CFA Institute offers tips for SRI investing

Days before a potential “promise” by Liberal leader Stéphane Dion — that his new carbon-tax plan will not include an increase at the pumps — the CFA Institute has released 10 tips on becoming a socially responsible investor.

The report, released on Tuesday, is based on the 2007 Report on Socially Responsible Investing Trends in the United States, conducted by the Social Investment Forum.

“The data in the U.S. shows that socially responsible investing (SRI) is growing at a very rapid rate,” explained Stephen Horan, PhD, CFA, head of private wealth at the CFA Institute. “This rapid growth, however, is not isolated to the States. Globally, this is the general trend.”

Dion sees this trend as a “new generation of green-collar” workers; Horan and the CFA Institute see this trend as a shift in investor sentiment.

“More often than not, individual investors have a general sense that if they are going to make investments, they might as well support companies that ‘do good,’ but they can’t articulate well what they want to promote,” explained Horan. This is when advisors can play the biggest role.

“Advisors can really add value, beyond numbers,” said Horan. “The more you know [as an advisor], the more effective you will be.”

Horan explained that the tips for becoming an SRI investor follow a logical progression. They are as follows:

For investors:

1) Seek advice from an investment professional.

For advisors:

2) Define a client’s goals and objectives. 3) Decide on an investment approach. 4) Select an appropriate benchmark. 5) Employ a ratings firm. 6) Decide on the investment vehicles. 7) Look at pension options — particularly employer-defined contribution plans. 8) Be aware of fees. 9) Avoid unrealistic expectations. 10) Diversify.

“SRI is a broad and growing field that means different things to different investors,” said Horan. “The first step in developing a socially responsible investment program is to ask a client what they hope to achieve. The answers should be based on their values and what they consider to be important.”

For example, a client may wish to promote environmentally sustainable commerce or support companies that explicitly incorporate social responsibility into their governance systems. Or a client may want investments that are compliant with Sharia, the sacred law of Islam.

“There are now more Sharia-compliant investments — bond contracts, mortgages and mutual funds — than ever before. Socially responsible investing has broadened its scope, and, based on our studies, that’s one reason for the rapid growth of this investment area.”

Once the values have been set, an advisor can determine the approach based on the client’s goals and then the investment vehicles that fit with those goals.

Horan also suggests that advisors and investors become familiar with how different SRI approaches to investing affect portfolio holdings.

One approach that is popular among mutual funds is portfolio screening, which can take two forms, explained Horan. Negative screening excludes some companies or sectors from the possible investment universe based on certain criteria relating to the company’s policies, actions, products, or services (such as eliminating companies that manufacture tobacco products). Positive screening specifically includes some companies or sectors in the investment universe based on the company’s meeting certain standards (such as seeking out companies with strong diversity programs).

Another approach is called the best practices classification, said Horan, which chooses companies in a particular sector that rank highly on one or more environmental, social, governance or ethical criteria as well as financial criteria.

A third approach is using shareholder status as an owner in the company to monitor management, initiate constructive dialogue about its business practices and influence managerial behaviour through proxy voting or direct engagement, explained Horan. Although this active approach may not be feasible for the typical investor, investors can choose investment managers, pension funds and mutual funds that define their investment strategies by such advocacy efforts. “A client should expect an extra cost [for this type of investment approach], and this cost will show up in the fees, but that’s because it is active management and the approach does require more overhead.”

While Horan does not believe it would be a breach of duty if an advisor did not introduce SRI as a topic, he does believe it would be a breach of duty if a client introduced the desire and the advisor did not address it.

“Investors who choose SRI add an additional challenge to the already complex world of investing,” Horan said. “But with proper advice and guidance, investors can pursue their social and financial goals simultaneously.”

Filed by Romana King, Advisor.ca, romana.king@advisor.rogers.com

(05/18/08)