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Do Good and Prosper.

With socially responsible investing gaining mainstream approval, more investors are considering how a well-chosen SRI fund might enhance their portfolio returns

The prevailing assumption on socially responsible investing -- selecting or managing investments according to social or environmental criteria -- was that you could have either a healthy pocket book or a healthy conscience, but not both. Nowadays, research studies and decade-long performance data suggest that doing good while prospering is no longer wishful thinking.

Judging by the findings of The Canadian Social Investment Review 2001, the first comprehensive study on socially responsible investing (SRI) in Canada, many investors seem to agree. The study, published by the Social Investment Organization (, a non-profit group of investors, advisors and institutions with an interest in socially responsible investing, reports that more than 50 billion dollars are invested in Canadian SRIs, an estimated 3% of the mutual fund and institutional investment market.

In the United States, approximately one out of eight investment dollars of professionally managed assets are held in SRIs, according to the Social Investment Forum (, a Washington, D.C.-based advocacy group. In the United Kingdom, the phenomenal growth in this niche area has influenced legislation. As of July 3, 2000, all U.K. pension funds are now required by law to disclose their SRI policy if they have one.

While the precise origins of socially responsible investing are somewhat vague, one source dates back to the American Bible Belt of the early 1900s. Not wanting to endorse sinful activities with their hard-earned money, investors excluded alcohol, gaming and tobacco enterprises from their investments. Although small clusters of socially-conscious investors operated at grassroots levels from the 1960s to the 1980s, it was not until the last decade that socially responsible investing gained notoriety in the realm of professional money management.

A broad and sometimes misunderstood term, socially responsible investing addresses a range of social and ethical concerns: environment, alcohol, tobacco, gaming, pornography, nuclear power, the military, employee relations, human rights and animal rights. In addition to incorporating an ethical agenda, socially responsible investments employ a variety of investment management styles. Some, such as Vancouver-based Ethical Funds Inc., use exclusionary practices known as negative screening to weed out companies whose products or practices run counter to the ethical mandate of their funds.

Others use inclusionary principles, or positive screening, by investing in companies that support the fund's social or environmental agenda. Toronto-based Acuity Funds Ltd., for example, invests in companies that support sustainable development -- business practices that incorporate environmental stewardship, economic prosperity and social responsibility. Some socially responsible funds apply a mixture of both negative and positive screens, and the latest evolution in SRI investment styles is the more risky sector-specific funds such as alternative energy.

While a better-educated and more ethically-conscious investing public accounts for some of the rising star status that SRIs are enjoying, there is no denying that performance plays a role. The long-term history of SRIs has not revealed any significant compromise in returns; in fact, many SRI funds have outperformed reputable, established indexes.

But is the high performance attributable to the social and environmental criteria alone? Dr. Blair Feltmate, partner of the Sustainable Investment Group, believes that from a sustainable development perspective at least, there is a correlation. To support his thesis, Feltmate, who is an advisor to the YMG Sustainable Development Fund and YMG Sustainable Value fund (a retail mutual fund and pension fund respectively), created and developed the Sustainable Development Index to evaluate companies for investment purposes.

The index is based on between 80 to 160 industry-specific criteria, spanning environmental, economic and social best practices. Companies that score 70% or higher are considered sustainable development practitioners and eligible for inclusion in the portfolio, provided they qualify on the financial criteria. Feltmate has found that companies that score in the upper percentile tend to have superior management, apply greater energy efficiency, generate less waste, and pose less liability to lending institutions when borrowing capital to expand their operations.

While Feltmate believes it is still too early to state categorically that sustainable development practices alone account for the success, he says that "both sustainable development and superior management are meaningful contributors to the good share price performance we are seeing."

Curiously, Feltmate's portfolio is heavily weighted in natural resources, not traditionally favoured as environmentally-conscious industries. He contends that the sector is undergoing intense reform. "Many resource companies are now becoming leading sustainable development practitioners. Suncor Energy is one example. This company's oil extraction practices seek to minimize environmental disruption, but senior management is also allocating research and development money to renewable energy sources. As a company with a long-term commitment to sustainable development best practices, it has value from an investment perspective."

Feltmate does not shy away from mining either, for similar reasons. "More progressive companies like Falconbridge, Noranda and Placer Dome are tracking dispersion pathways and looking at bringing back the discarded matter as feedstock in the form of recycled electronics like computers and television sets. At the end of their productive cycle, well-run mines engage in complete site restoration as a post-operational commitment to the communities in which they operate."

Socially and environmentally responsible investing are reshaping the business landscape. The recent surge of shareholder advocacy and activism has taught companies that being perceived as a bad corporate citizen can negatively affect profits. Conversely, adopting more responsible social and environmental practices can actually improve the bottom line. Higher profits for companies mean greater rewards for shareholders, who in turn invest more capital into these companies, resulting in a continuous benefit cycle.

Anne Papmehl, MA, ( is a Toronto-based business and financial writer.

How to choose an SRI fund

With SRI investing gaining mainstream approval, investment firms are responding with more product offerings. In Canada, there are about forty SRI mutual funds and labour sponsored funds on the market, with more anticipated. In selecting a socially responsible investment, start as you would with any investment: determine your objectives, risk tolerance, age and years to retirement. From this point, you should have an idea of the general type of investment product you need: equity, bond, money market or balanced fund.

Product selection is the next step. If you are attempting to align your investing with your values, consider the fund's SRI agenda and portfolio holdings in this context. This is where your conscience becomes your guide; however, with ethics being subjective and individual, be prepared to make some compromises. If an otherwise promising investment fund contains one or two companies that you find questionable, do you overlook it on the basis of what you disagree with, or include it based on the companies that meet with your approval?

Finally, be sure to scrutinize the fund's financial objectives, performance and, above all, the qualifications of the management. The simple avoidance of tobacco or nuclear weapons manufacturers, while commendable, is not enough to ensure that your investment will perform well. Also, do not be surprised to find that SRI management expense ratios run slightly higher than with traditional mutual funds, owing to the extra research and evaluation required.

What started as an alternative to investors wanting to put their money where their mouth is has taken an unexpected detour as a broader investing public discovers that profit and values can be complementary. Consider how a well-chosen SRI might enhance your portfolio returns.
COPYRIGHT 2001 Society of Management Accountants of Canada
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2001 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:socially responsible investing
Author:Papmehl, Anne
Publication:CMA Management
Geographic Code:1USA
Date:Jun 1, 2001
Next Article:From Dot-com to Dot-bomb.

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