Mutual funds that focus on Socially Responsible Investing (SRI) have been around for several years. At first they were as much a political statement as an investment philosophy, but much has changed. Rather than excluding many industries and companies that were considered to be detrimental to the environment and society at large, SRI funds now invest in most sectors, with the exception of tobacco, arms and nuclear, and engage companies in discussions about ways to be better corporate citizens. This new approach has resulted in improved returns for SRI funds and successful engagements with companies to incorporate practices and policies that promote social, environmental and economic sustainability.
For many investors unfamiliar with SRI, there is the immediate assumption that social benefits come with financial sacrifices - that a portfolio focusing on environmentally sound companies might exclude some of the markets most profitable ones. This assumption is proving to be a myth. It's now becoming increasingly clear that a company's financial performance cannot be separated from its impact on the environment or the people it affects. In other words, companies must operate with the knowledge that decisions they make have an effect on their environment and also their own bottom lines. Socially responsible investing seeks to ensure there is no trade-off between financial performance and social responsibilityand to promote more sustainable companies over the long term.
There are many different approaches to socially responsible investing. Portfolio screening is considered a lower-impact strategy because the change created is limited in scope. The idea behind it is to either seek out companies in sectors or industries that promote certain activities (like green energy) or avoid companies in which poor social or environmental performance could adversely impact the company's financial performance. Most SRI funds apply a selection process to screen out companies that dont meet their investment guidelines and identify companies that are acceptable. Some funds use outside research sources to make these determinations.
Going a few steps further are shareholder advocacy strategies. You cannot change a company you do not own, so owning common stock whether in a mutual fund or on its own provides investors with an opportunity to improve corporate social responsibility from within. Investors use their shareholder rights to positively influence key decision-makers within corporations via strategies of corporate engagement, shareholder resolutions, and proxy voting. This approach is considered higher impact because it seeks to actively change corporate behavior. They rely on stringent screening methodologies to identify areas of concern. Then, using the power inherent in being a shareholder, they will use engagement tactics to make a company's management aware of the issuesand often propose solutions.
Ethical Funds is an example of a fund family that uses a shareholder advocacy program. Now a part of the newly formed Northwest & Ethical Investments L.P., Ethical Funds have been at the forefront of the SRI industry for over twenty years and use one of the most robust shareholder advocacy programs in Canada.
The good news is that more and more companies are showing a willingness to respond to concerns and make socially responsible change. Companies are recognizing that the integration of ESG practices is not only good for public relations, but also for the bottom line. The growth of socially responsible investing has helped accelerate that process and allowed the average investor to make change in a meaningful way without ever losing sight of their financial goals.
If you have any questions about socially responsible investing in your portfolio, please don't hesitate to contact me.