Should you consider ethical investing for your portfolio? Can changing the world also make you money?
We ask ourselves the same question every year. Should we add socially responsible investments to our fund line up for our clients? Sure, the concept of avoiding “sin” stocks such as purveyors of tobacco and weapon makers gives you an instant feel good reward. But, as your financial planner, my question is, do these funds make profits and what are the risks? How are these funds managed and are they diversified enough to preserve capital over the long term? The face of socially responsible investing has changed dramatically over the past few years. Let’s review what they are today and why you may be interested.
When SRI was first created, it was a mission or values based approach that often looked at the company for their moral behaviour above their financial potential. However, time and experience have evolved products in this area. Many firms are moving, or have moved, away from negative screening, and are now using positive performance metrics when evaluating a company’s environmental, social and governance performance.
Positive screening is the process of selecting, rather than excluding, securities based on established SRI criteria. Specifically, positive screening looks for companies that provide social justice and environmental accountability. Responsible investors seek to align their investment strategies with their values. They consider the impact of their investments on the world and invest in companies that aim to minimize the negative impacts or produce positive ones.
In the 1990’s environmental problems came to the forefront of public awareness with issues including ozone depletion, climate change and hazardous waste. As a result corporations began assessing and reporting on a variety of environmental programs to demonstrate their level of commitment and progress in addressing these problems. At the same time some shareholders took responsibility for their ownership in companies and became more active at annual shareholder meetings. They sought improvements in environmental policies and practices, as well as in the level of disclosure and quality of reported information.
Over time, company reporting became more sophisticated and broadened to include other factors and issues that demonstrate corporate social responsibility: employee relations, corporate governance and community relations.
Today responsible investing has evolved as an intentional investment strategy aimed at generating financial returns from responsible companies. A key part of this strategy is shareholder engagement, which encourages and promotes responsibility and helps investors identify companies with the best practices. In recognition of the importance of responsible investing in financial performance more than 200 international pension funds, including the Canada Pension Plan and other institutional investors, holding more than $9 trillion US in assets have adopted the UN Principles of Responsible Investing. The Principles include:
Incorporating environmental, social and governance issues into financial analysis and decision-making, becoming active shareholders, seeking disclosure on these issues, promoting acceptance of the Principles in the investment industry and reporting on activities and progress towards implementation. Recognition that environmental, social and governance performance can have a profound impact on financial performance, as well as on the small planet we share, has brought responsible investing to the forefront of mainstream investor consciousness.
Responsible investing is the foundation of a few Mutual Funds companies. They rigorously incorporate environmental, social and governance criteria into in-depth financial analysis and portfolio construction. They identify core corporate responsibilities and ensure they are being appropriately addressed by the companies they invest in. You may want to read a blog written by Dermot Foley from Inhance Investments on the subject.
We short-listed several leaders in the Responsible Investment space who may be the right fit for your portfolio. Please ask us for more details.