Canadians are slowly warming up to the idea of social finance, a spectrum of investment approaches where moral values and money go hand in hand. A key part of that investment universe -- socially responsible investment (SRI) -- has been gaining ground in Canada despite poor understanding and cynicism among both investors and financial advisors.
As an investment strategy, it comprises a set of approaches that incorporate environmental, social and governance (ESG) issues into financial analysis and investment decisions to help investors meet their capital and conscience needs.
A white paper released by European firms Robeco and Booz & Co. says the SRI market has evolved significantly since the introduction of the first SRI mutual fund in Canada in 1985. The report predicts that globally, the SRI market will have become mainstream by 2015, reaching between 15% and 20% of total global assets under management.
Consistent with that prognosis, a growing number of Canadians are seeking to invest in a way that makes a positive impact on society and the environment. SRI assets under management have grown by 16% in Canada between 2010 and 2011, according to a Responsible Investment Association report.
Currently, nearly a dozen fund companies in Canada are offering a wide variety of SRI products in a wide range of asset categories.
According to the association's most recent biennial survey, released in 2012, SRI had grown to become 20% of the investment-management industry as whole with $600 billion in assets under management. However, institutional investors, such as pension funds, represent the great bulk of the total, with mutual funds and other managed retail assets accounting for only 10%, the survey said.
Studies show Canadians are open to socially responsible investing. But there appears to be a general lack of awareness and clarity around the investment discipline. According to SRI experts, this is holding back many retail investors who are unable to make the connection between investment returns and societal benefits.
 |
|
 |
|
| Deb Abbey | |
|
|
|
|
|
Deb Abbey, CEO of Responsible Investment Association, says investor attitudes are shifting and the industry is responding accordingly. "We've evolved from just screening out companies that we don't like," she says. "Increasingly, investment managers are incorporating ESG analysis into the selection and management of investments as a means of reducing risk, recognizing opportunity and generating superior long-term financial returns."
Much remains to be done to dispel persistent misconceptions, however. A common investor concern about socially responsible investing, also known as sustainable investing and green investing, is that such investments tend to underperform traditional investments.
This is a misconception, according to Kim Buitenhuis, senior vice-president, marketing and product, for NEI Investments. "I don't think investors generally have a good concept of what reasonable returns are," she says. "When you have a narrative that's all about doing good, investors just assume that profit and doing good just don't go together. It's a myth." You can perform just as well with SRI products, she says, as you can with any other kind of investment.
Investment advisor Stephen Whipp of Stephen Whipp Financial in Victoria, B.C., a division of Wolverton Securities, blames financial advisors for the performance fallacy. "It's largely perpetuated by well-meaning advisors who don't really understand this space and think of it as an investment built for the Birkenstock crowd," he says. "The returns we have seen in the last decade are equal to, or better than, most of the mainstream options available."
 |
|
|
|
| Stephen Whipp | |
|
|
|
|
|
Abbey agrees the gap isn't in performance, but in awareness. She points to academic studies, including one by the United Nations, as an evidence of a positive correlation between ESG and performance. Here at home in Canada, the Jantzi Social Index has outperformed the S&P/TSX Composite Index since its inception, says Abbey, author of Global Profit & Global Justice. "In the Responsible Investment Association's quarterly mutual-fund performance reports, we have outperforming SRI funds in every major mutual-fund category," she adds.
Investors want to make money while doing good, but without having to take on greater risk. Responsible investments can provide superior risk-adjusted returns and positive societal impact, says Abbey.
"There's a growing consensus that accurate valuations and proper risk management are only possible with adequate disclosure of how companies are addressing these issues," she says. "Recent research has shown that analysts are giving more positive recommendations to companies that address ESG risk."
Some of the attitudinal shift among investors is attributed to the global financial events of the recent past. As a result, investors are reviewing their investment criteria more closely to learn how their assets are invested. They are choosing SRI products as any other investment, weighing investment risk against return expectation.
Responding to this shift, many funds have integrated several of these new preferences into their offerings. In Canada, money managers have been integrating ESG factors into the investment process to reduce risk and add value to active management strategies.
Some employ a best-of-sector approach to identify companies that are the best in their sector or class in terms of environmental protection, supply-chain management, alternative energy, executive compensation and consultation with aboriginal communities.
 |
|
|
|
| Kelly Gauthier | |
|
|
|
|
|
Others take a thematic approach and invest in sustainable businesses. These include companies involved in energy efficiency, green infrastructure, clean fuels and "companies providing adaptive solutions to some of the most challenging issues of our time," says Abbey. "And who can ignore the opportunities presented by the trillions of dollars of green investment that are needed worldwide if we want to avoid the worst impacts of climate change."
As products and preferences changed, so did the execution of investment strategies around them. "Over the last 10 to 20 years, there has been a global realignment of the SRI approaches and implementation strategies," says Rosalie Vendette, senior advisor, socially responsible investment, Desjardins Group. "What started with the introduction of filters by religious communities has now developed into a [number of] strategies [including] principle-based exclusion (often weapons, tobacco and nuclear), ESG integration into investment decision model, impact investing and thematic investment."
Impact investing, in particular, was born of a desire to make more intentional impact, rather than the "do no harm" approach of negative screening, says Kelly Gauthier, senior consultant at Purpose Capital, an impact investment-advisory firm in Toronto.
"The proliferation of other product types and investment strategies is as a result of the poor pick-up of socially responsible investments," she says. "Investors have looked for other ways to achieve social/environmental impact with their investments."
But underlying these differing approaches is a common objective of value creation, not just in the economic sense but also in terms of fundamental social values and environmental preservation.
