Over the years, Canadians have become a more socially conscious bunch. Not only are we eating more organic foods and buying brands that share similar values to our own, but we’re also starting to invest in more socially responsible companies. Why? Because socially responsible investing (SRI) has evolved to the point where Canadians can buy companies they believe in and still generate a decent return.
According to Sustainalytics, a leader in environmental, social and governance (ESG) research and ratings, the Jantzi Social Index has produced a 5.43% 10-year annualized return, compared to 4.33% for the S&P/TSX Composite Index. Other studies have concluded that investing with ESG principals can produce better risk-adjusted returns. “We’ve seen that ESG investing produces competitive returns when material ESG issues are taken into consideration in the research process,” says Meredith Block, vice-president and ESG specialist at New York’s Rockefeller Capital Management.
A more nuanced approach
SRI has evolved over the years. It used to be about avoiding energy and cigarette stocks, but now fund managers consider issues such as gender diversity on boards, labour practices and carbon emissions. When Block, whose firm manages the equity portion of Mackenzie’s Global Sustainability and Impact Balanced Fund, chooses stocks, she looks at the various ESG factors that could impact a company’s long-term potential.
She doesn’t eliminate a company based on sector alone. Mackenzie’s balanced fund, which has an even split between stocks and bonds, holds some resource sector stocks, but they’re operationally efficient. For instance, one company developed a water recycling system that allows it to reuse water in its hydraulic fracking operations. “We consider which ESG factors are material to the company and to the sector, and the effectiveness of the policies in place to either control for risks or maximize opportunities,” she says.
More than just equities
Fixed income, both government and corporate, can be screened for these same factors, says Jonathon Ennis, a senior analyst at Mackenzie Investments. Mackenzie considers 37 indicators to score and rank 79 countries. Only countries that rank in the top half make it into a portfolio. It also uses quantitative and qualitative factors to score ESG factors on corporate debt. Every company selected must have a passing score for each of E, S and G.
Creating this kind of asset mix is difficult for investors to do themselves. That’s why buying a balanced fund is an ideal way to get into ESG investing. “It’s difficult for investors to pick securities that have good ESG characteristics in part because that sort of information is not easy to find,” says Ennis, “With our balanced fund, you can get everything in one package.”
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