Faceoff: Are SRIs relevant?

Most investors are interested in one thing: returns. Right? Wrong, says Betty-Anne Howard, a Certified Financial Planner with the Making Dreams a Reality Financial Services in Kingston. Despite the turmoil of the last few years, Howard says investors are now interested in how those returns are generated. And that means investing in socially responsible investment (SRI) funds.

Ethical or socially responsible investing is becoming increasingly popular, and the industry is listening: four of the Big Five banks offer a socially or environmentally focused mutual fund, and fund companies are scooping up boutiques with SRI expertise (witness AGF’s November 2010 acquisition of Acuity). And investors demanding SRIs aren’t misguided treehuggers happy to sacrifice returns for the sake of Mother Earth—they’re serious about making money.

“[SRI] investors come from all walks of life,” Julian Parrott, chair of the Ethical Investment Association, told the UK’s Independent in November 2010. “Just like Fairtrade coffee, ethical investment is entering the mainstream. […] There are sufficient investments both for those clients who just want to dip their toe in the water and for those who want to create a fully ethical portfolio.”

We asked Betty-Anne M. Howard, M.S.W., B.A.(Hons), CFP, CLU, RHU, of the Independent Planning Group (Making Dreams a Reality Financial Services) to answer some common SRI questions.

Argument: Following the financial meltdown, there must have been a drop-off in client interest in SRIs.

Response: There was a drop in interest in investing, period. It was reassuring for some SRI investors to know the intention of the fund was to try to do some good in the world. But having said that, there seemed to be a pervasive fear that we were entering into unknown territory with the meltdown, which was very scary for both the investors and me. Some SRI investors fled to safer investment vehicles like GICs or parked their money into money market funds to take a wait-and-see approach. A few SRI investors saw the meltdown as a buying opportunity and wanted to get some money into the markets, but these investors were few and far between.

The pre- and post-financial meltdown interest in SRIs has remained similar when it comes to actual money coming in the door to be invested. What has increased is the general interest in knowing more about SRIs, which I believe will lead to more money being invested in this area. Not only have investors been interested, but also more advisors are taking an interest because clients are coming to them asking about SRIs. I tend to ask all my clients if they have [an interest in] SRIs. The majority expresses an interest. If more advisors asked the question, more investors would say they are interested. In Australia, there is a question about SRIs in the Know Your Client form. I would like to see that here as well.

Under the leadership of the Social Investment Organization (SIO), I helped develop an SRI course for advisors, which Advocis chapters across Canada have offered. This [type of education] is an important step towards letting investors know what is actually involved in socially responsible investing. More investors (and consequently, advisors) would be interested in SRIs if they understood how they worked.

It’s merely a matter of caring about how profits are made. If you can make money while being mindful of the impact profits have on the environment and society, why wouldn’t you be interested?

Argument: SRIs exclude companies, which is bad for returns.

Response: I had a conversation with a colleague of mine about SRIs and he zeroed in on the negative screens (excluding investments in tobacco, for example). When I told him about positive screens and shareholder advocacy, his ears perked up and he went on to admit he doesn’t understand SRIs or their investment performance.

Positive screening can involve a best-in-class approach of favouring investments with best practice among sector peers to achieve sector balance within the investable universe, or investing in certain sectors, such as clean technology.

Exclusion criteria don’t necessarily lead to underperformance. In June 2010, one of Norway’s largest pension funds, KLP (AUM: €35bn), reported its index outperformed the MSCI World Index by 1% in 2009. The KLP index doesn’t invest in companies selling weapons or tobacco and divests companies if they violate environmental, social and governance (ESG) criteria.

Argument: SRIs are only attractive to a certain type of investor.

Response: I have found interest in all age groups, wealth levels and vocations when I bring up the subject. Most people recognize companies that address climate change, environmental and social issues will ultimately be more profitable. They see the [associated] opportunities to make money. In addition, investors are aware of and concerned about the environment and so are attempting to align those concerns and values with their investment practices. I say ‘attempting’ because few people realize that’s even a possibility. If investors don’t know about SRIs, how can they possibly make an informed decision about investing in them? Both advisors and investors often miss the shareholder advocacy and corporate governance aspects.

Argument: SRIs consistently underperform.

Response: There are lots of examples of SRI outperformance. The Global 100 Most Sustainable Corporations in the World, a list created by Toronto-based Corporate Knights Magazine, has seen a gross total return from its inception in February 2005 to December 31, 2010 of 54.95%. During the same period, its benchmark index, the MSCI All Country World Index, returned 38.83%.

The 2010 Benchmark report by the Responsible Investment Association Australasia found Australian SRI funds outperformed average mainstream funds over one, three, five and seven years for Australian shares and international shares.

Professor Olaf Weber, Export Development Canada Chair in Environmental Finance at the School of Environment, Enterprise and Development at the University of Waterloo, was the lead author of an analysis of the monthly returns between December 2001 and June 2009 of 151 SRI funds. In the study, “the SRI fund-portfolio had a higher return during all periods compared to the MSCI World Index.”

The Jantzi Social Index®, a socially screened, market capitalization-weighted common stock index consisting of 60 Canadian companies that pass a set of broad ESG rating criteria, has only slightly underperformed the S&P/TSX 60 since its inception in 2000—6.23% for the JSI versus 6.28% for the S&P/TSX 60 as of December 31, 2010.

This challenges the whole notion that you can’t make any money if you are investing in SRIs. It’s a misconception due to lack of awareness of the actual returns.

Argument: SRI fund MERs are too high. How is that ethical or responsible?

Response: In some cases, the MERs are higher. But generally, you get what you pay for—in the long run, SRI funds will outperform their benchmark. Others are no more expensive than the average mutual fund. The SRI companies try to keep their MERs competitive.

Editor’s note: According to Morningstar Canada, the average Canadian equity fund’s MER is between 2.42% and 2.52%. The average MER for Canadian equity funds assessed in the 2011 Corporate Knights Responsible Investing Guide is just slightly above that, at 2.55%.

Argument: Socially responsible investing is just a fad.

Response: It’s actually poised for a comeback. If you look at the statistics in Canada, Europe, the U.S. and Australia, you see an amazing increase in AUM within this sector, including on the institutional side of this business, over the years. According to the Responsible Investment Association Australasia, over half the managed funds in Australia are now signed to the UN Principles for Responsible Investing. The Social Investment Forum has found almost one of every eight dollars under professional management in the U.S. is now managed according to SRI criteria.

A lot of education needs to take place. Sustainability is the new business model, so it only stands to reason that we need to be looking at sustainable profits.

The UN Principles for Responsible Investing are seeing more and more signatories among companies that are managing billions of dollars: at the end of 2010, the PRI had 855 signatories that control $22 trillion of assets under management. That’s almost 10% of the global capital market. That will ultimately have an impact on the number of people investing in SRIs, along with the amount of money inside the sector. It is my hope that eventually ESG factors will be part of all money managers’ approach to investing.

You need to have a long-term perspective when it comes to SRIs. I don’t want short-term gains at the expense of sustainable, longer-term profits. Once we have a full convergence of advisors and investors and ESG practices are aligned with investment practices, we’ll see an enormous increase in SRI investing. The entire sector will no longer be necessary once ESG principles and values are an integrated part of all investment practices.

Editor’s Note: For this faceoff, we couldn’t find an advisor who would go on the record against SRI funds. If you’d like to provide a rebuttal, email us here.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.