Socially responsible investing, part 1: How to clean your portfolio

Over $22.89 trillion of global investments are considered to be socially responsible investments (SRI). Find out what to consider before making your first SRI.

Canadians have allocated $1.5 trillion towards SRI, increasing at an annual rate of 25 per cent since 2006. What do you need to know before taking the leap into SRI?

Risk mitigation and values-based investing

Consumers, activist shareholders, not-for-profits and visionary leaders – including Governor Mark Carney (Bank of England), CEO Michael Bloomberg (Bloomberg L.P.) and CEO Larry Fink (Black Rock, Inc.) – have all applied pressure on fund managers and CEOs to identify and respond to their environmental, social and governance (ESG) risks.

 

Investors are looking to SRI to align their values with their investments, hoping to sleep better at night knowing their investments have less exposure to companies with poor environmental or social performance. Traditional investors are looking to SRI as an alternative to traditional mutual funds or exchange-traded funds as a way to minimize risks within their portfolio, including climate change, water scarcity and labour disputes. 

Types of SRI products

There are four ways socially responsible investments achieve their mandate:

  • applying negative screens to exclude risky industries (tobacco, fossil fuels, armaments) or corporate practices (environmental degradation, labour relations, governance practices)
  • applying a positive screen which seeks to invest in companies with desirable corporate practices
  • taking an active role with corporate engagement using the voices of shareholders to encourage corporate policies and strategic direction with regards to environmental, social and governance (ESG) matters
  • integrating ESG with financial data ensuring a holistic approach to investing

How do these funds perform? The Responsible Investment Association (RIA) shows that Canadian and global equity SRI funds outperformed their traditional counterparts over the past five years. This indicates that there is no need for compromise when it comes to investing based on your values.

Cleaning your portfolio

Here are some steps you can take to introduce socially responsible investing to your portfolio: 

  1. Identify the issues you care about. Are you passionate about climate change, appalled by corporate bribery and poor labour practices? Or do you simply want the peace of mind that the companies you’re investing in have governance practices that mitigate the risk of poor ethical behaviour? If you’re unsure, try starting with the United Nation’s Sustainable Development Goals which highlights 17 problem areas  that nations, businesses and civil societies are working together to solve.
  2. Determine how ‘clean’ you want your investments to be. The extent to which environmental and social considerations are integrated into SRI funds varies significantly. Negative screens are a good starting point, followed by corporate engagement. ESG integration seeks to minimize risk, while positive screens aim to prioritize emerging sectors or favourable corporate attributes. Be aware that funds with a greater non-financial emphasis may bring with them higher management fees.
  3. Engage your advisor. Start the process by asking your advisor about which SRI products they can offer, which approach they take to SRI and how their funds perform against the relevant benchmark. Some advisors may be pressured to sell a limited selection of funds, so review the RIA’s list of SRI funds so that you can compare the performance and management expense ratios to the ones suggested by your advisor.

Keep the conversation going

Have you assessed your portfolio from a socially responsible lens?  Post a comment below.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.

About the Author

Imran Jiwa, CPA, CA

Imran is the director of impact and finance at Active Impact Investments.