Socially responsible investing catching on with Canadians
As the new year stretches ahead — with new opportunities to change things up — consider how you can invest in a way that doesn’t conflict with your ethics, and advances the causes you care about.
It’s something a growing number of investors are considering.
Investing in funds that contribute to causes such as climate change mitigation, affordable housing and gender diversity in boards and management teams — also known as socially responsible investing (SRI) — is rapidly gaining popularity in Canada. According to RBC, Canadian assets in socially responsible funds account for more than $1 trillion of investments under management. And Ernst and Young reported in 2017 that funds flowing into sustainable investments have increased 107.4 per cent each year since 2012.
A major reason for the shift is millennial investors: they’re more likely to invest in sustainable funds, and believe their investments can create positive change.
“A lot of the movement in millennial investing has been to invest with a purpose, and not just for performance,” said Dave Nugent, the chief investment officer of Wealthsimple, which has had SRI options since April 2016. “There’s a gravitation toward socially responsible companies.”
Fund companies, banks and robo advisers have responded accordingly, launching options that allow investors to put their money where their interests are. For those looking to get started with sustainable investing, there are some things to consider.
For instance, you don’t have to sacrifice returns to follow your conscience. A 2015 study by Tessa Hebb, a distinguished research fellow at the Carleton Centre for Community Innovation and author of studies on socially responsible funds, found that socially responsible equity mutual funds financially outperformed industry benchmarks 63 per cent of the time.
“Most studies find that high (scores for environmental, social and governmental practices) is not a detractor from fund performance. In most cases, the fund either performs the same or may outperform,” Hebb said.
Companies in socially responsible funds have better environmental, social and governmental (ESG) practices overall and are at less risk of scandals, disasters and lawsuits that impact share prices and erode value, Hebb said. She cited the example of BP, which in eight years has still not returned its stock price to where it was before the Deepwater Horizon oil spill in 2010.
Another myth is that there’s only one way to be a socially responsible investor. SRI is an umbrella category that encompasses several types of investing, including positive and negative screening. Positive screening means investing in companies with high ESG performance scores, and negative screening keeps certain companies or industries — ranging from weapons manufacturing to gambling to resource extraction — out of your portfolio. There is also impact investing, which means selecting funds that have the intention to generate measurable positive social or environmental impacts.
Because there are options, it’s important to understand the type of funds you’re looking to invest in. “Not every company is going to get filtered out, and this is what we try to make sure our clients understand,” said Navid Boostani, CEO of ModernAdvisor, a robo adviser that has offered socially responsible options since it launched in 2016.
And just like with regular investments, it’s important to diversify your portfolio. “We’re seeing a lot of products that are being promoted and they could be a good piece of someone’s portfolio … but those type of products as someone’s entire financial investment are not suitable,” Boostani said.
As well, socially responsible funds tend to be more expensive than regular funds, Nugent said, because the market is smaller. Plus, most funds that screen out entire industries are actively, rather than passively, managed — meaning the fund manager is regularly involved — and have higher management fees.
Hebb said you may need to start the SRI options conversation if it’s something you’re curious about.
“Most people don’t feel well-informed about finance, and there’s a tendency to follow the advice of the adviser,” Hebb said.
“But investors have to indicate they’re interested and want to know what’s available.”