Frequently Asked Questions (FAQ)
Q1 What is Socially Responsible Investment (SRI)?
Q2 How are investments screened or evaluated?
Q3 What is Community Investing?
Q4 What is Shareholder Advocacy?
Q5 Does Social Investment lead to Social Change?
Q6 The Performance Myth: Do Social Investors Sacrifice Returns?
Q7 Is SRI a passing investment fad?
®Ethical, Ethical Funds, Ethical Growth Fund and The Ethical Funds Company are registered marks owned by Northwest & Ethical Investments L.P. and are used under licence.
Q1 What is Socially Responsible Investment (SRI)?
Socially responsible investment (SRI) combines investors' financial objectives with their commitment to social and environmental concerns such as social justice, economic development, peace or a healthy environment. Socially responsible investing can be done by individuals or institutions such as foundations, religious organizations, trusts, investment pools and pension plans.
Socially responsible investors believe that companies that commit to limiting their environmental impact, that treat their workforces with respect and dignity and produce safe and useful products are more likely to make sound financial investments in the long-run.
There are three basic approaches to socially responsible investment:
Positive and negative screening. This is the application of social and environmental criteria or "screens" to the investment process. It can be done directly by investing in particular stocks or other investments selected according to specific screens, or through socially responsible mutual funds† employing pre-established screens.
Negative screens usually include issues such as tobacco and military production, companies operating with sweatshop or child labour, or the manufacture of alcohol or pornography. Companies falling into these categories are excluded from portfolios containing these screens.
Examples of positive screens are companies making a contribution to social, economic or environmental sustainability or industries with exemplary employee practices. Portfolios with such positive screens will seek out such companies.
Community Investment. This is the investment of money into community development or micro-enterprise initiatives that contribute to the growth and well-being of particular communities. The idea is to reverse the drain of capital and income that debilitate low-income communities.
Shareholder Advocacy. This is the process of using shareholder influence to help to bring about positive social environmental change at corporations. This can include corporate engagement (communicating with management on particular issues), filing shareholder resolutions and using the threat of divestment to bring about positive change
Currently there are fifty mutual funds (including Labour sponsored funds) using social and environmental criteria in Canada.
Q2 How are investments screened or evaluated?
Socially-responsible investment screening involves selecting companies in a portfolio based on social or environmental criteria. Typically, socially responsible investors exclude or screen out certain companies for products or practices that have a negative social or environmental impact. Positive screening involves selecting companies based on their positive contributions to society or the environment.
Social investors know there are no perfect companies. The screening process attempts to identify companies that are well-managed, that produce socially useful products and treat their employees, suppliers, customers and the environment in which they operate well. Screening decisions can involve some trade offs which are informed by careful research and evaluation.
There are a large number of social and environmental issues that investors can use to select investments:
Armaments. Is the company a major military contractor?
Charitable Contributions. How much & what kinds of charities does the company contribute to?
Community Involvement. Does the company support local programs strengthening the community in which it operates?
Ecology and Environment. Does the company operate according to sustainable development practices?
Labour Relations. Does the company have a good record with regard to treatment of its employees? Do contractors of the company use sweatshop or child labour?
Minority Groups. Does the company have a good record in dealing with minority groups?
Product Safety and Quality. Does the company produce safe, reliable products or services?
Women. Does the company have a good record on its treatment of women generally and its female employees in particular?
Social and environmental screening allows investors to invest in a manner that is consistent with their values while also assisting them to identify companies that are more profitable and sustainable in the long-term.
Q3 What is Community Investing?
Community investing consists of direct investments in projects that benefit specific communities or constituencies, especially in economically disadvantaged areas. These investments usually take the form of loans or equity investments that can be either at or below market rates. In Canada, community investment includes:
- Micro-enterprise Lending. Community-based organizations providing capital for micro-entrepreneurs unable to obtain capital from conventional financial institutions. Loans are usually less than $25,000 with typical loans in the $2,000 - $5,000 range.
- Community Development Venture Capital. High risk loans or equity placements in locally based businesses meeting community or social needs. This sometimes includes non-profit development organizations but can also include venture capital companies. The focus here is on businesses with an emphasis on community-building that meets local needs.
- Non-profit Lending. Lending to non-profit organizations pursuing a social mission that are unable to obtain capital from conventional financial institutions. This is usually done by non-profit lenders.
- Co-operative Development. Funds making loans or equity placements in new co-operatives.
- Lending for social or affordable housing. Risk mortgages or construction loans for housing targeting to low-income markets.
- Economically Targeted Investments (ETIs) These are community development investments made by pension funds or other institutions.
- Other forms of locally-based investment targeted to meeting the needs of particular communities or groups.
Community investment helps to link local investors, consumers and business – embodying the philosophy of “think globally, act locally.”
Community investors want their investments to help generate a high “social return” in the form of local job creation, the development of local enterprise, the provision of affordable housing and the empowerment of workers and consumers and are generally willing to accept a slightly lower financial return as a result.
Q4 What is Shareholder Advocacy?
Shareholder Advocacy is the process of using shareholder influence to help bring about positive social and environmental change in corporations. It is usually carried out by institutional investors such as foundations, mutual and labour funds, trusts, investment pools and pension funds. However, individual investors can also be “active shareholders”. The process usually includes one or more of these three steps:
- Corporate Dialogue - Individual investors and institutions can engage directly in dialogue with companies around issues of concern. Investors can identify areas of improvement for individual companies and then try to persuade these companies to commit themselves to improving their performance. Through telephone calls, letters and meetings, social investors press management to address issues of concern to them.
- Proxy Voting Policies - Institutional investors such as pension funds and mutual funds can also develop proxy voting guidelines which reflect their position on key issues for social change. For example, OMERS, the Ontario Municipal Employee Retirement System is one of the first large Canadian pension plans to explicitly publish policies on Socially Responsible Investment (SRI). OMERS believes that high principled and environmental standards add to the long term financial performance of companies. Mutual fund companies such as Meritas and Ethical Funds® also have socially responsible proxy voting guidelines and post them on their websites.
- Shareholder Proposals - In cases where companies are not responsive or where dialogue breaks down, social investors can take their concerns directly to other shareholders through the shareholder resolution process. In recent years, shareholder proposals have been presented on sourcing of lumber products for Home Depot and establishing codes of conduct for vendors of Sears Canada and HBC. [Please see fact sheet # 4] Recent changes to the law governing corporations in Canada will make it easier for shareholders to submit proposals on social and environmental issues in the coming years.
- Divestment - If corporate management is adamant that it does not want to heed your wishes as a shareholder, you may want to consider selling your shares as a way to show the managers your displeasure with their lack of action. Divestment is also a means to maintain that your portfolio is honorably consistent with the views of your members or other stakeholders who feel strongly about the issue or action.
Q5 Does Social Investment lead to Social Change?
What evidence exists that shows that investment tied to social and environmental goals 'changes' company behaviour?
Socially Responsible Investing has been perceived primarily as a negative approach to investing. That is, many see it as the process of eliminating “bad” companies from a portfolio. However, SRI includes more activist approaches to social responsibility that use economic and political interventions in an attempt to make economic practices more democratic and workplaces more humane.
- Social investors have begun over the last decade to influence company behaviour. Examples from the last few years include the successful campaigns to protect old-growth temperate rainforests in British Columbia. Partially as a result of pressure from a coalition of investors (including Canadian based Ethical Funds®) Home Depot agreed to phase out its purchases of wood products from such areas. As one of the largest consumers of wood products in North America Home Depot has agreed to source wood products from Forests certified by the international Forestry Standards Council .
- On sweatshop and labour issues, shareholder proposals have asked Sears Canada and HBC to comply with the International Labour Organization’s labour standards and report on compliance to shareholders. Though the proposals failed to pass, they generated enough attention that management at HBC has agreed to examine the issue.
- Predatory Lending A shareholder resolution prompted Citigroup the giant financial services corporation - one of the biggest in North America - to take steps to improve the way it serves low-income communities. In late 2000, a coalition of church groups and other socially responsible investment institutions asked Citigroup to develop policies to ensure that no employee or broker engages in predatory lending practices.*
- Due to recent positive changes to the law that governs shareholder proposals in Canada, it will be easier for Canadian institutional investors (mutual funds and pension funds) and individuals to bring proposals on social and environmental issues to the attention of all shareholders.
Q6 The Performance Myth: Do Social Investors Sacrifice Returns?
Many investors assume that there is a financial cost to employing social and environmental criteria in investment decisions. However, a growing body of empirical evidence indicates socially responsible investments can perform as well as conventional investments. In some cases, they have performed better.
In the US, the Domini Social Index (DSI), an index of 400 socially responsible companies, has outperformed the Standard & Poors 500 on a total return basis and on a risk-adjusted basis since its inception in May 1990. For current data, visit www.kld.com.
In Canada, Michael Jantzi Research Inc. (MJRA) has created the Jantzi Social Index, an index of 60 Canadian companies selected on social responsibility criteria. The index was launched in January, 2000. The data shows that the JSI index has outperformed its conventional benchmark. For current data, visit www.jantziresearch.com/.
The cause of such outperformance is a matter of some academic debate. Some researchers believe that this outperformance is due to investment factors, such as sectors, industries, capitalization or other factors. Others believe that there is a social premium, that socially responsible screening leads to higher returns because of social and environmental factors, such as far-sighted management, higher productivity, lower legal and social liabilities and market opportunities. A full discussion of these issues is available at www.sristudies.org.
A recent academic study* comparing Canadian SRI mutual funds with conventional mutual funds found that investing in a socially responsible manner has a neutral effect on returns. Moreover, the same study suggests that socially responsible screening may even reduce investment risk. See http://www.investmentreview.com/archives/2001/winter/social.html.
What is clear is that -- contrary to conventional wisdom -- investing according to social and environmental screening does not equate to lower returns. In fact, in some cases, social screening can produce higher returns.
* Predatory lending targets low-income borrowers who don't qualify for prime rates and involves excessive fees and interest rates, hidden costs, unnecessary insurance, and other abusive practices. Predatory lending has been blamed for stripping the equity from the homes of people in low-income communities.
Q7 Is SRI a passing investment fad?
SRI assets grow to more than $500 billion in Canada
Growing institutional interest in socially responsible investment has propelled SRI assets in Canada to more than $500 billion, according to a study released today by the Social Investment Organization.
The study, entitled the Canadian Socially Responsible Investment Review, estimates total SRI assets in Canada in 2006 at $503.6 billion. This is an increase from $65.5 billion in 2004.
The study is based on a survey of SRI assets conducted every two years. It was sponsored by Acuity Funds Ltd., Alterna Savings, Desjardins Trust, Meritas Mutual Funds and The Ethical Funds Company®.
The findings include $57.4 billion in assets invested according to Core SRI Strategies, which incorporate values-based decisions about investment selection and management with risk and return considerations.
It also includes $446.2 billion in assets invested according to Broad SRI strategies, which are primarily based on a fiduciary analysis of the risk and return characteristics of environmental, social and governance issues. This is a relatively new approach in SRI.
The dramatic increase in SRI assets is largely the result of the recent adoption of SRI policies and practices by several large public pension funds.
“Issues such as climate change, human rights and international development are generating enormous public and financial industry concern,” said Eugene Ellmen, Executive Director of the Social Investment Organization (SIO), which published the study. “Investment managers are now recognizing this, and adopting socially responsible investment policies and strategies as a result.”
† Mutual funds are offered through Credential Asset Management Inc. and mutual funds and other securities are offered through Credential Securities Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, cash balances, mutual funds and other securities are not insured nor guaranteed, their values change frequently and past performance may not be repeated. Credential Securities Inc. is a Member - CIPF. ®Ethical, Ethical Funds, Ethical Growth Fund and The Ethical Funds Company are registered marks owned by Northwest & Ethical Investments L.P. and are used under licence.