Growing your book with SRI

Some clients see their investments as an opportunity to help exert pressure on companies to be responsible corporate citizens, and to help bring about positive environmental, social, or governance (ESG) changes. When tragedies around the world hit the headlines – whether it’s the collapse of a garment factory in a developing country, or an oil spill out at sea – they often provide the incentive for clients to seek out non-conventional investment approaches.

Most advisors become interested in building an SRI capability into their business after clients raise the topic of responsible investing with them, SRI experts suggest. The needs of most clients can be handled through mutual funds that are managed in a socially responsible way.

“When you can offer your clients comparable returns to non-SRI products, while still helping your client align their investments with their values, that’s how you can build a strong relationship,” says Dermot Foley, manager of environmental, social, and governance analysis at Vancity Investment Management Ltd. in Vancouver, which manages funds for IA Clarington Investments Inc. in Toronto.

SRI can mean different things to different clients. Some clients are interested in keeping certain companies or entire industries out of their portfolio. Others are interested in making sure their investment dollars are only invested in companies with a good track record of corporate responsibility, regardless of industry or sector. Finally, some clients prefer that only a portion of their portfolio be in SRI, with the remainder invested in non-SRI products.

“SRI investing isn’t one thing, it’s a grouping of strategies that takes ESG concerns into account in addition to financial metrics,” Rajagopal says. “How much you do it, and how you do it, will vary, and there’s nothing wrong with that.”

Rajagopal tells her clients about what she calls the three pillars of SRI investing: screening, shareholder engagement, and community investing.

Screening can involve filtering out certain investments – such as companies that deal in tobacco or military weapons. There is also best in class screening, meaning choosing the strongest socially responsible performers in every sector and investing in those firms. A related process involves filtering out the least socially responsible performers in each sector.

“If you take industries like mining or oil and gas – resource-based sectors – best in class screening would involve identifying those best managing the inherent environmental risk, and the inherent health and safety risk, and investing in those,” says Ian Bragg, associate director of research, policy and institutional services at the Social Investment Organization in Toronto.

Shareholder engagement puts the focus on trying to get firms to adopt better governance. Managers of SRI funds, for example, may put pressure on the boards of the companies in which they invest to adopt “say on pay” or similar rules to rein in executive compensation, or advocate for more diversity on corporate boards.

Finally, there is community or impact investing, which involves providing financing to community-oriented ventures that might otherwise have difficulty obtaining access to affordable financing. These ventures would offer a social development benefit, such as the building of affordable housing, but would also provide a financial return in the form of a competitive rate of interest on invested capital.

Some SRI fund companies offer investors access to community investing by directing a portion of the money invested in their funds towards a portfolio of community development loans.

While community investing is still the least developed of the three pillars, it’s likely that there will be much more progress in this area in the years to come, says Rajagopal: “There’s a real desire for this on the part of investors.”

This is the first article in a three-part series on socially responsible investing.

Tomorrow: understanding shareholder engagement.