Investing with your conscience – not as easy as you might think

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If you think a lot about espresso, you're probably willing to spend $5 for an Americano made by your neighbour using fair-trade beans that were roasted across town. If you think a lot about your investments, do you hold them to the same kind of standard?

A growing number of Canadians are. A fifth of the assets managed by Canada's financial industry – totalling $601-billion – are considered socially responsible investments, according to a report released this year by the Toronto-based Social Investment Organization.

But the definition of a "socially responsible" investment is surprisingly convoluted. The most accessible opportunities, often offered through funds with names such as "ethical" and "global sustainability," tend to focus on the environmental, social and governance policies of the stocks they hold. But to guarantee financial returns, these usually include stocks from unexpected players, such as banks or oil and gas companies, that are sure to draw the ire of picky investors.

Investing with your conscience comes down to a battle of idealism versus pragmatism; until the infrastructure for more direct ethical investments gets built, Canadian investors who actually want financial returns are bound by what's available.

"People expect to see a portfolio filled with organic food companies or wind turbine manufacturers, but that's not the reality of the stock exchange," says Bob Walker, vice-president of ethical funds with the mutual-fund company NEI Investments.

The nature of publicly traded companies is that they will be focused on profit – but "how they achieve that profit, in terms of their environmental, social and governance standards," plays a strong role in socially responsible investing, or SRI, says Thomas George, vice-president of Toronto-Dominion Asset Management.

Mr. George manages TD's Global Sustainability Fund, which invests largely in global equities "that are viewed as contributing to the world's future sustainability." Alongside stocks such as future-of-food-focused WhiteWave Co. and some tech companies, Merck & Co. Inc. is one of the fund's top holdings.

At first glance, a pharmaceutical giant looks like an oddity in a fund whose aim is global sustainability. But, Mr. George points out, the company has reduced its greenhouse gas emissions by more than 12 per cent since 2004 and has committed more than $115-million to HIV awareness and risk-reduction campaigns in the developing world.

And that fits in with the fund's broader environmental, social and governance (ESG) goals. Companies in these kinds of funds aren't all going to be glittering examples of environmental stewardship, but they usually have a demonstrated commitment toward one of those three pillars.

Companies in these funds usually are "coming up with new solutions for the world, but they are for-profit entities," Mr. George says. "Their work ... should make this world a better place."

How exactly that's measured differs for every company. Often, companies' ESG performance is measured in comparison to their peers; the social conditions in which a smartphone is made, for instance, is measurable, but not comparable to the environmental impact of an oil and gas company. "What's relevant for one sector is a smaller piece for others," Mr. George says.

NEI Investment's Ethical Funds division actually engages companies to change practices and modify their governance to become more sustainable and transparent, rather than outright excluding them from funds.

This approach, though, takes a lot of time and work. "We know that change can take time," NEI's Mr. Walker says.

Many funds have negative screens – casting aside tobacco-related companies or those involved in illegal weapons, for instance – and positive screens for stocks that are the best in their class. And investors always have their own screens, which they should tell their adviser or financial planner about when they're picking funds in this area.

It's more difficult to invest directly in companies whose mandates include social or environmental returns instead of pure profit. This field, called impact investing, began to seriously develop in 2007, and the next year the Rockefeller Foundation announced it would invest nearly $40-million to grow it as a sharply focused industry. At the moment, the field is open only to accredited investors, but there are industry players working on building a regulatory infrastructure accessible to retail investors.

"Here in Canada, and in most other places, there's not enough product for retail investors," says Karim Harji, co-founder of Purpose Capital, which works as a middleman between investors and impact opportunities.

"The problems are access to capital, cost of capital for entrepreneurs, the due diligence and the amount of time and cost it takes to look at investment opportunities," says Adam Spence, special products manager with the MaRS Centre for Impact Investing. "There's an unco-ordinated marketplace."

There's also the issue of quantifying what exactly one means when expecting a certain amount of social or environmental return; metrics need to be developed and widely adopted so investors can measure the progress of their dollars.

But it's a realistic – and desirable – possibility for the coming years. "Think of the opportunity to invest in a local affordable housing project, a local fair-trade coffee company, a local community power initiative. That's an opportunity many Canadians would want and take," Mr. Spence says.