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Getting great returns with a clean conscience

Special to The Globe and Mail
August 16, 2008

Practitioners of socially responsible investing (SRI) will not miss the ample, always growing dividend of Rothmans Inc. if the takeover offer from Philip Morris International Inc. goes through. SRI types weren't invested in the company anyway, since its tobacco products are deemed harmful to society.

Some SRI followers might rejoice. Tobacco companies have been some of the more rewarding investments to own over the long run, so the delisting of Rothmans shares could lead to lower non-SRI returns and make SRI returns look better - perhaps even allow the latter to outperform by a wider margin.

For when it comes to investing, the nice guys have been finishing first for some time - or at least tied for first. To put it another way, a great deal of empirical evidence indicates SRI at least matches, if not beats, returns earned by other investors. The disappearance of Rothmans would make equivalency more assured, if not raise outperformance.

Before reviewing the evidence, let's deal with the misconception that SRI entails sacrificing performance. Detractors say SRI restricts choice to a subset of stocks and bars positions in profitable companies (like Philip Morris, the top performer in the S&P 500 index from 1957 to 2003, according to Jeremy Siegel's book The Future for Investors).

The same criticism can be levelled at mainstream investing. Most investors "look at only a small subset of the investment universe that matches their investment style," says Pinch Group (, the website of SRI-focused advisers. Value investors, for example, will screen out richly valued growth companies.

SRI is also thought to underperform because socially irresponsible companies don't incur as many costs or forgo as many profit opportunities. For example, they may skimp on pollution-remediation technology or carry on business in a country with extensive human rights abuses.

However, this is an incomplete analysis of the costs and benefits. "Proponents of SRI argue that such costs are more than compensated for because the companies they invest in have lower costs from lawsuits, consumer boycotts and other penalties and damages," Pinch Group counters.

While arguments for and against SRI may leave some undecided, there is a compelling amount of empirical data that suggest the ethical approach does not compromise returns. Take the performance of the Jantzi Social Index, which tracks the stocks of 60 socially screened Canadian companies. Since inception in 2000, the Jantzi Social Index has kept pace with or been ahead of the market. As tabulated by Jantzi Research (, the index (as of June 30) registers a cumulative gain of 100.2 per cent compared to 101.0 per cent for the S&P/TSX composite index over the same interval.

Then there are the dozens of academic studies that have investigated the performance of SRI. Most have found no performance penalty. An October, 2007, survey of the literature by analysts at Phillips Hager & North Investment Management Ltd. reported: "The chief finding of this research is that socially responsible investing does not result in lower investment returns."

Two other overviews were also recently published and arrived at the same conclusion. One was issued by the United Nations Environment Program Finance Initiative. The other came from Goldman Sachs Global Investment Research.

In Canada, SRI mutual funds do as well as non-SRI mutual funds, according to a study by Maastricht University Professors Rob Bauer, Jeroen Derwall and Roger Otten in a peer-reviewed journal. The conclusion: "Canadian evidence supports the conjecture that any performance differential between ethical mutual funds and their conventional peers is statistically insignificant."

The annual reviews of SRI mutual fund performance in Canada by Corporate Knights magazine paint a similar picture. Now into their sixth year, the reviews have regularly found "that over time, socially responsible mutual funds perform no better or worse than the average fund."

Equivalent or better investment returns for SRI arise from a similarity to non-SRI portfolios, in the opinion of many observers, including Corporate Knights editor-in-chief Toby Heaps. This is because SRI has moved away from negative screening (i.e. excluding undesirable companies).

While certain sectors - tobacco, for example - still remain off limits for the most part, SRI funds in Canada will invest in less-than-perfect companies if they show progress in achieving social responsibility and/or are setting good examples for a wayward industry. The idea is to use the investing process to reward, rather than punish.

A less negative screening approach is often combined with shareholder advocacy, or "engagement." This latter aspect is perhaps now the main distinguishing feature. A SRI fund in Canada will invest in most companies - but with a commitment to campaign for greater corporate responsibility.

Since SRI is relatively new (the first ethical fund in Canada, the Ethical Growth Fund, was formed in 1986), studies of SRI performance don't have particularly long comparison periods. This is recognized as a shortcoming by even the researchers themselves, and it leaves performance over the long run open to debate.

Some proponents of SRI predict the long run will see outperformance.

Peter Camejo, author of The SRI Advantage, says it will come from weeding out or reshaping companies that harm society - i.e. those exposed to the hidden liabilities of court settlements, government-mandated restrictions, etc.

Ron Robins, a SRI financial adviser and founder of Investing for the Soul (, is another believer in superior results over the long run. "If, increasingly, more people invest according to their personal values," Mr. Robins adds, "only companies employing these higher values will truly prosper." If ethical corporations become more highly valued, Nabil Khoury and Klaus Fischer note in a working paper, they will enjoy a competitive advantage thanks to better access to capital.

What is socially responsible investing?

SRI has three main branches: 1) screening, 2) shareholder activism and 3) cause-based (or community) investing.

Screening is broken down into negative, positive and best-of-sector categories. Mutual fund managers will adopt and mix these approaches to varying degrees, so finding the right fund for an investor's preferences may require a bit of legwork or consulting with an SRI financial adviser (see

Negative screening excludes companies involved in certain activities such as tobacco, pollution, human rights abuses, nuclear power, alcohol and weapons. The worse offenders, tobacco and pollution, will be nearly universally screened out while the less odious, such as alcohol, may be allowed in some funds.

Positive screening selects companies that yield social and/or environmental benefits (for example, alternative energy, health care and education) and companies with social/environmental programs outside their normal operations (e.g. human rights campaigns and recycling programs).

Best-of-sector screening selects the best companies in each sector, even though the sector may not pass other SRI criteria - the idea being to reward those companies with helpful social/environmental initiatives and to create incentives for other companies to improve.

Shareholder activism involves meeting with management, participating in proxy votes and proposing shareholder resolutions to encourage the adoption of practices and policies that are ethical and sustainable.

Cause-based (or community) investing is a relatively small part of SRI. This style directs investment funds toward a particular social issue, for example, job creation in the local community.


These mutual funds have received Corporate Knights "Five-Shield" rating for the best mix of SRI principles and performance.

To June 30, 2008
MUTUAL FUND INCEPTION 3 yr % annual average return MER
(% of assets)
ASSETS ($ millions) CATEGORY
Ethical Canadian Dividend Fund 9/20/2002 10.4% 2.50% $296.6 Canadian Dividend
Ethical Income Fund 4/1/1967 2.1% 1.55% $243.6 Canadian Fixed Income
PH&N Community Values Bond Fund Series A 10/1/2002 3.0% 0.77% $44.4 Canadian Fixed Income
Ethical International Equity Fund 9/20/2002 4.4% 2.63% $68.2 International Equity
Mac Universal Sustainable Opportunities Class A 10/26/2000 6.0% 2.44% $28.8 Global Equity
Acuity Clean Environment Equity Fund 12/31/1991 13.8% 2.89% $341.4 Canadian Focused Small/Mid Cap
Mavrix Sierra Equity Fund 5/26/1999 11.6% 2.94% $14.1 Canadian Focused Small/Mid Cap
Ethical Canadian Index Fund 10/1/2004 15.1% 1.00% $27.8 Canadian Equity
Ethical Growth Fund 1/6/1986 10.2% 2.26% $819.0 Canadian Focused Equity
Vancity Circadian Monthly Income Fund 1/10/2007 Canadian Equity Balanced
Ethical Monthly Income Fund 10/1/2004 6.8% 2.27% $55.0 Canadian Neutral Balanced
Ethical Balanced Fund 6/1/1989 6.0% 2.19% $713.6 Canadian Equity Balanced


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