What is Socially Responsible Investing?

Posted 25 Jun 2019 by Rick Irwin, CFP, CLU


Part of the job of a financial advisor is to stay on top of trends in the investment industry, and to advise clients accordingly.  One of the fastest growing sectors of the Canadian investment landscape is the Socially Responsible Investment sector. SRI is no longer just a niche segment of the marketplace; as of December 31 2017, just over half of all invested assets in Canada use SRI screens. The 2018 Canadian Responsible Investment Trends Report reveals that assets under management in SRI mandates have risen 41.6 percent from 2 years ago.  SRI is particularly dominant in Canada’s major pension funds, where now 65% of all plans are governed by SRI criteria. This is particularly interesting as pension plans and other large institutional investors tend to be at the leading edge of investment trends.

The same report revealed that the most common SRI strategies, as listed by asset size, are

  1. Environmental, Social and Governance (ESG) integration. This is when an investment manager incorporates ESG analysis into their regular financial analysis of a company to develop their investment recommendations, rather than using financial analysis only. 
  2. Shareholder engagement. This refers to the asset managers using their rights as shareholders to influence corporate behavior.
  3. Norms-based screening. This occurs when investments are made in compliance with international standards such as the UN Guiding Principals for Human Rights or the OECD Guidelines for Multinational Enterprise.  
  4. Negative screening. This strategy excludes investment in a set of companies or industries based on ethical considerations (generally: alcohol, civilian firearms, gambling, weapons, cluster bombs, landmines, nuclear power, GMOs, and tobacco).

Other growing areas of SRI investing are Thematic Investing (investing in industries with specific ESG themes such as environmental sustainability or women in leadership) and Impact Investing, which is defined as investments in companies who can deliver a measurable social or environmental impact along with delivering a financial return. 

Looking into why an increasing amount of assets have moved into SRI strategies, a survey of 100 large asset managers that invest with a SRI overlay revealed the top four reasons they have chosen to invest using ESG screens:

  1. Managing risk
  2. Increasing returns over time
  3. Meeting client/beneficiary demand
  4. Fulfilling fiduciary duty

Looking at individual investors, the mutual fund space has also seen a high level of growth, with a 34% increase in assets in SRI mandates from 2 years ago. The past year has seen a few of the major fund companies I regularly work with launch SRI mandates, generally outsourced to firms that have a long history of running SRI portfolios.

It’s interesting that when I look at the top holdings of most of the managers I recommend currently I see quite a bit of overlap between the top holdings in many of the Responsible Investment funds I have looked at. This may be for two reasons. One, many of the high growth new economy/disruptor types of stocks that some of these managers tend to invest in (ecommerce, cloud computing etc) tend to score fairly high on matters relating to labour standards, corporate governance and environmental impact.  Also, despite not being governed by Responsible Investment criteria, there is a general consensus among many investment professionals that firms with poor practices tend to make bad investments over time. If you are curious at how your current investments stack up on SRI factors, I have access to analysis tools that rate many funds’ current holdings on Environmental, Social and Governance screens as well as the percentage of the portfolio that is exposed to companies flagged for one or more standard SRI exclusion factors.

Whether the incorporation of responsible investment strategies is something of interest to you or not, it is something we should all be considering given the large growth rate, particularly among trend setting large Canadian institutional money mangers. If you would like to discuss whether this is something you should be considering for part of your investments going forward