Socially responsible investing (SRI) now has a well-established history and has proven itself as a way of profiting from companies who meet various criteria for socially responsible behavior. In Canada, the first socially responsible ETF launched in 2007 and has since benefited numerous investors over the years. Yet widespread awareness of such options has yet to be achieved and Canadian investors still have a relatively limited assortment of options for SRI.
The first Canadian social index fund
The iShares CDN Jantzi Social Index Fund [XEN] first came on the scene in 2007 from Barclays Canada. This exchange traded fund was the first of its kind in Canada and remains relatively unique. The fund is based on the Jantzi Social Index which, at that time, was composed of 60 companies from Canada that passed “broadly based environmental, social, and governance rating criteria.”
XEN was actually a response to two growing trends, exchange traded funds (ETFs) and socially responsible investing. ETFs provided a cost-effective way to access baskets of stocks without relying on more expensive and sometimes unwieldy mutual funds. At the time, SRI assets made up a “staggering 20 per cent of the combined retail mutual fund market and the institutional investment market.”
The Jantzi Social Index, which launched in 2000, has grown in value by “almost 78 percent” in the ensuing period. From its launch to October 2018, the Jantzi Social Index “achieved an annualized return of 6.33 percent,” beating out both the S&P/TSX Composite and the S&P/TSX 60.
Low awareness of great returns
Canadian investors seem surprisingly unaware of the financial benefits of SRI. As one analyst noted, in the five years prior to October 2017, XEN “returned 41% whereas the main Canadian index climbed 27%.” Yet, though 82% are aware of SRI, only a third or so of Canadian investors are exposed to the socially responsible sector.
Actually, given the wide variety of investing approaches one finds in the market, a third may be a fairly strong level of exposure. In addition, awareness of SRI reveals that investors are split on whether SRI is about profiting from socially responsible companies that are ahead of the game or about investing from an ethical standpoint. Yet one could simply make the claim that exposure to such stocks is a smart way to diversify one’s portfolio.
Investment advisor Petra Remy feels that the perceived gap between awareness of SRI and its obvious profitability comes down to education. She maintains that there is a shortage of investors with full awareness of companies under the socially responsible umbrella. She also looks to the Responsible Investment Association as a useful starting point for such education.
SRI as a historical movement
Socially responsible investment as a movement began long before the launch of XEN or even of the Jantzi Social Index. Even the institutional aspects of the Canadian movement goes back at least to the launch of the Social Investment Organization (SIO) in 1989. The SIO was renamed the Responsible Investment Association (RIA) in 2013 and has since continued as a leading SRI organization in Canada.
Today, the RIA organizes events and educates investors about SRI. They maintain working groups of investment professionals in Toronto and Vancouver that meet regularly for networking and peer education. And they maintain that the “integration of environmental, social and governance (ESG) factors into the selection and management of investments can provide superior risk adjusted returns and positive societal impact.”
Limited options beyond individual stocks
Yet despite such developments and the growing evidence for the profitability of SRI, interested investors mostly have to piece things together on their own or with the help of advisors. As the Sustainable Economist blogger points out, if one wants to build a socially responsible portfolio for Canadian stocks using exchange traded funds and similar options, the pickings are slim.
Financial blogger Alain Guillot takes an even more skeptical view of SRI but comes to the same conclusion. Canadian investors interested in social responsibility do not have a lot of choice. And he maintains that those willing to build their own SRI portfolio composed of individual stocks may have trouble diversifying those portfolios.
Creating new approaches to encourage SRI
Depending on one’s criteria, it may well be possible to build a stock portfolio featuring socially responsible Canadian companies. But leaving investors to their own devices after they are educated and aware is not the ideal way to encourage SRI. It took seven years after the launch of the Jantzi Social Index for a related ETF to launch. Perhaps creating new ETFs would be encouraged by new indexes which reflect the full range of approaches investors take to SRI. If some wish to emphasize the environment and others wish to focus on peace, multiple indexes and corresponding funds could emerge giving investors broader options and helping the socially responsible investing movement take bigger steps.