Hey there, time traveller!
This article was published 28/4/2018 (572 days ago), so information in it may no longer be current.
The fintech revolution has made socially responsible investing — or ethical investing, as it’s sometimes called — an increasingly doable strategy for the average investor.
And it’s not just mutual funds. Investors now can look to a growing number of low-cost exchange-traded funds (ETFs) that offer various takes on socially responsible investing (SRI).
In addition, investment data companies — Sustainalytics is the largest of them — are tracking the entire stock universe in regard to how each firm measures up when it comes to being good corporate citizens to their shareholders, society and the environment.
Often leading the charge are high-net-worth investors — wealthy folks, foundations and pension funds — seeking to screen out companies involved in oil, other carbon-intensive industries, weapons, war, tobacco and so on. For the past few years, their wealth managers have been making increasing use of advances in software that employ artificial intelligence (AI) to sort through reams of corporate and media reports in an effort to weed out companies that don’t suit the ideals of their investors.
But average investors also have better technology at their fingertips, allowing them to build portfolios that align more to their values, says Tim Nash, a sustainable investment expert and founder of the Sustainable Economist.
"Tech has contributed to what I call the democratization of SRI," he says. "As a result, it has become so much easier for a regular Joe investor to access the strategies and investments that were before really only available to professionals."
He points to the major index makers such as Morgan Stanley Capital International (MSCI) now offering a variety of indices that track companies based on certain traits regarding ethical behaviour and sustainability.
For example, the MSCI ACWI (All Country World Index) Sustainable Impact index is composed of companies that generate most of their revenue from products and services addressing at least one of the world’s major social and environmental challenges as identified by the United Nations Sustainable Development Goals.
And investors can buy this index at a low cost through ETFs like the iShares MSCI Global Impact ETF, Nash says.
Closer to home, the Jantzi Social Index (managed by Sustainalytics) contains the 50 leading, large-cap Canadian firms regarding environmental, social and governance scores. Again, investors can buy this basket of stocks through an iShares ETF.
Of course, these indices and ETFs still may contain some firms — such as energy companies — that some investors find unsavoury.
This includes many Manitoba investors, says Cheryl Crowe, senior financial adviser for SRI investments at Assiniboine Credit Union and leading SRI advisor in the province.
"The trend I am seeing is ‘no oil,’ where most of the SRI investors I work with don’t want oil companies in their portfolio," Crowe says.
A few years ago, no-oil investors would have been challenged to create portfolios even with SRI mutual funds. That’s changed.
Crowe cites NEI’s Environmental Leaders Fund, which is fossil fuel-free and focused on companies involved in energy efficiency, water infrastructure, sustainable food production and waste recovery.
SRI strategies have always involved some sort of negative screening, only they did not exclude oil. Instead, they were mostly focused on corporate engagement, whereby they would invest in oil companies and push them toward adopting more environmentally friendly policies.
Fintech has helped change this paradigm. Investors now can be more selective about what they own and screen out — for example, gun makers.
That said, Crowe notes, most SRI funds already have screened out gun manufacturers for some time because religious sects — notably Mennonites — were among the originators of the ethical investing movement. They sought to eliminate the so-called sin stocks, such as gunmakers and companies involved in gambling, tobacco, alcohol and pornography.
As the movement progressed, it expanded to include environmentally conscious investors seeking to make companies better stewards of Mother Nature.
Most investors hadn’t given SRI much thought at all, but then the Parkland high school shooting happened, and high school students in the United States started a focused effort to get people, pensions and foundations to divest of gunmakers, says Craig Pearson, CEO of Private Wealth Systems, based in Charlotte, N.C.
And while plenty of SRI funds don’t hold weaponmakers, divesting in guns can be more challenging than it appears.
Pearson says investors, for instance, may look at their portfolio and not see the big names associated with guns. They then might assume they don’t own them. But, in reality, they might own them and just not realize it because many of the well-known gun brands are now owned by largely anonymous parent companies.
For example, American Outdoor Brands Corp. owns Smith & Wesson. It’s the same thing with Winchester, now owned by Olin Corp.
Investors also might be surprised to realize their core ETFs hold large stakes in gun companies. For example, Vanguard and BlackRock (iShares) — two of the world’s main asset managers — are among the biggest shareholders in the three largest publicly traded gun companies. That’s because they provide the most widely held ETFs tracking indices like the S&P 500, which include the key gun manufacturers and retailers.
That may leave a nasty, gun-metal taste in the mouth of many investors — including those with large sums of cash, Pearson says.
"We’re seeing younger generations inheriting this wealth and they want more personal control," says Pearson, whose firm provides a software management system allowing managers and clients to have more clarity and control over what they own.
Designed for family offices with more than US$50 million, Private Wealth Systems’ software allows investors to bring together all their assets into one program and apply negative screens to suit their values.
"It’s not just for guns. It could be the #MeToo movement. You can take any theme of socially responsible investment and apply it," he says.
Vancouver-based Genus Capital offers a similar strategy for its high-net-worth clients — which includes the David Suzuki Foundation, says Mike Thiessen, manager of sustainable research at Genus.
"We have well over 1,000 screens investors can choose from."
He adds clients now are less concerned about returns and more focused on building portfolios that support their values.
"A lot of high-net-worth clients are basically saying, ‘We want these screens and if you can’t beat the market, that’s OK as long as it’s somewhere close,’" he says.
"But we’ve found that it’s actually the opposite."
Sustainable investing has been outperforming its benchmarks, Thiessen says.
This makes logical sense in the age of climate change, he adds. Companies that are good corporate citizens, that treat communities where they operate well and promote sustainable environmental practices are less risky than companies that don’t.
To put it bluntly, companies that exploit, pollute and kill will only face more regulation and find themselves increasingly shunned by more consumers (and investors), Nash says.
Someday soon, he adds, SRI won’t be a subset of investing.
It will be the way to invest.
"The entire industry is moving in this direction, and it’s just a matter of time."