By Sheryl Smolkin
Read this article and comments at Moneyville.ca
In a recent moneyville article portfolio manager Pat McKeough says that ethical investing works as a marketing angle for the handful of investment companies that offer ethical mutual funds, but it is less effective at securing the objectives of people who buy these investments.
However, other investors who have chosen to integrate environmental, social and governance (ESG) factors into their investment decision-making or stock selection process have a different perspective.
For example, 883 Canadian and international organizations managing over $25 trillion have committed to theUnited Nations Principles for Responsible Investment. And at the other end of the continuum, my son Charles has invested a small inheritance in social index funds.
So I asked Kevin Rammey who heads up Responsible Investment Services at Jantzi-Sustainalytics (the largest independent ESG focused research firm in the world) for his take on the following questions.
Can ethical investing cut down on unethical corporate behaviour or promote favourable corporate behaviour?
Ramey says truly astounding changes that have taken place over the last 10 to 15 years. “Many novel multi-stakeholder initiatives have emerged setting new standards across a broad range of activities from how to manage forests to how to manage fisheries to how to manage human rights in the supply chain.”
Along with companies that endorse the United Nations Principles for Responsible Investment, he cites the Global Reporting Initiative and the Carbon Disclosure Project as examples of collaborative efforts which have resulted in tangible “on the ground” changes in corporate behaviour.
ESG investors cannot take full credit for these changes, but Rammey says “they have been a hugely important player in raising the bar.”
Will ethical investment depress your financial returns?
The impact on investment returns of ESG or socially responsible investing has been the subject of much debate. However, Rammey says according to Jantzi research, it is a largely a neutral factor with any differences attributable to the investment managers themselves. Furthermore, he believes that over time ethical investing may lead to “outperformance,” or higher returns.
In February 2011 the Jantzi Social Index reported that since its inception on January 1, 2000, the index has achieved an annualized return of 6.79 per cent. The S&P/TSX Composite and the S&P/TSX 60 had annualized returns of 7.05 per cent and 6.75 per cent respectively over the same period.
Can discouraging distasteful activities lead to more harm?
It has been suggested that discouraging distasteful activities could result in more harm. For example, if oil from the Canadian oil sands is banned as advocated by U.S. environmentalists, significant unemployment could ensue.
Rammey says he is not aware of any ESG investors advocating a complete boycott of the oil sands. Nevertheless, he believes that if there is some area of business production that is so degrading that it should be shut down, then there is a need to look for other areas in which to generate new job opportunities.
He points out there are tremendous opportunities for investment in renewable energy, energy conservation, food sustainability and a whole host of other areas.
Isn’t donating to sympathetic charities or political parties a better option?
Rammey agrees that charitable donations are very important. Nevertheless, he believes they do not preclude aligning investments with personal goals. “Socially responsible investment is one way investors can contribute to change.”
My son Charles agrees.
To stay true to his values, he has invested in social index funds including the iShares Janzi Social Index Fund and other comparable U.S. and international products. He believes that each year his funds have performed within one per cent of the non-screened indices for each asset class.
“The Jantzi Social Index completely excludes categories of investment like weapons, tobacco and nuclear power,” he says. “By buying funds that mirror this index, even as a small investor I can make my voice heard.”