Gain Responsibly in Canada

11/30/2011 11:30 am EST

Focus: GLOBAL

For many investors, what their money is used for may be as important as how much profit it makes. But for many other investors, such an approach has been regarded as a route to inferior investment results. The truth may surprise you, says James Kedzierski of Canadian Mutual Fund Adviser.

There’s a large segment of the investing public that’s interested in the impact of companies on their communities and the environment. Such investors prefer an investment approach that incorporates social values into the security selection process.

This approach was known as ethical investing for a long time, but in recent years it has come to be known as socially responsible investing, or SRI for short.

SRI used to be fundamentally negative in its approach. Ethical investing, for example, meant avoiding investments in companies that engaged in what was considered to be negative behavior, such as profiting from gambling or the production of alcohol, tobacco, pornography, and military weapons.

Today, SRI is still about avoiding companies that engage in negative behavior. But it has also evolved to include a more positive dimension. For instance, the SRI investor may actively seek out companies that demonstrate leadership in environmental practices and are committed to complying with environmental regulations, that respect employees’ rights and promote equal employment opportunities, and that follow strong corporate governance practices.

By emphasizing companies with positive behaviors, SRI doesn’t necessarily rule out investments in companies whose activities have a negative impact on the environment.

Take resource companies, for example. Resource extraction normally produces some adverse consequences for the environment. But if you were to eliminate resource stocks from your investment portfolio altogether, you would reduce its diversification and, thereby, most likely hurt your long-term returns. The SRI investor gets around this problem by following a “best-of-sector” investment methodology.

With regard to resource companies, this consists of identifying those with the best environmental practices. To the SRI investor, sound environmental policies let a company develop a sustainable, profitable business model.

Companies that engage in unsound practices, on the other hand, will not be able to sustain their business over the long term and profitability, as a consequence, will suffer. For instance, ignoring environmental concerns can lead to accidents such as oil spills, which in turn hurts a company’s profitability, as it falls prey to lawsuits and the need to engage in cleanup activities.

Advocates of SRI, therefore, argue that it produces superior returns to the traditional investment process. But there is no convincing evidence to suggest that its long-term investment results are significantly higher or lower than the traditional approach.

For investors who consider themselves to be socially responsible, this is good news. By engaging in SRI, it’s likely that you won’t have to sacrifice returns in order to invest in a socially responsible manner.

For such investors, we continue to recommend PH&N Community Values Canadian Equity Fund, which is on our Top 40 funds list. It models itself after PH&N’s core Canadian Equity Fund, which is also on our list. But it excludes companies that don’t conduct themselves in a socially responsible manner. The fund’s a buy.

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