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Socially responsible investing appeals to people's ethics, but it also makes smart financial sense, JEFF BUCKSTEIN writes

Special to The Globe and Mail

About 15 years ago, as Irene Herremans was working on her doctoral degree with a thesis that focused on corporate social responsibility, she began to think carefully about how those principles might apply to her own financial investments.

"I looked at the relationship between finance and the environment. That's when there were initial indicators about global warming and so forth, and we were becoming aware that we needed to do something," recalls Ms. Herremans, now a business professor at the University of Calgary.

Her self-reflection intensified when she began to teach courses in environmental management, looking at ways companies could be socially responsible while still providing a strong financial return for shareholders. "I felt I needed to walk the talk," she says.

One strategy she settled on was to select mutual funds that would consist of companies that had passed through some sort of social responsibility screen -- developed either by her, or by others.

Patti Dolan, a senior investment adviser with Pacific International Securities in Calgary, is Ms. Herremans' financial adviser. Ms. Dolan started examining the phenomenon of socially responsible investing (SRI) in about 1995. At that time, it was a new concept, she recalls, and only one client self-identified as a socially responsible investor.

Today, "at least one-third of my clients are very much aware" of socially responsible investment opportunities, and many select mutual funds by taking their ethics into account, Ms. Dolan says. What has caused this shift in attitudes?

Experts point to such issues as poor corporate governance, highlighted by the collapse of giant companies including Enron Corp. and WorldCom Inc., as well as a growing understanding of environmental issues.

Demographics have also fed the growth of ethical investing. Many baby boomers, who now have a considerable amount of disposable income, are examining their principles when deciding where to invest their money. Younger people are knowledgeable about, and sensitive to, social and environmental issues and global trading practices.

"If they start investing after just coming out of university, some of those ideals are still very close to their heart," says Katrine Sperling, an investment representative with Edward Jones in Vancouver.

Such heartfelt principles have had considerable impact on the investment industry. According to the Toronto-based Social Investment Organization, a national non-profit association that promotes ethical investing, $65.5-billion in assets in Canada were "managed according to socially responsible guidelines as of June 30, 2004." That was up 31.1 per cent from $49.9-billion in 2000.

Of the $65.5-billion total, about $4.4-billion were assets of socially screened mutual funds.

In fact about a half-dozen companies specializing in mutual funds now exclusively provide funds that promote SRI, says Ms. Dolan.

For example, Inhance Investment Management Inc., based in Vancouver and a wholly owned subsidiary of Vancity Credit Union, offers 10 mutual funds, five nationally and another five exclusively to B.C. residents, all of which are screened for social responsibility.

Meritas Financial Inc. of Waterloo, Ont., offers seven funds with a focus on SRI. The assets under management of these funds increased by about 54 per cent to $138-million, at the end of 2006 compared with 2005, says Brian Barsness, the company's vice-president of sales and operations.

The Ethical Funds Co., based in Vancouver, provides a selection of 15 SRI-screened mutual funds with assets under management of more than $2.1-billion at the end of 2006, up from $1.5-billion in 2003.

Even some of the larger, well-known fund companies "have at least one or two funds that practice SRI investing," Ms. Dolan notes.

Acuity Investment Management Inc. of Toronto, for example, offers five socially responsible mutual funds to its investors, three of which advertise under the title "clean environment" and two of which emphasize "social values."

Vancouver-based Philips, Hager & North Investment Management Ltd. offers four SRI-related mutual funds. These have assets under management of close to $150-million, says communications analyst John Ly.

A key finding by ethical investors is that socially responsible investing and profitable financial investing are not necessarily mutually exclusive concepts.

Ms. Herremans found that investing in ethical mutual funds, while personally important, also provided her with some decent financial returns over the years. And her academic research backs up the notion that ethical investing is profitable for others as well.

"The evidence really is piling up now in favour of it making good business sense," she says. "The companies on these socially responsible indexes have been around for a long time and have produced really good returns."

Michael Jantzi is president and founder of Jantzi Research Inc., an independent Toronto investment research firm that monitors and publishes reports about the environmental, social and corporate governance practices of companies. He says the notion that socially responsible investing can't also be profitable is "certainly dissipating."

"On the institutional side of the business, there's a much more sophisticated understanding that an examination of environmental, social and governance issues is a smart part of the due-diligence process," Mr. Jantzi says. "But I don't think that has translated completely to the retail side of the market yet."


Tracking ethical funds

The Toronto-based Social Investment Organization is a national, non-profit association that promotes socially responsible investing. It publishes results of funds that have passed through various social screening processes, and tracks returns for about 70 mutual funds available in Canada.

"To be included in this list, a fund has to include social and environmental criteria in its investment policies and it [also] has to put those in its prospectus," says SIO executive director Eugene Ellmen.

Some of the SIO-screened mutual funds show healthy returns, though it should be noted that some have not quite matched those of major indexes around the world of late. For example, the SIO lists 15 Canadian equity mutual funds whose average return was 2.7 per cent lower than the S&P/TSX Composite index over a one-year period ended Sept. 30, 2006; down by 2.7 per cent over three years; and 2.3 per cent lower over a five-year span.

Yet in general, the SIO-listed funds were very competitive, providing double-digit returns for those same three- and five-year periods (16.2 per cent and 11.3 per cent, respectively). In other instances, SIO individual funds and fund groupings performed better than other major world indexes.

As well, SIO statistics show that the 60 Canadian companies listed on the Jantzi Social Index (JSI) posted an average 12.2 per cent return in the 12 months prior to Sept. 30, 2006. That return compared favourably with 10.6 per cent for the S&P/TSX 60.

Over the previous three years, the JSI-listed companies returned 18.6 per cent, compared with 19.6 per cent for the S&P/TSX 60. And over a five-year span, the JSI list returned 13.5 per cent, compared with 13.2 per cent for the S&P/TSX 60.

© 2007 The Globe and Mail. All rights reserved.

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