Canadian investors warming up to 'ethical' funds

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A growing number of Canadian investors are looking to earn profits without padding the wallets of companies with shoddy environmental and poor human rights track records.

Socially responsible investing, the marriage of investing and personal ethics, has been growing in popularity over the past few years, as investors look to build portfolios that reflect their values.

A report by the Responsible Investment Association in January found more than $1-trillion worth of assets in Canada were being managed using responsible investing strategies by the end of 2013. That was a 68 per cent increase from two years earlier, when the figure was around $600-billion.

While pension plans are behind some of the growth, Deb Abbey, chief executive of the Responsible Investment Association, says the flood of millennials into the stock market is also playing an important role.

"We're finding that the younger generation tends to have more knowledge and interest in responsible investing – in making money and having a positive impact on society at the same time," Abbey said.

There are three factors that fund managers typically take into account when evaluating whether a company should be included in a portfolio of ethical stocks.

The first is the company's environmental track record – for example, whether it has been responsible for dangerous spills, or has a plan in place to offset its carbon footprint.

The second is social policy, which includes the health and safety of its workers, the company's relationship with its unions and its track record on human rights issues.

Finally, fund managers will take into account issues surrounding corporate governance, such as how diverse the company's board of directors is and how the company determines how much to compensate its executives.

Daniel Solomon, chief investment officer at fund manager NEI Investments, says some investors wish to stay away from entire sectors that they consider unethical. For example, investors may dislike mining and oil and gas companies because of their environmental impact, or may not want to buy bank stocks because of issues around executive compensation.

"The reality is, when you take those three sectors out, you take out 80 per cent of the Canadian marketplace," Solomon says. Limiting your investments to "perfect" companies – of which there are virtually none – would also limit your returns, Solomon says.

Instead, he advocates for affecting change from the inside – for instance, by becoming a shareholder and then pressuring the company to improve its environmental, social and governance practices.

"When you're not at the table, you can't affect positive change," Solomon said.

Among the criticisms of socially responsible investing is the notion that investors give up a significant chunk of profits to abide by ethical standards. But Jason Milne, manager of corporate governance and responsible investment, says that isn't the case.

"Our research has shown that this is not the case. If you're investing in a diversified portfolio, the responsible portfolio will perform in line with a regular portfolio over the long term," Milne said.

Having solid environmental, social and governance policies can allow companies to generate more revenue and better manage risks, says Abbey. For example, having measures in place to avoid an oil spill can prevent a company from having to pay the hefty costs associated with clean up in the event that one takes place.

Investors who are interested in building portfolios that reflect their ethics should seek out an adviser who specializes in socially responsible investing, Milne said.

"The investment adviser industry isn't really that familiar with these types of products, so sometimes it can be difficult to talk to your adviser about this type of investing," he said.

"If you're not getting the answers you need from your regular adviser, then I would recommend seeking out a specialist adviser."