Thursday, 23 July 2009

Socially Responsible Investing - Putting Your Money Where Your Morals Are

Perhaps the ongoing financial crisis has made you leery of corporate ethics and you want your savings to be invested in companies that will save not destroy the planet? If so, you can consider the option of ethical investing, or as it is better known Socially Responsible Investing (SRI).

What is Socially Responsible Investing?
SRI means investing in companies or funds that meet criteria, either of doing or being good, or of not doing bad or making harmful products. Of course, what one person thinks is good or bad may not be so for another and a wide range of criteria are used to either screen in or out companies. Example criteria:

Negative Screens for the Bad - firearms, military weapons, nuclear weapons, nuclear power, alcohol, tobacco, gambling, pornography, animal exploitation / testing, human rights abuse, environmental harm, child labour, genetic engineering, support of dictators or oppressive regimes, unsustainable timber harvesting

Positive Screens for Good - environmental protection, pollution control, conservation, recycling, waste disposal, wind power generation, safety and security such as protective clothing, fire alarms, senior alarm systems, ethical employment, equal opportunities employment, public transportation, good corporate governance, aboriginal relations, community involvement

More on the pros and cons of screening criteria:
Jon Entine's Ethical Investing on the Corporate Governance website
CBC News' backgrounder Ethical Investing

How to Find SRI Companies and Funds?

There are many choices of SRIs amongst individual company stocks, mutual funds and exchange traded funds.

Mutual Funds: Jantzi Research provides a list here (click on the download of the Canadian SRI Investment Review 2008) of the 109 SRI mutual funds available to Canadians as of June 2008.

ETFs: There is only one Canadian ETF so far - iShares Canadian Jantzi Unit (symbol XEN) - though the Social Funds website reports that Claymore has decided to launch the Global Environment 60 Index ETF. There are also ETFs traded on US exchanges which are thus available to Canadian investors - see this handy list on Stock Encyclopedia. The names of many give an idea of which screens have been applied but the only real way to verify is to check the prospectus.

Companies: The quickest and easiest way to find SRI companies is to check the holdings of relevant SRI ETFs. Otherwise, look for information at index creators like Jantzi Research in Canada or KLD Indexes in the US.

It's ethical but is it profitable?
It is hard to give a definitive answer to this question. Mutual funds can be seen in the above-mentioned Jantzi list to both underperform and outperform relative to peer funds and to the related benchmark index. Differentiating the effect of the constraint of SRI from the results of good or bad analysis by active fund management is difficult. The relatively new iShares XEN ETF (it was launched in May 2007) seems to be tracking the TSX index quite closely as shown in the Google Finance chart below - the fact that the 60 holdings in XEN considerably overlap the top 60 in the TSX may simply mean that XEN is another form of the same thing.

With SRI, maybe it's possible to feel a bit better about investing. Certainly these days, that's a welcome change.

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