Every do-it-yourself investor wants to do well, but can you do good at the same time?
In theory it should be easy – invest only in ethical, responsible companies and funds whose holdings, products and services are either helpful to the world or don't do harm.
In practice – and would-be ethical investors won't even like the description – investing in a morally responsible way can be a minefield.
"It's not easy for DIY investors to invest responsibly unless they invest in mutual funds or ETFs (exchange-traded funds)," says Deb Abbey, CEO of Canada's Responsible Investment Association (RIA). Her not-for-profit organization includes individuals as well as financial institutions, mutual fund companies, advisers and groups who are looking for ways to invest while enhancing returns, reducing risk and catalyzing positive social change.
"There just isn't enough transparency at the corporate level to make it easy for someone to determine whether a company is socially responsible or not. And especially not among small and medium-sized companies. It's a full-time job for whole teams of researchers at most of the investment management companies, so it doesn't lend itself to the average DIY investor," she says.
It can be done by DIYers, with a lot of work – one has to study the output of those teams of researchers. Ms. Abbey says even the term "ethical" has been eclipsed by the concept of "responsible investing" because there are so many variables and opinions as to what is good or bad, and what will yield respectable returns.
"We have evolved from just screening out companies that we don't like to integrating environmental, social and governance, or ESG criteria, into the selection and management of investments. It's not just about my values or your values any more. It's about the impact that these issues have on risk to long-term shareholder and stakeholder value," she says.
An investment's corporate social responsibility values can affect its market value, Ms. Abbey says. The recent U.S. Federal Court decision finding BP PLC grossly negligent in the 2010 Deepwater Horizon oil rig explosion could see the company facing as much as $18-billion (U.S.) in fines; news of the decision alone drove BP's shares down 5.9 per cent in one day.
Corporate responsibility works on the positive side, too, Ms. Abbey says. "Study after study has demonstrated that Responsible Investments perform as well or better than traditional investments. The RIA's quarterly mutual fund report shows outperformance by RI funds in every major mutual fund category."
While her association uses fine-tuned criteria to determine what's responsible, a do-it-yourselfer's own personal right-versus-wrong criteria can be subjective and contradictory.
For example, to some DIY investors, a liquid natural gas company may be acting responsibly, because gas produces less climate-change-causing carbon emissions than coal, yet to others, it's still a fossil-fuel company. "With 25 per cent of the TSX in fossil-fuel companies, it's a difficult equation for our financial institutions and for investors," Ms. Abbey says.
What's a DIY investor to do? "As an individual I'd want to align my investment choices with what I think is right or wrong. I'd want to make those decisions first, before I make decisions on what to invest in," says Peter Chapman, executive director of the Shareholder Association for Research and Education, which advises institutional investors on responsible investing picks.
Mr. Chapman says there are advisers who devote their careers to developing and refining the criteria for determining what corporate practices are responsible, and researching which companies and funds live up to these. Their research is crucial to institutional investors, but it can be a lot of work for DIY investors to go through all the different indices and responsible measurement tools.
Start with what you think is right, he suggests. "One frame to use is to put ethics first, then I would try to match my investments [to these values] and look for individuals who can guide me."
One tool to start with is the United Nations-backed Principles for Responsible Investment (PRI), six "voluntary, aspirational" principles designed by a team of international investors. DIYers can look for stocks and ETFs that hold companies and institutions that sign on to the PRI initiative.
PRI signatories agree to pursue good environmental, social and governance practices, to be transparent and seek disclosure from the companies they invest in, and to report on what they do.
DIYers can also look at measurement tools such as the Dow Jones Sustainability Indices, the FTSE4Good Index Series or reports from the research firm Sustainalytics, which surveys responsible investment indexes and publishes its own Jantzi Social Index.
Do-it-yourself investors should stick to their principles, says Andrea Seale, Deputy CEO of the David Suzuki Foundation: "Anyone with investments can take an ethical approach. It's another way to live your values."