Forrest and Diana Smith care deeply about where their investment dollars go. “I want the investments I buy to reflect my values,” said Mr. Smith, a 67-year-old environmental management consultant in Victoria, B.C. He and his wife do not invest in companies that manufacture armaments, tobacco and liquor, and they are careful in their selection of resource-based companies. They look for companies with good environmental records, fair employment practices and those that give back to their communities.

“It just makes sense to look at company's corporate environmental record,” Mr. Smith said. “If we don’t take care of what we have today, it won’t be there tomorrow. Protecting the environment is a long-term investment.”

Socially responsible investing, sometimes called ethical investing, has been on the Canadian financial scene for the past 25 years. Fuelled by the current heightened public awareness of issues such as global warming and corporate governance, SRI is surging in popularity. More than $600.9 billion of Canadian financial assets are currently invested in SRI financial products, said Ian Bragg, associate director, research, policy and institutional services, at the Social Investment Organization, the Toronto-based trade association for Canadian SRI companies. SRI assets, he added, represent 20% of overall assets under management in Canada.

The SIO’s most recent survey of the SRI market that was released in mid-January 2013 found growth of 16% in Canadian AUM managed under SRI guidelines from its previous survey 18 months earlier ($517.9 billion). By comparison, total Canadian AUM grew by 9% in the same period.

Canadian pension fund assets currently account for a whopping $532.7 billion or 89% of Canadian SRI assets, and they’ve seen 17.5% growth (from $453.4 billion) 18 months earlier. “There’s a growing awareness by pension fund managers of the correlation between SRI and long-term financial performance, and of the cost to the economy of bad environmental practices,” Mr. Bragg said.

“There’s also a growing awareness by pension plan beneficiaries of the kinds of investments their pensions are invested in,” he added, “and the importance of being in line with commonly shared social and environmental values and international norms.”

The retail sector makes up only a tiny part – 2% – of the SRI market, but the survey found growth here. SRI funds managed on behalf of individual clients totalled $13.5 billion, up 8% from the previous survey.

But there’s still low uptake on the part of Canadian consumers. Research conducted in October 2011 by Ipsos Reid on behalf of Standard Life Canada found that 87% of Canadians surveyed expressed interest in SRI investment products but only one in 10 surveyed actually hold SRI products in their portfolios. The survey found that 92% of those who do expressed satisfaction with their performance. “There’s real opportunity for growth here,” Mr. Bragg said.

What may be holding investors back, he added, is the perception held by individual investors and by some financial advisors that they have to sacrifice investment returns for their social consciences. “They believe that, by screening out certain companies or industries, their investment opportunities are reduced and their risk is increased,” he said. “But it’s a myth that SRI funds underperform the market. Financial performance and social responsibility are not mutually exclusive.”
Research Mr. Bragg conducted last year using performance numbers provided by Fundata to March 31, 2012, showed SRI funds outperformed the markets in every asset class. “In the Canadian equity fund class, for example, the average of SRI funds outperformed the average of all Canadian equity funds on a one, three, five and ten-year basis,” he said. “Eleven of the 15 funds in this category outperformed the industry average on a one-year basis, six of nine outperformed on a three-year basis and four out of four outperformed on a 10-year basis.”

Mr. Smith in Victoria added that when he compares the performance of his investment portfolio with those of his friends, “I find that I’m doing as well or better than most of them.”

Although the jury is out on exactly why SRI funds perform well, Mr. Bragg said his research shows that they are not compromising returns. “Over the long term, funds that incorporate good environmental, social and governance practices are managing the full range of risk and opportunity that can impact financial performance. Poor corporate governance and a bad environmental record will eventually undermine a company’s business and affect its stock price performance.”

Best-of-sector screening

Some SRI funds venture into industries that may be considered controversial by ethical investment purists. While some SRI fund managers use “sin” screens to weed out companies with negative records, and others apply positive screens to select companies with outstanding social and environmental performances, the best-of-sector screening approach looks for the best companies in each sector, even though the sector itself may not pass other screening methods. The idea is to reward companies with progressive social and environmental initiatives, and create an incentive for other companies to improve their records.

“There’s not a lot of pure green Canadian companies out there,” said Ryan Colwell, a financial planner with IPC Investment Corp. in Georgetown, Ont., who has about 60% of his book invested in SRI products. “But there are many that are good enough to accept the kind of money Canadian investors have to offer.”

Mr. Colwell is a firm believer in the importance of corporate engagement. “These fund managers try to make the companies they hold more progressive, greener. And they can force the issue by having it voted on by other shareholders.”
“You can’t change a company that you don’t own,” added Bob Walker, Vancouver-based vice president at Ethical Funds Co. and ESG Services for NEI Investments. “We don’t see avoidance as being ethical.”

Ethical Funds, the major SRI player in Canada, has eight core funds and a number of fund-of-funds, and $2.8 billion in AUM as of Nov. 30, 2012. It also has a very active corporate engagement program. “We’re invested in every sector of the stock exchange,” Mr. Walker said. “We get the energy companies we own to improve their corporate and social responsibility. We see it as our role to help the companies we own improve their ESG [environmental, social and governance practices], and our job is also to provide a competitive rate of return. Our tag line is “make money and make a difference. Some people expect a SRI portfolio to be made up of windmill and organic food companies, but those are mostly venture capital companies at this point, present a lot of risk and volatility, and are not appropriate for our clients. The reality is that energy and mining companies make up about half the Canadian stock exchanges.”

Mr. Colwell said he spends a good deal of time explaining to clients that, under most conditions, SRI funds are very comparable to their peers. “They are not that different in terms of the companies they hold, the returns they can expect and the risk they hold. I explain that investing in SRI products is not charity giving. But if you can have fair-trade, organic coffee at the same price as regular, why wouldn’t you go for it?”

Mr. Bragg said SRI financial advisors such as Mr. Colwell are, however, in the minority in Canada. The 2011 Standard Life survey found advisors generally do not talk to Canadian investors about SRI products unless investors ask about them. “More financial advisors need to initiate conversations about socially responsible investing with their clients,” Mr. Bragg said. He added that the SIO is currently talking to the Mutual Funds Dealers Association and the Investment Industry Regulatory Organization of Canada about including a mandatory question about SRI investing in the know-your-client due-diligence process.

Investors should also raise the subject of socially responsible investing with their advisors, he added, and work with financial professionals who share their values. The SIO’s website has a directory of financial advisors across Canada who are SIO members and knowledgeable about socially responsible investing.