Investing with a Conscience

For those who invest in ethical funds, the same alphabet soup of acronyms tends to come up again and again. Terms like socially responsible investing (SRI), environmental, social and governance criteria (ESG), and corporate social responsibility (CSR).

This article was originally published in Maclean's Magazine on December 10, 2007

For those who invest in ethical funds, the same alphabet soup of acronyms tends to come up again and again. Terms like socially responsible investing (SRI), environmental, social and governance criteria (ESG), and corporate social responsibility (CSR).This article was originally published in Maclean's Magazine on December 10, 2007

Investing with a Conscience

For those who invest in ethical funds, the same alphabet soup of acronyms tends to come up again and again. Terms like socially responsible investing (SRI), environmental, social and governance criteria (ESG), and corporate social responsibility (CSR).

Once you decide that you're concerned with more than just the bottom line, investing gets a whole lot more complicated. And a lot more interesting. There are important questions that need to be asked about what issues are vital to your moral code, and which can be bent in pursuit of profit and a comfortable retirement: does this conglomerate have ties to chemical weapons or cluster bombs? And does that company do business with repressive regimes? It can take some serious sleuthing to find the answers. But the payoff comes in knowing your portfolio will truly reflect your beliefs.

Today it seems there are as many possible social and ethical issues to fret over as there are channels on TV, and the number is growing fast. Where once ethical funds concerned themselves chiefly with avoiding polluters and industries like tobacco and nuclear power, their job has gotten much more complicated.

The environment remains top of mind, but SRI investors are looking at specific issues such as climate change, water use and deforestation. War is hell, of course, but it's conceivable some investors would tolerate companies that build protective gear and weapons for our troops, while still avoiding those with ties to land mines and bunker busters. At the same time, old vices like gambling and pornography don't look nearly as sinful as they once did, considering roughly two-thirds of the population gambles at least occasionally and porn still dominates the Web.

Making things even more difficult, emerging societal problems will likely become hot-button issues for some investors, says Mark Wexler, a professor of business ethics at Simon Fraser University. "The debate over what is and what isn't virtuous changes over time," he says. "The notion of obesity just got put on the virtue map, where it wasn't there seven years ago." Does that mean McDonald's is a no go? How about Tim Hortons?

Before proceeding, you have to set limits on what issues are important to you, say experts. Otherwise you might blacklist huge swaths of the market, limit your investment options and make your portfolio too risky. Restricting yourself to solar power and biofuel stocks may make you feel good, but you might be devastated in a market downturn.

Just as important, you need to decide how deep your convictions are. "That might take you right down to the producers who supply base metals to companies that make war munitions," says Eric Kirzner, a professor of finance at the University of Toronto's Rotman School of Management. According to Teck Cominco's website, the Vancouver mining giant makes certain lead alloys used in the ammunition industry. Would that mean ruling out one of Canada's last domestically owned major mining companies, one that scores high on most CSR surveys? It depends how close to the sin you're willing to get.

Even the most responsible investors must draw the line somewhere. SRI mutual funds grapple with this question constantly. Many invest in a company so long as no more than 10 per cent of its sales come from problem industries. For example, Ottawa tech firm Cognos (which was just acquired by IBM) is a stalwart in many ethical funds, even though it's earned a small part of its sales from gambling industry heavyweights like Harrah's. "If you're really determined to do this, and not just to make yourself feel good in front of your friends," says Kirzner, "you're going to have to define how far you're willing to go."

But that's the easy part. Actually finding information about the companies you want to invest in is another matter entirely. Plenty of firms specialize in analyzing companies beyond mere financial measures, but their research will cost you. Jantzi Research in Toronto compiles detailed reports on thousands of stocks in Canada and around the world, delving into environmental, social and governance performance. The firm's research serves as the cornerstone for some of the largest SRI funds in Canada. This week, Maclean's provides some of that insight to our readers. But the cost of buying individual reports from professional analysts can really add up.

Several research houses compile indexes of companies that meet their SRI criteria, and in some cases those lists are public. For instance, banking giant Barclay's recently created an exchange-traded fund based on the Jantzi Social Index. Barclay's discloses the list's 60 Canadian companies on its website. Likewise, Dow Jones runs several sustainability indexes, and names which companies make the cut. By the same token, mutual funds must regularly update their holdings through, Canada's regulatory disclosure website.

It also helps to know what's got SRI fund managers riled. Each year they file dozens of shareholder proposals ahead of corporate annual meetings, on topics like the environment and human rights. It can be a way for investors to learn a thing or two about stocks in their own portfolios. For instance, Vancouver-based Ethical Funds publishes the resolutions it's involved with. Among the issues tackled this year: human rights abuses in China, and what Nortel, Power Financial and Cisco Systems, which have operations there, are doing to address them.

But only by digging into a company's operations can you truly tell if it fits your particular values. Some companies make that easier than others. In addition to regular financial statements, many now publish corporate social responsibility reports, addressing issues like environmental performance, labour standards and governance practices. Yet some CSR reports aren't worth the recycled paper they're printed on. "Many times all they make are motherhood statements," says Sucheta Rajagopal, a financial adviser with Hampton Securities in Toronto, which focuses on ethical investing. "If [CSR reports] are just full of nice statements, and no numbers and specifics about their policies, then the companies probably aren't doing anything."

So what separates the wheat from the chaff? Details. Take Alcan's 2007 CSR report, for instance. It measures every ton of greenhouse gas and hazardous waste discharged from its aluminum operations. Meanwhile Telus, which has had a rocky relationship with its unions in the past, discloses detailed figures that track employee grievances, accidents at work, and the makeup of its workforce.

CSR reporting standards are slowly emerging. The Global Reporting Initiative, a not-for-profit group made up of institutional investors, companies, unions and academics, operates a clearinghouse at that investors can search. Only those reports that meet certain guidelines are on offer, though. So far, only a few dozen Canadian companies make the cut.

Even CSR reports from some of the biggest global companies aren't perfect, though. Earlier this year, General Electric admitted it misled investors in previous CSR reports. In the past, GE said it did not have ties to producers of land mines or cluster bombs. But while producing this year's report, it realized it had acquired a subsidiary that supplied sensors used in those explosives. Sales from the sensors were less than .001 per cent of GE's business, and it has vowed to exit the business this year. But the incident shows the difficulties companies face when trying to be good, and the challenge for investors who rely on companies to fess up about their more unscrupulous activities. "Ultimately, I think the world would like to see Bloomberg-style reports on companies that are readily available on their strengths and concerns," says Eugene Ellmen, executive director of the Social Investment Organization in Toronto.

Already, regulators seem to be heading in that direction. Earlier this year, the U.S. Securities and Exchange Commission launched an online tool to help investors root out companies that do business with countries the U.S. considers "State Sponsors of Terrorism," including Iran, Cuba, Sudan and North Korea. The SEC took the site down after complaints from some companies that information was not completely up-to-date. The SEC has said the tool is being revamped and will return. And some large pension funds want regulators in the U.S. and Canada to force companies to disclose their greenhouse gas emissions alongside their profits and losses.

Then there are the activist sites such as (targeting companies that operate in Sudan), and Human Rights Watch (, which recently listed companies drilling for oil in Burma. Even a simple Google or Yahoo search can uncover a lot of information about where companies operate. But take heed: such sites are often riddled with incorrect and out-of-date information.

For now, it's still hard to find detailed, accurate information unless companies are forthcoming with it. If fund companies with billions in assets struggle with the ambiguities of responsible investing, chances are individual investors will too. Yet for many people, what counts is that their portfolios reflect who they are, and what they believe in. "Professionals may do it better than you, but ask yourself whether doing your own SRI research is going to be more rewarding in the long run," says SFU's Wexler. "I like the idea that when I screw up, I know the mistakes were mine, versus someone else's."


Maclean's December 10, 2007