Green and ethical investing
When ethical investing first came on the Canadian scene in the mid-1980s, it was all about avoiding the so-called sin stocks -- tobacco, alcohol, weaponry and gambling.
Times have changed. While the screening of those companies remains the main criterion for many traditional investors, what was first referred to as ethical investing now takes a much broader approach as part of socially responsible investing, or SRI, and green investing strategies.
Read on to find out how to make the most of ethical and green investments in your retirement portfolio.
"For some, green investing means clean tech or renewable-focused investing, but what I find in most cases is that's too narrow a definition," says Michael Jantzi, one of Canada's leading advisers on SRI. Jantzi is the CEO of Jantzi-Sustainalytics, in Toronto, which provides environmental, social and governance, or ESG, analysis of organizations. The firm also compiles the Jantzi Social Index, or JSI, a benchmark index of 60 ESG-screened Canadian companies.
In the early days, when ethical investing focused on excluding companies that didn't meet the conventional criteria, Jantzi offered a different approach. "Part of socially responsible investing was the fact that you had to take the good, the bad and the ugly," he says. "Companies were not perfect."
So, when Jantzi opened his doors in 1992, his firm took a best-of-sector approach. That means they don't discount the oil or mining sectors, for example, which many traditional ethical investors would avoid. Rather, Jantzi recognizes the environmental risks and challenges within those sectors and determines which companies are doing a better job than their counterparts in dealing with those issues. Jantzi says that companies that are able to manage their environmental and social risks are better long-term performers financially.
Industry adopting SRI values
Since the launch of the first investing SRI mandate, the screening process has had a significant influence on spurring many different sectors to take ethical and environmental considerations more seriously.
Robert Hammill, managing director of Guardian Capital LP and manager of the Ethical Growth fund, says SRI investing today is simply common sense. As a subadviser to Northwest & Ethical Investment LP since June 2004, he says "we share their value system when it comes to what we would define as quality -- essentially, properly managed organizations. They're generally not the kind of organizations that cheat you and treat their employees improperly."
While an oil sands company probably doesn't come to mind when considering environmentally conscious organizations, Hammill says Suncor Energy, Inc. is one of the holdings under his ethical mandate.
"Despite the fact that they are an oil sands mining company, this is the kind of company that (SRI) will try to influence, and they may have had some influence already," he says. "Suncor is among the best in the country in environmental reporting."
Ethical investing turns a profit
Eugene Ellmen, executive director of the Social Investment Organization, agrees that in addition to the traditional ways of screening for ethical investments, it's important to include environmental, social and governance criteria in the mix as well.
"That's the way that asset managers incorporate nonfinancial issues into their investment selections," says Ellmen. "Some of the more recent funds represent thematic approaches, such as environmental technologies, climate change and green real estate, so there's a number of different ways of doing it."
Many investors, and even some people in the financial services industry, are under the misconception that SRI investments underperform traditional investments. The statistics dispel this myth. The JSI, for example, achieved an annualized return of 5.92 per cent between its inception, on Jan. 1, 2000, and April 30, 2010. During the same period, the S&P/TSX Composite had an annualized return of 5.91 per cent, while the S&P/TSX 60 had an annualized return of 5.79 per cent.
"Our view is that if your adviser or mutual fund manager invests in companies that are socially responsible, they will earn reasonable returns over time and (the companies) will actually be sustainable in the future," says Ellmen.
Still, choosing the right green and SRI investments is no small feat for individual investors. "It's complicated enough sorting out your financial situation, whether it's figuring out your investment time horizon, appropriate asset allocation or risk," says Ellmen. "And then to have to deal with all of the social and environmental issues on top makes it even more complicated."
For those reasons, Ellmen strongly recommends working with a professional adviser when seeking environmentally and socially responsible investments.
"Often we're contacted by individuals who say, 'Oh, my adviser has told me it's not possible to do this, or it's not possible to do this profitably.' Our advice is to go back to their adviser and say, 'I want you to research this and give me some options.' If they're unwilling, our advice is to fire your adviser and contact another because there are lots out there."
Diana Cawfield is a writer based in Ajax, Ont.