed to roughly mirror the sector weights of the S&P/TSX 60. For what its worth, XEN has outperformed the iShares S&P/TSX 60 (XIU) over the five years ending in April despite is much higher fee (0.55%). The Meritas Jantzi Social Index Fund tracks the same index, but the manager has also “added further screens in the areas of alcohol, gambling and pornography.” This mutual fund is a lot more expensive than its ETF counterpart: the A Series has an MER of 2.23% plus loads, and the F Series charges 1.30%. But it has a much more activist mandate that some SRI investors may be willing to pay for. Meritas has a long record of shareholder engagement, which the iShares ETF does not share. The fund also allocates a small share of its assets to community development investments that “foster sustainable social and economic well being.”

US equities

The US family of iShares ETFs offers two index funds for socially responsible investors. The iShares MSCI Socially Responsible ETF (DSI) holds 400 large, mid and small-cap stocks screened for “positive ESG [environmental, social and corporate governance] performance relative to their industry peers.” The index gives the boot to companies involved in “alcohol, tobacco, firearms, nuclear power, military weapons and gambling.” The iShares MSCI Select Socially Responsible ETF (KLD) focuses on fewer and larger companies: it includes about 130 stocks with a median market cap about twice as large as that of DSI. It also screens for companies with high ESG ratings, though the only business activity specifically excluded is tobacco. The sector breakdown in these two indexes is roughly the same as the broad market so they “exhibit risk and return characteristics similar to the MSCI USA Index.” The MER on both funds is 0.50%. Importantly, these iShares ETFs have a clear proxy voting policy “consistent with the principle that ‘socially responsible’ shareholders are concerned not only with economic returns and sound corporate governance, but also with the ethical behavior of corporations and the social and environmental impact of their actions.” International equities When it comes to SRI index funds tracking companies outside North America, the pickings are slim. The only ETF that fits the bill is the Pax MSCI EAFE ESG Index ETF (EAPS). The index is designed to mirror the popular MSCI EAFE Index, so the largest country allocations are Japan and the United Kingdom, and the largest sector weights are financials, consumer retailers, and health care. From a universe of almost 1,000 stocks, the index screens for the top 150 or so with the highest ESG ratings. The ETF’s management fee is 0.55%. “Pax World has been in this space for a very long time, and they also perform shareholder engagement, which is why I really like them,” Tim Nash told me in our interview. But this ETF very small, with just $30 million in assets. Indeed, one potential problem with SRI funds is they’re often slow to attract investors and are vulnerable to closure: Pax World used to offer a North American equity ETF with a socially responsible screen, but that fund was shuttered in March. (If a fund closes you don’t lose your money: you’re just forced to liquidate. But in a nonregistered account, a forced sale can stick you with capital gains taxes.) Later in the week I’ll look at fixed income options for socially responsible Couch Potatoes.