Five things you must know about socially responsible investing

By Helen Burnett
Globe Investor Magazine Online,
January 18, 2008

Ethical investment has skyrocketed over the last few years, with around 70 SRI (socially responsible investing) mutual funds and retail venture funds in Canada. SRI retail funds in this country have grown $18.1-billion as of the end of 2006 from $14.8-billion in 2004. Investment in companies that meet socially responsible guidelines in Canada was also up nearly $440-billion in the same period, says the Social Investment Organization.

This growth was primarily from mainstream institutional managers using socially responsible investment criteria, says Michael Jantzi, president of Toronto-based SRI research firm Jantzi Research, who has been in the SRI business for 18 years.

"There's been no time where there's been such an interest in SRI" as there is now - an interest which is starting to reflect in the line-up of products available to investors.

SRI integrates environmental, social and governance factors in the selection and management of investments, notes the Social Investment Organization, and includes elements such as positive and negative criteria-based screening , and portfolio analysis and management based on environmental, social or governance policies.

Here are several things to know about SRI given the popularity and recent expansion of the sector.

1. Get connected with a planner or financial adviser willing to work with SRI.

The number of fund choices in the SRI space has expanded in the last year or so, with banks such as Royal Bank of Canada and Barclays, (both of which either use Jantzi Research's screening model or track its Social Index) as well as Toronto-Dominion Bank launching products a few months ago. As a result, this has created an added challenge for investors and a lot of opportunity for them to expand their horizons, which is where Mr. Jantzi says the role of a good financial adviser can come in. However, not all of them are up to speed on SRI.

Either when trying to find an adviser or when working with one, investors also need to take some responsibility for educating themselves about SRI, he adds, in order to ask intelligent questions and have a basic understanding of what is happening in their portfolio.

Mr. Jantzi adds that SRI does mean that advisers have to work a little harder because they have to be "knowledgeable about how to meet clients' financial goals in a way that is consistent with the clients' environmental and social criteria." This means an added level of due diligence. SRI products are also continuing to diversify and expand in terms of asset classes, says Mr. Jantzi. SRI products are currently available in equity, fixed income, balanced, and money markets - with different styles, different size focus, and with active and passive mandates.

2. Sources of information on SRI.

Investors educating themselves on ethical investments can do so through the Social Investment Organization ( www.socialinvestment.ca), which lists socially responsible mutual funds and also includes names of financial advisers active in SRI. Information about environmental, social and governance performance ratings of several hundred Canadian companies can also be found in the Canadian Social Investment Database run by Jantzi Research ( www.jantziresearch.com) while the firm's Jantzi Social Index , a market capitalization-weighted common stock index is made up of 60 Canadian companies that pass environmental, social and governance rating criteria.

3. Don't expect perfection.

Investors have to keep in mind that SRI isn't about investing in "perfect" companies; it's about investing in companies that are trying and are making a difference, says Mr. Jantzi. Top companies in the Jantzi Social Index in various sectors according to market capitalization include Shoppers Drug Mart Corp., Research In Motion Ltd. and EnCana Corp. The standards are also continuing to rise, says Mr. Jantzi.

"Socially responsible investors expect that companies will continue to improve their environmental, social and governance performance over time and our rating and rankings reflect that desire." The S&P Global Eco Index launched earlier this year. It is an investable index of 30 companies for those seeking exposure to environmentally responsible investment strategies and requires companies to not only have a listing on a developed market exchange, a total market cap of at least $1-billion ( U.S.), but also be a current member of the S&P Global Clean Energy Index, S&P Global Timber & Forestry Index, S&P Global Water Index or the S&P/Citigroup Global Environmental Services Sector Index.

4. SRI investors can have the best of both worlds.

Those who are interested in SRI have absolutely no reason to go into this area with the thought that they are going to lose money, says Mr. Jantzi. One of the myths that has surrounded SRI, is that investors can either invest to make money or invest in line with their values, but not both, he notes.

"For me, the myth should long ago have disappeared, because you've seen very very competitive returns from socially responsible investment products," he says. As social and environmental issues are something companies have to pay attention to, returns are competitive and those who understand their responsibilities and address their environmental challenges are going to perform better over the long term, says Mr. Jantzi. According to the Social Investment Organization, Canadian equity funds that use social and environmental criteria to select investments posted returns in the range of 16.1 per cent to 34.4 per cent in the year to Sept. 30. "Investors can now have their cake and eat it too," says Mr. Jantzi.

5. Know what is important to you.

Investors educating themselves in this area should have an idea of the issues most important to them, but keep in mind that no one mutual fund in this space is likely going to fit all of their criteria. For example, there may be an ethical issue that is part of the SRI screen that wouldn't be there if an investor had their way, or one that you wish were there. At the end of the day, he says, investors need to ask themselves if investing in this area is better than an alternative option.

"I think in the vast majority of cases, people say 'yeah', the SRI fund might not be perfect, it might not match who I am one for one or 100 per cent, but its better than the alternative," says Mr. Jantzi.

Special to The Globe and Mail