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Definitions

What is socially responsible investing (SRI)?

Many investors today want a portfolio that’s not just diversified but also one that will have an impact, whether that means putting their money into companies that are making positive change or avoiding ones they perceive as doing harm. Increasingly, people are looking for investments that support Environmental, Social and Governance (ESG) mandates.

What is Environmental, Social and Governance (ESG) investing?

ESG has no formal definition, but the general framework includes: promoting environmental sustainability and reducing a company’s carbon footprint; fostering social justice and responding to concerns of local communities; having an independent board of directors and a diverse management team; and consistently allocating capital effectively to the benefit of shareholders and stakeholders.

RBC Global Asset Management’s annual survey on responsible investing trends found that 80 per cent of Canadian respondents used ESG principles as part of their investment approach in 2019, and the number who “significantly” rely on ESG factors jumped five percentage points to 26 per cent over 2018.

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What is impact investing?

Impact investing is a more assertive form of socially responsible investing. In other words, SRI is more aspirational; impact investing is more activist.

Impact investing goes beyond excluding companies that may have questionable business practices. Instead, it seeks out companies with a stated intention to generate positive, measurable social and environmental impact alongside a financial return. It’s a trend that is on track to play a much larger role in the years ahead.

The Responsible Investment Association’s 2018 Canadian Impact Investment Trends Report reveals that assets under management in impact investing in Canada grew to $14.75-billion as of year-end 2017 – up by 81 per cent from $8.15-billion two years earlier.

Whether you’re using SRI in general or impact investing in particular, one thing to bear in mind is that it doesn’t have to be an “all or nothing” proposition.

What makes an investment responsible?

There is no one-size-fits-all definition, but companies and investors might aim for a positive impact on the environment, human rights, social justice, local communities and gender equality.

For example, investor scrutiny of gun makers picked up after a 2018 mass shooting at a Florida high school, and some activists have urged asset managers to drop holdings such as Sturm Ruger & Co. and American Outdoor Brands Corp.

One in four ETFs and 15 per cent of all mutual funds are invested in at least one of the 40 publicly traded companies in the firearms industry – most of which cater to civilians (rather than the military or law enforcement) – according to Sustainalytics.

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mediaphotos/iStockPhoto / Getty Images

Investors

Who are socially responsible investors?

Young investors are leading the way when it comes to SRI, and it might be because the criteria of what makes an investment responsible is new and evolving. Perhaps older investors have been holding their portfolios for longer than younger ones who have just started looking at choices.

Barry McInerney, president and chief executive officer of Mackenzie Investments, says SRI can be straightforward at any age.

As with any other investments in your portfolio, it’s important to regularly revisit your SRI holdings to ensure they align with your life stage and that the underlying assets match your evolving risk profile, he adds.

Is your portfolio aligned with your ethical principles?

As a starting point, investors can search their mutual funds’ top 10 holdings, which are listed online. Semi-annual filings offer a snapshot of all holdings held on a particular day, but do not serve as a comprehensive tally of the stocks and bonds held over the past year.

Exchange-traded funds (ETFs), however, typically list all holdings up front. In both cases, investors may want to consult a financial adviser on the industries and companies in a given fund.

Funds that cater to a range of ethical leanings have proliferated over the past few years, screening out sectors and corporations that run the gamut from fossil fuels to tobacco, gambling and land mines. And contrary to conventional wisdom, they don’t lag standard funds in terms of returns.

For those who want to go beyond merely avoiding companies that fall afoul of their morals, Tim Nash, a financial planner at Toronto-based Good Investing, recommends ETFs and companies that actively work toward particular social goals.

NicoElNino/iStockPhoto / Getty Images

Where to start

No matter how you want to invest, there’s a socially responsible way to do it. The Globe’s personal finance columnist Rob Carrick takes a look at the range of SRI options.

ETFs

The Canadian market has had a socially responsible ETF since 2007, and many other socially responsible ETFs have been listed on the TSX.

For thoughts on portfolio-building with SRI ETFs listed on Canadian and U.S. exchanges, check out the Sustainable Economist blog.

Mutual funds

Whereas the ETF sector is only now adding the funds needed to build a properly diversified SRI portfolio, mutual fund companies have long covered all the major fund categories with SRI options. The issue with these funds is their comparatively high fees.

Another issue with SRI mutual funds is fuzzy branding. While the latest SRI ETFs effectively lay out their mission in their titles using phrases such as low CO2, global ESG and gender diversity, SRI mutual funds are often generically titled and described in the broadest terms.

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Robo-advisers

Seven of the 13 firms in The Globe’s latest robo-adviser guide offer SRI portfolios.

Wealthsimple chief investment officer David Nugent said between 25 and 30 per cent of the firm’s clients have an SRI portfolio for at least one account. A few things stand out among these SRI clients – they skew slightly to women, their average age is slightly younger than the overall average age of 33 years and they tend to be slightly more level-headed as investors. “People who have elected for the social portfolio versus the traditional regular one exhibit better behaviours in market downturns,” Mr. Nugent said.

Traditional advice

The Responsible Investment Association’s website will help you locate an investment adviser who offers SRI investments. Dozens of advisers from British Columbia to Newfoundland are listed, and they’re associated with a range of firms that include banks, credit unions and independents.

An advice firm that focuses on SRI is Genus Capital Management, which offers a series of “fossil free” portfolios that exclude companies involved at any stage of fossil fuel production, as well as companies with strong ESG scores.

Clients with $250,000 in aggregated family assets can get a portfolio of Genus funds managed for them on a discretionary basis, which means the portfolio manager makes decisions using his or her own judgment. Fees start at 1.5 per cent, which is low in comparison to SRI mutual funds.

wutwhanfoto/iStockPhoto / Getty Images

How to find an ESG fund

Two funds that both insist they’re investing on ESG principles can wind up with radically different portfolios. But the discrepancies are not a reason to stop trying to invest responsibly. Rather, they are a reason to drill down and find a strategy that fits your own goals. The Globe’s Ian McGugan offers four starting points for anybody thinking of investing in an ESG fund.

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Labels aren’t everything

In theory, an ESG rating offers a definitive, objective guide to a company’s environmental, social and governance prowess. In practice? Opinions can differ. A company that has a dismal history of polluting offences may also have a stellar record on gender representation. There is no obviously correct ESG grade to put on such a mixed bag of achievement. Bottom line: An ESG label by itself says little about a fund.

Fossil fuels divide opinion

Investors who are primarily concerned about climate change may be surprised to discover that many ESG indexes are fine with companies that produce oil and gas or are otherwise involved with fossil fuels. The iShares ESG MSCI Canada Index ETF, for instance, has 16 per cent of its money in the energy sector. It lists Enbridge Inc. and Suncor Energy Inc. among its top 10 holdings.

But those concerned about climate change should still take a close look at Desjardins Funds’ suite of low-carbon funds. They should also consider CI First Asset’s MSCI World ESG Impact ETFs, which exclude fossil-fuel companies.

Research individual holdings

Various ESG rating schemes emphasize different issues. The only way to see how these priorities play out is to look at a fund’s individual holdings – something that can usually be found on the ETF’s website.

Early approaches to ethical investing often grew out of religious principles. They focused on ruling out sin industries, such as tobacco, alcohol and pornography. Newer approaches tend to emphasize a different roster of concerns, from climate change to gender diversity in top management. They also reward companies that are improving their behaviour rather than simply excluding entire industries.

Look at alternatives

Daniel Straus, a vice-president in National Bank’s ETF research group, says investors have to consider the higher costs involved with many ESG funds. They should also ask themselves how many percentage points of return they would be willing to give up in pursuit of their ethical goals.

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If they can’t find a product that fits their own preferences and risk tolerance, they may want to consider a “barbell” approach, putting 80 per cent of their portfolio in more conventional investments and 20 per cent in a fund or specific companies that are championing a particular priority – solar energy, say, or diversity in hiring.

Doug Ives/The Canadian Press

More reading

One man’s quest to make socially responsible investing more responsible

ESG and future returns, blue chip dividend stocks with 5% yields, and a small cap delivering big gains

Responsible investment is quickly becoming a must-have advisor skill

Commentary

Investing in Canada or addressing climate change – a choice we shouldn’t have to make

Canadian firms must adopt a common standard for impact investing

This guide was compiled by Sierra Bein with reporting from David Israelson, Ian McGugan, David Milstead, Rob Carrick, Terry Cain, The Canadian Press and Reuters.

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