All socially responsible investment funds are not created equal. They differ according to the types of companies and industries they will invest in, the degree to which they monitor companies’ social and community activities and in the methods they use to screen out companies deemed inappropriate to their mandates.

SRI fund companies generally create their own criteria or “screens” to determine the types of companies they want in their portfolios. Some firms apply those screens themselves, while most leave that task to external research firms.

Although SRI still represents a small portion of Canada’s investment market, it is growing, according to Eugene Ellman, managing director of the Social Investment Organization, the Toronto-based national trade association for SRI firms. Ellman says $6.5 billion is invested in SRI securities in Canada, representing 3.6% of the overall market. “It’s a small percentage of the investment industry assets,” he says. “But it is growing, and we expect that in five years, SRI will become the standard way of doing business.”

The industry is indeed evolving and finding new ways to reflect the concerns of investors while attempting to find companies in which to invest that lessen environmental damage and have a positive impact on communities.

And when it comes to SRI fund companies’ investment standards, there are more similarities than differences, says Ellman. Most SRI funds screen out companies with poor environmental and human rights records. Many refuse to invest in tobacco companies and military contractors. Most avoid the nuclear industry and some even eschew alcohol, gambling and pornography.

These criteria for rejecting unwanted companies are known as “negative screens.” Investment firms also have “positive screens” — indicators of good corporate citizenship.

“We try to paint a picture of what we are looking for,” says Gary Hawton, CEO of Guelph, Ont.-based Meritas Financial Inc. , which operates six SRI funds. “We ask ‘What does a good company look like?’ rather than ‘What does a bad company look like?’ and ‘What is the picture of the future if all companies are operating according to the screens?’”

Hawton says his firm aims for “zero tolerance” on its negative screens. That means a firm deriving even less than 10% of its revenue from a restricted activity would be rejected. “If we were to allow 5% or 10% of a company’s revenue to come from military or weapons contracting, that would become a slippery slope,” he says.

But Meritas’ screening process acknowledges that no company is perfect, and many disparate businesses are interrelated. So Meritas’ “secondary screens” are more tolerant. For example, a phone company that runs lines into a military base might not necessarily be considered a military contractor, especially if revenue from that relationship represents only a tiny percentage of the firm’s revenue.

Most SRI firms develop their own screens and have a research firm find companies that meet the criteria. Hawton prefers to use an external firm, Jantzi Research Inc. of Toronto, to do SRI research and then use separate portfolio-management firms to run the funds. This prevents conflicts that may arise over a hot-performing company with questionable ethical practices.

Vancouver-based Ethical Funds Co. does its SRI research in-house, with external portfolio managers running the funds. The firm has five SRI analysts who dig for a range of information on companies.

“We base our evaluations on three results areas: respect for the environment, respect for stakeholders and respect for human rights,” says Bob Walker, Ethical Funds’ vice president of sustainability. “Under those broad headings or domains of sustainability, we would have a number of indicators, depending on the sector that we’re evaluating. After that, we would have sector-specific criteria.”

Ethical Funds analysts then look at two types of indicators. The first is policy and systems indicators. In the environmental area, for example, the analysts would look for companies that have an environmental policy as well as a management system to implement that policy.

The other type of indicator is “performance metrics,” which provide measurements concerning the results of environmental policy. To get this information, analysts typically look at emissions data — on pollutants and carcinogens that are released into the environment legally — that have been collected for the government. “We are looking for evidence that companies are setting action plans and targets for success in reducing those emissions,” Walker says.

@page_break@Next, the analysts place the information in context, comparing the companies to their peers, looking for trends to indicate whether the company is getting better or worse.

The toughest challenge, Walker says, is getting the data. Even among companies that are willing to co-operate, many are suffering from “survey fatigue” and are reluctant or slow to respond to the analysts’ questionnaires. The solution would be to standardize the information and make it universally available. There is an international effort to create a standard reporting protocol called the global reporting initiative, sponsored by the United Nations. The GRI, first proposed in 1997 and now into its third version, aims to create a common set of reporting criteria for all companies worldwide. Ethical Funds is part of a group working on the new standard.

“We are hopeful that this sort of common reporting format can be used by companies to reduce their questionnaire fatigue,” Walker says. “It could be used by analysts, from both the SRI world and from the conventional investment world, to evaluate companies on the basis of their environmental, social and governance performance.”

More than 800 companies now use the GRI reporting format, including some Fortune-500 companies and some of the largest firms in Canada.

Michael Jantzi, CEO of Jantzi Research, has developed a number of methods for screening out “bad” companies and screening in the “good” ones. One of the methods is called “best of sector.”

In the early 1990s, he says, SRI funds, such as Investors Group Inc. ’s Summa C Fund, avoided the resources sector altogether. (See story on page 28.)

“When you look at mining, paper, oil and gas — the very nature of those businesses means they will have some adverse impact on the environment,” Jantzi says. “But our research allows our clients to distinguish between those companies that are doing a better job with respect to the environment and their counterparts that aren’t doing a great job.

“We’re not demanding perfection; we are comparing the company to its industry peers. And we’re able to determine what companies are doing a better job and the ones we think are better investments over the long term.”

SRI funds also look at corporate governance, an area that was not well documented by SRI firms until about seven years ago, according to Walker. Now, standard corporate governance issues, such as independent directors and executive and director compensation schemes, are integrated into SRI research.

Social issues are more difficult to measure and vary by sector, but usually include matters such as employee health and safety, which are particularly important when it comes to resources companies.

Walker says Ethical Funds also monitors community relations. The firm has a shareholder action program through which it uses its sway as an investor to help companies resolve community issues positively. However, community controversy is difficult to measure, he says. Local residents’ objection to a mine opening in their neighbourhood, for example, may be justified. In other cases, the controversy can be difficult to judge. The Ethical Funds program aims to promote formalized ways of resolving these conflicts.

“We have an extensive program for engaging companies in active dialogue in areas in which they could improve,” Walker says. “Just because a company is in our fund doesn’t mean it’s perfect.”

Meritas has found a way to help the communities surrounding the companies in which it invests. The firm allocates a portion of its funds to micro-credit community development investment. The money is invested into community loan funds in Canada and around the world that are committed to projects such as job creation, low-cost housing and clean drinking water.

The fund company lends money to existing credit institutions, which in turn lend the money to the local projects. “We try to match the community development investment with the geographical mandate of our funds,” Hawton says.

The next trend in SRI screening, will be marked by the kinds of industries the funds buy into, says Jantzi, who predicts the next wave of SRI funds will specialize in alternative energy companies. “These are the firms that are positioning themselves to become the companies of the future,” he says. IE