RI 101: Four Ways to Spot a Responsible Investment

November 12th, 2018 | Jeffrey Lew, Andrew Simpson, Dermot Foley

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:

Corporate governance

  • Is there a majority of independent directors?
  • Does the company have a code of conduct and business ethics?

Sustainable products

  • 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?

Employee relations

  • Does the company have a history of good or poor employee relations?
  • Does the company contribute to employee health and retirement plans?

Employee diversity

  • Does the company have a commitment to increasing gender and ethnic diversity?
  • How diverse are the board and senior management?

Community relations

  • 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?

Environmental performance

  • 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:

  • Tobacco
  • Nuclear power
  • Military weapons
  • Adult entertainment
  • Gambling

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:

  1. Environmental risks associated with financing oil pipelines and other infrastructure that may contribute to long-term climate change
  2. 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.

Sources

  • Global Sustainable Investment Alliance, 2016 Global Sustainable Investment Review.
Disclaimer
The information provided herein does not constitute financial, tax or legal advice. Always consult with a qualified advisor prior to making any investment decision. Statements by Vancity Investment Management Ltd. represent their professional opinion, do not necessarily reflect the views of iA Clarington, and should not be relied upon for any other purpose. Information presented should not be considered a recommendation to buy or sell a particular security. Unless otherwise stated, the source for information provided is the portfolio manager. Statements that pertain to the future represent the portfolio manager’s current view regarding future events. Actual future events may differ. iA Clarington does not undertake any obligation to update the information provided herein. The information presented herein may not encompass all risks associated with mutual funds. Please read the prospectus for a more detailed discussion on specific risks of investing in mutual funds. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.

Author

Jeffrey Lew

Portfolio Manager
Vancity Investment Management Ltd.

Jeffrey joined Vancity Investment Management Ltd. in 2016, with ten years of investment analysis and portfolio management experience. Prior to joining Vancity Investment Management, Jeffrey established his career as a corporate banking analyst for a large international financial institution. Following this, Jeffrey spent five years as a member of a fixed income team for a crown corporation that managed a North American fixed income portfolio of $7 billion. Most recently, he was a portfolio manager at a large B.C. based investment management firm, where he was responsible for asset allocation and discretionary portfolio management. Jeffrey has a Bachelor of Commerce in Finance from the UBC Sauder School of Business and holds the Chartered Financial Analyst designation.

Andrew Simpson

Portfolio Manager
Vancity Investment Management Ltd.

Andrew joins Vancity Investment Management Ltd. with over 15 years of analytical and portfolio management experience, both in Canada and abroad. Prior to joining Vancity Investment Management, Andrew established his career as a member of the global equity team at one of Canada’s leading investment management firms. He then broadened his international experience overseas as an Equity Analyst based in London, England. Andrew then returned to Canada as a Portfolio Manager and Canadian investment committee member of a global wealth management firm. Andrew has a Bachelor’s Degree in Economics and holds the Chartered Financial Analyst designation.

Dermot Foley

Portfolio Manager
Vancity Investment Management Ltd.

With his depth of knowledge in labour relations, energy stocks and climate change impacts and solutions, Dermot Foley takes a lead role in analyzing the environmental performance, social responsibility and corporate governance (ESG) of companies for the IA Clarington Inhance SRI Funds. Dermot brings over 25 years of experience in social and environmental advocacy, research and policy analysis. As a key member of the Vancity Investment Management Investment team, his role is to assess business practices, management systems and treatment of ESG risk. Dermot is also responsible for determining and executing shareholder engagement strategies on behalf of the Inhance SRI Funds. Dermot holds the Chartered Financial Analyst designation and the Canadian Investment Manager designation.