Planning
Socially Responsible Investing (SRI)
As contributing members to our society and community many people have their own social or environmental concerns. Now more than ever before investors can apply their personal beliefs and values to the investment decisions they make.
Spinning the World
By Rick Searle - Posted on 24 February 2006 EKOS Communications
Socially responsible investing (SRI) is not a new, trendy concept dreamt up by some marketing guru. In fact, in the U.S., SRI topped the $2 trillion mark in assets in 1999, with an estimated one out of every eight dollars under professional management part of a socially responsible portfolio. Canada's first SRI fund was introduced back in 1986, and as of July 2001, our country boasted approximately three dozen socially responsible mutual and segregated funds.
There are various kinds of SRI products, strategies and screening approaches, but the one issue that inevitably arises when discussing SRI is the question of whether or not investing according to social and environmental values means a sacrifice in financial performance. According to one recent Canadian study that compared the annualized compound returns of four SRI funds to the performance of the Toronto Stock Exchange over a 10-year period, there wasn't any significant sacrifice. In the U.S., the Domini 400 Social Index, a group of screened American stocks, outperformed the S&P 500 in seven of the past 10 years.
In Canada the JANTZI Social Index tracks 60 SRI companies listed on the TSX. A comparison of this group of funds compared to the TSX over the last 5 years shows very little difference in overall return. So if there is no real financial difference in choosing to invest in a socially responsible manner, you might wish to consider the tangible and intangible benefits of knowing your investments are consistent with your personal philosophies.
History of Socially Responsible Investing (SRI)
The origins of SRI date back thousands of years. In biblical times, Jewish laws laid down directives on how to invest according to ethical values. In the U.S., Quakers practiced SRI as early as the 18th century, based on their beliefs in human equality and non-violence, but SRI has only come into modern favor in the last 20 years.
The social climate of the 1960s raised concerns about civil rights, the environment and militarism. The turning point in the U.S. came during the campaign to eliminate the institutionalized racial discrimination of Apartheid in South Africa.
The modern roots of SRI in Canada can be traced back to the formation of the Taskforce on the Churches and Corporate Responsibility (TCCR). The taskforce was established in 1975 to assist participating churches, church agencies, and religious orders to acquire and share research, and to develop strategies for addressing issues related to the social responsibility of corporations. TCCR's agenda focused attention on the churches' own investment policies and practices, the development of ethical and alternative investment choices, and corporate governance issues affecting corporate accountability and shareholder rights.
Today, hundreds of thousands of Canadians have embraced the concept of investing according to their beliefs, and yet, many believe that the industry is still in its infancy compared to market surveys and the experience in other countries.
What is Socially Responsible Investing?
A growing number of investors are choosing to invest in the future of their communities, their environment and their world. These investors are at the heart of socially responsible investing (SRI), one of the most positive emerging trends in the investing world. Socially responsible investing (sometimes referred to as ethical investing) is defined as the integration of peoples' societal, environmental and ethical values with their investment decisions. It is the act of making investment decisions to achieve not only financial returns, but also social and environmental returns producing a "triple bottom line". It includes all of the financial decision-making processes that are a part of a prudent investment management approach, but it also includes the selection and management of investments based on peoples' ethical, moral, social and/or environmental concerns.
Everyone's vision of an improved world is not the same. Some are concerned about the production of certain products, such as alcohol, tobacco or military weapons. Others are more concerned about the effect corporations have on the environment, while still others want to ensure the protection of basic human rights or progressive employee relations.
Many believe that there is more to SRI than the traditional approach of simply screening investments. In fact, they believe that there are 3 key components to being a truly active and committed socially responsible investor.
Three Components of SRI
Screening
Screening involves selecting investments that meet certain requirements. For some socially responsible investors, this involves screening out those companies that do not meet the investor's ethical, environmental or social concerns.
Negative Screening
The most prevalent form of screening is negative (or avoidance) screening. This may include screening for companies with involvement in the following industries (to name a few):
- Tobacco production
- Alcohol production
- Military or weapons-related contracting
- Gambling
- Nuclear power
- Pornography
In the process of negative screening, a decision is made not to select a security based on the company's performance on some or all of the criteria listed previously. Not all portfolios screen for all items and many tend to have different tolerance levels for participation in some of these areas. Where some funds will immediately exclude a company once it has any involvement in military contracting or weapons production, others may include such companies as long as their income from these screened areas is below a specified threshold such as 10% of their total income. Additionally, most portfolios employ a secondary screen behind their negative screens that examines suppliers to excluded companies or industries.
Positive Screening
Positive (or affirmative) screening also involves the application of social and environmental guidelines or "screens" to the investment decision process.
Positive screening is more proactive, selecting companies that show leadership in social issues, such as companies with exemplary employee relations practices or companies that make a contribution to social, economic or environmental sustainability. Portfolios that employ these positive screens will seek out such companies.
Shareholder Advocacy
Shareholder advocacy is the process of using shareholder influence to help bring about positive social and 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.
Corporate Engagement
This is the process of meeting or communicating with a corporation's management in an attempt to persuade them to modify corporate behaviour on the issues or actions of concern. As an investor, you can engage with corporate management through meetings, or communication by telephone, letter or other means. Speaking with company management directly about issues of concern can avoid the confrontational approach of shareholder resolutions. The investor may well find a sympathetic ear. Although large institutional shareholders typically have more clout, addressing a letter to the president or the Investor Relations department as a shareholder will usually get a response.
Shareholder Proposals
In some cases, you may want to use your rights as a shareholder to persuade others to pass a shareholder's resolution mandating that the management take certain actions. Additionally, some socially responsible investors actively vote their shares at the company's annual meeting to ensure that the company hears their voice.
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 your displeasure with the company on their lack of action. Divestment also ensures that your portfolio is consistent with the your views when you feel strongly about a particular issue or action.
Community Investment
Often referred to as Community Development Investments (CDI), or caused-based investing (in the UK), this is the investment of money into community development or micro-enterprise initiatives that contribute to the growth and well being of particular communities. One approach to community investing is a growing movement within the SRI community to set aside a small portion of each portfolio to invest in micro-lending opportunities. It is the placement of money in businesses or investments reflecting a vision of an alternative kind of economy. The idea is to reverse the drain of capital and income that debilitate low-income communities.
Canadians who invest in community loan funds are putting their money directly to work in local communities. This has provided large numbers of micro-entrepreneurs with access to capital to start their own businesses, capital that would not have been available through conventional banking institutions.
In Summary
Socially responsible investment is the integration of social and environmental criteria into the traditional investment decision-making process. Whether large institutions or individuals, social investors believe in using economic and market levers to encourage corporate responsibility and positive social change. Social investment allows large institutions and individuals alike to make investments that are consistent with both their social and financial goals.
