Canadians’ increas-
ing awareness of environmental issues has the country’s socially responsible investing sector optimistic that a breakthrough into the mainstream is on the horizon. One main hurdle is getting more advisors up to speed.

Bob Walker, vice president, sustainability with Vancouver-based Ethical Funds Co. , says SRI is ready to shed its reputation as a haven for tree-hugging investors. To move further into the mainstream, the company recently hired three wholesalers to expand distribution of its 13 funds outside its current channel, Canada’s credit union system.
Walker says he’s optimistic there will be progress in time for the 2006 RRSP season.

“We’re trying to build partnerships, but by no means are we ignoring the credit union system. We believe there’s more appetite in the system for SRI. We have consumers who are concerned about the environment, but right now not enough of them are connecting those concerns with their investment portfolios,” he says. “If we can help them make that connection, we think SRI is going to grow very quickly.”

The enthusiasm is being carried over to institutions. Ethical Funds and Guardian Capital LP of Toronto recently formed Guardian Ethical Management Inc. to serve the SRI needs of institutional investors.

Eugene Ellmen, executive director, Social Investment Organization, a national trade association for SRI, says his own optimism is rooted in the sector’s asset growth in the past few years, coupled with growing evidence that the “green consumer” movement is poised to spill over into the financial world.

“People are becoming more aware of how they can purchase products and services that help the environment and the world rather than hurt them. The same thing goes for their investments,” he says.

For example, he notes, almost every grocery store today has an organic food section, and makers of fuel-efficient hybrid cars can hardly keep up with demand.

Ellmen says the sector is doing its best to educate advisors on SRI, including hosting a June conference in Toronto for 200 reps, because its surveys have shown that up to 50% of Canadians would be interested in investments that screen out the likes of tobacco, alcohol and military spending. SRI has about 300,000 investors across the country, so it’s a long way from reaching significant market penetration.

Much of the problem is that relatively few advisors are fully versed in SRI, Ellmen says: “Advisors have existing relationships with other mutual fund companies, so maybe they’re not interested in learning more about SRI. We feel average investors are being poorly served by investment advisors in Canada. We want to see what we can do as an industry to educate [advisors] and help them service Canadians better.”

Gary Hawton, CEO of Toronto-based Meritas Mutual Funds, says his SRI company intentionally flew beneath the industry’s radar screen during its first four years of operation, but now it’s poised to make a move.

“It’s hardly worth hiring wholesalers [in the early stages] because you need to build a brand and establish a track record. Then you have a story, not just the concept,” he says. Meritas plans to boost its sales staff to seven from two in the next three years, while adding one fund annually to its current lineup of six. It has $85 million in assets under management.

A main challenge is breaking down the stereotypes of what SRI is all about, Hawton says. “There’s a misconception that a socially responsible portfolio contains none of the names that a traditional mutual fund would own, that we think every business is bad.

“The reality is there are some industries we avoid, and in others we say we’re going to be involved but we’re only going to own the best companies.”

Ellmen notes investors aren’t limited to SRI mutual funds. There are also income trusts, corporate bonds and individual stock accounts that screen out undesirables. “It’s right across the board, virtually any kind of security from a socially responsible point of view,” he says.

The SRI universe is still a niche in the grand scheme of things. There were more than $65.5 billion of assets being managed under social or environmental guidelines in Canada in 2004, up from $51 billion in 2002. About one-quarter of the total is made up of retail investors, Ellmen says.

All SRI players admit expanding the sector to new heights wouldn’t be possible if they attracted money only because of investors’ guilt. Luckily, performance numbers back up their assertion that one can have an SRI portfolio and still generate competitive returns. The Jantzi social index, the benchmark for SRI in Canada, posted a 35.9% return for the five years ended July 31, compared with 35% for the TSX composite index. In the past three years, the Jantzi index returned 5.7% vs the TSX’s 5.5%.
IE