With an increasing number of investors becoming more in tune with environmental and social concerns, the onus is now on the investment community, including financial advisors, to ensure that they can fulfill the expectations of their clients by offering socially responsible investment (SRI) products. A specific, but growing, segment of the investment population has become increasingly demanding in terms of the level of corporate social responsibility that they now expect from corporate CEOs and directors. For these investors, corporate social responsibility has become a meaningful factor in driving investment decisions.
The point of concern for investors as well as professional money managers is whether strong returns can be generated while pursuing a socially responsible investment mandate. Many still hold the opinion that emphasizing SRI will limit the scope of potential investments, thereby tying the hands of Advisors or Portfolio Managers in positioning an investor’s portfolio for optimal return.
However, it has been demonstrated that strong investment returns can be produced by companies that pursue socially responsible agendas. In fact, some companies with a clear goal of reducing environmental footprint have been able to operate at lower cost while gaining additional benefits such as carbon credits, which have monetary value.
Another cause of concern for advisors is that while investors might express a desire to pursue some sort of altruistic behavior with regard to their investment choices, it may be difficult to gauge the extent to which clients want their portfolios weighted to such holdings. Furthermore, how will clients react in the event that actual returns turn out to be lower than expected returns? In such cases, there is the possibility for clients to claim that the manager did not fulfill his/her fiduciary obligations by investing with a socially responsible goal instead of a focus on returns. To that end, it is perhaps best for the advisor to explicitly include these wishes in the investor’s written objectives in order to keep everyone on the same page.
The Global 100 Most Sustainable Corporations list, declared by Corporate Knights every year, names the 100 highest performing stocks across the globe with respect to sustainability parameters. The list is announced each year during the World Economic Forum in Davos. Umicore which ranked first in the 2013 list, derives a major portion of its revenues from clean technologies such as catalysts which mitigate pollution caused by internal combustion engines in vehicles. The other companies in the top 5 are Statoil, Novo Nordisk, Neste Oil and Natura Cosmeticos.
As can be seen from this list, a wide variety of companies are pursuing sustainable mandates, so there are plenty of multinationals and large capitalization stocks to choose from in constructing an SRI portfolio.
Several recent studies reveal that the performance of SRI funds are in line with that of traditional funds. Research by Globe Investor conducted amongst Canadian equity funds also show strong performance amongst SRI funds, with NEI Ethical Canadian Dividend A being the top SRI performer. The fund had a ten-year annualized performance of 9.2%.
The Jantzi Index
Jantzi Research came up with the Jantzi Social Index (JSI) in January 2000 in association with Dow Jones Indexes. The JSI, based on the S&P/TSX 60, is a market capitalization-weighted, socially screened common stock index comprising 60 Canadian companies that fulfill certain social, environmental and governance rating criteria. This index has started to generate the initial definitive data for the impact of social screening on financial performance in Canada.
Environmental criteria take into consideration the company’s pollution, waste, energy use, animal treatment and natural resource conservation. Social criteria incorporate an organization’s business relationships. When it comes to governance, investors are keen to ensure that companies are using transparent and accurate accounting methods and that common stockholders possess the right to vote on significant issues.
While Advisors are approaching incorporation of SRI into their practice to varying degrees, some are at a slower pace because they are unsure of how clients might react. The evidence shows that most clients are receptive to having a discussion about including SRI into their portfolios.
It is highly possible to find a wide range of socially responsible investments that can produce the returns that investors seek. Not only is it common to find investments that minimize environmental footprint, but also it is possible to unearth investment opportunities that actually make a positive impact on the world and satisfy your clients’ altruistic aspirations.