More and more investors are recognizing the personal and financial benefits of responsible investing (RI). Globally, RI accounts for over US$20 trillion in assets; in Canada, RI assets are well over $1 trillion.1
With steadily growing demand for responsible investments, the mutual fund industry has answered with a wide array of options. Here are some features to consider when evaluating RI funds.
1. Wide-Ranging ESG Criteria
An investment selection process that places significant emphasis on environmental, social and governance (ESG) factors is the primary feature that distinguishes RI from conventional approaches. ESG factors fall under a wide range of categories, including:
- Is there a majority of independent directors?
- Does the company have a code of conduct and business ethics?
- Do the company’s main products or services contribute to, or detract from, quality of life?
- Is the company developing products that advance or detract from sustainability?
- Does the company have a history of good or poor employee relations?
- Does the company contribute to employee health and retirement plans?
- Does the company have a commitment to increasing gender and ethnic diversity?
- How diverse are the board and senior management?
- Are employees compensated for volunteer work?
- Has the company been involved in disputes with the community?
Human rights practices
- Does the board have a human rights policy?
- Does the company monitor working conditions at supplier facilities?
- How does the company’s environmental performance compare to competitors?
- Does the company provide regular information on environmental performance?
Different investment funds will hold companies to different standards when it comes to ESG performance. The stricter the standard, the more responsible the fund.
2. ESG Screens
Screening for ESG factors generally takes two forms: negative and positive. A negative screen eliminates companies that fail to meet the fund manager’s ESG criteria. This often includes companies with major interests in:
- Nuclear power
- Military weapons
- Adult entertainment
A positive screen goes one step further by seeking out companies that actively pursue an ESG agenda, such as clean energy development.
3. Shareholder Engagement
A company with a clean bill of ESG health may make it into an RI fund, but what happens if, over time, it fails to maintain high ESG standards?
This is where shareholder engagement can play a role. This involves using the fund’s leverage and influence as shareholder to call company boards and management to account. To increase its effectiveness, shareholder engagement is often undertaken by a group of likeminded shareholders.
Shareholder engagement can also be used to help ensure companies in the portfolio are dealing with new and emerging ESG risks. For example, two types of risk have recently generated significant concern among investors, communities and environmental regulators:
- Environmental risks associated with financing oil pipelines and other infrastructure that may contribute to long-term climate change
- Social risks resulting from the negative impact of pipeline construction on the rights of indigenous peoples
Portfolio managers can urge banks and other financial institutions to conduct thorough ESG risk evaluations prior to financing projects with potential adverse environmental or social impacts.
4. Willing to Put it Into Writing
With the growing popularity of RI, the market is now flooded with potential options – but that doesn’t mean they all meet high ESG standards.
If you’re concerned that some funds may only be paying lip service to RI, there is a simple way to root out the pretenders: check the prospectus for an unambiguous statement that identifies RI as a core investment objective. If no such statement is present, the portfolio manager may not have a very strong commitment to RI.
IA Clarington Inhance SRI Funds, managed by sub-advisor Vancity Investment Management Ltd., are an example of a responsible investment option that incorporates all of these features. The Inhance SRI Funds use an active, integrated approach that combines strict ESG criteria with rigorous fundamental financial analysis.
- Global Sustainable Investment Alliance, 2016 Global Sustainable Investment Review.