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How do socially responsible mutal funds measure up?

Cheryl Crowe is a talkative sort when it comes to socially responsible investing.

It goes with the territory since she’s Assiniboine Credit Union’s socially responsible investment (SRI) specialist — the only position of its kind in Canada.

Crowe, who became interested in SRI after visiting an African AIDS orphanage in the ’90s, gives community presentations, works with advisers and will offer her knowledge freely to anyone interested in mutual funds filtered through the lens of ethical investing.

And her quick, yet thoughtful manner of speaking becomes even more rapid fire when the discussion focuses on how they stand up to conventional funds.

“No matter what mutual fund you’re in, there’s going to be good times and bad times,” she says, adding that most SRIs are not as heavily invested in energy and resource holdings, which can hamper rapid growth when the price of oil is on a run.

“But you look at your own funds and then SRI funds, they are typically in the same boat,” she says.

Crowe adds that some of the major SRI funds remain in the top 25 per cent of mutual funds. Comparing two somewhat similar funds, one an SRI and one conventional, demonstrates that some SRIs do hold their own — even with oil at record high prices.

As of last week (June 3), the Ethical Canadian Index Fund, which has only been on the market for a little more than three years, posted about 15 per cent growth over a three-year period compared to about 11 per cent for CI Canadian Investment Fund. Although the ethical fund is more aggressive, with a larger percentage of its portfolio invested in Canadian equities than the CI fund, the two funds share some interesting similarities.

At the end of 2007, more than half of their top 25 holdings (excluding cash and equivalents) were identical. Both had Royal Bank of Canada as their top holding and EnCana Corp. — an Alberta-based oil and gas firm — as their fourth-largest holding. The CI fund had far more assets than the ethical fund, but the holdings made up similar percentages of the funds.

It raises the question: What makes one ethical and the other one not?

Dave Watson, partner with WPG — The Wealth Planning Group, says he has yet to have a client ask about investing in an SRI fund. If one ever did, his answer would be this: “The thing that comes up is — are they selling the sizzle or are they selling the steak?”

As he sees it, an SRI fund that holds RBC, Barrick Gold and Suncor doesn’t really appear to be anymore ethical than the next Canadian equity fund.

“The biggest misnomer with ethical funds — not the company, just the concept — is the branding of it gives people a false sense of security that they are doing the right thing,” he says, adding that a fund focusing strictly on companies that fit the narrow criteria of pure environmental and social responsibility would likely not perform that well.

They may not appear that different from a conventional fund, Crowe says, but what is different is the philosophy of the company running the fund.

Though SRI funds have been around since the ’80s, they have evolved from avoiding the so-called sin stocks — arms manufacturers, tobacco and alcohol — to including companies based on another set of standards.

“A great definition of socially responsible investing is really the integration of environmental, social and governance (ESG) factors into investment decisions,” she says.

Although they still make up a small fraction of market investment in Canada (about $6 billion), more financial institutions are now offering SRI funds, based on ESG standards.

RBC began offering a group of SRI funds last year in partnership with Jantzi Research, the Canadian leader in ESG investment screening. Richardson Partners Financial announced late last month it has also partnered with Jantzi to offer SRI fund services to high net-worth clients.

And Scotiabank unveiled an even more focused approach in February — the Scotia Global Climate Change Fund.

“The more research we did, the more we determined that research and investment management is going to have to start being aware and incorporating some of the risks of climate change,” says Neil Macdonald, managing director of mutual fund products for Scotiabank.

The fund of about $6 million in investments includes companies based on nine climate change themes, including renewable energy, clean fuels and sustainable living.

Scotiabank had initially investigated the possibility of creating a SRI fund based on ESG guidelines, but one question persisted.

“Does that mean if we launch a socially responsible investment fund, the current mandate we have to invest in Canadian equity is irresponsible?” Macdonald asks.

Already, he adds, many investment managers are beginning to consider environmental, social and governance issues with respect to the overall investment process.

Elaine McHarg, chief marketing officer for The Ethical Funds Company, agrees the ESG evaluation is becoming more the norm with investing, and increased competition is a good sign.

But ethical funds, she says, can excel in one area where others have not yet ventured.

“We believe that money is energy and with money and focused discussions, you can create change in companies,” she says. “What we really look for is corporate dialogue.”

Dialogue includes corporate coaching, whereby a team of ESG specialists from the fund engages a company’s management to help it improve in certain areas.

“Power here is being able to work with organizations and help them understand areas of sustainability that will in the long run help them operate better,” McHarg says.

As with most investing, SRI is all about the long view, Crowe says, predicting that sustainability will be crucial to profitability in the future.

“So if you want to look at it from a business perspective, forget all the SRI touchy-feely stuff. Look at it from a point of view of another layer of risk analysis,” she says. “It comes from the bottom line.”

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Four types of ethical investing:

Community investing: A strategy that invests in a local region to stimulate economic growth. This might be a GIC where 94 per cent of the money stays here in Manitoba, for instance.

Negative screening: Also called exclusionary screening, it screens out particular companies that do not meet investors’ social, ethical and environmental concerns. This might include tobacco, gambling, alcohol, genetically modified foods, military and nuclear power. It is the oldest form of SRI, dating back to the ’80s.

ESG screening: A process that includes companies that are moving toward positive social, environmental and governance policies. “Enron was the poster boy of bad governance,” said Elaine McHarg, CMO for The Ethical Funds Company.

Corporate engagement: Sometimes called corporate dialogue or shareholder action, this involves holding the stock of a company that might have many good traits from an ESG standpoint, but it needs to make progress in certain areas. Some progressive SRI funds will try to persuade the company to make changes regarding environmental or human rights policies. This can include putting forward shareholder resolutions. Ethical Funds recently pulled climate change-focused shareholder resolutions with three Canadian companies — Canadian Utilities, Finning International and Russel Metals — after they agreed to begin addressing their carbon levels and greenhouse gas emissions.

Four issues that will affect market investment in the future: Fresh water scarcity, climate change, food shortages and HIV/AIDS.

By 2020, for instance, there will be 20 million children orphaned by AIDS. Some sectors — particularly for companies with international operations in Africa or India — will need three people for every one position because two people will die by the end of the year,” SRI specialist Cheryl Crowe said.

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Tags: Investing