Socially responsible investments start with your own value system

Corporations are created to make a profit for their shareholders.  They are accountable to their shareholders, both with respect to the profits they make and the way they do business.

These days, a growing number of shareholders are looking for corporations to be both profitable and socially responsible.

What is socially responsible when it comes to investing?  This is a tough question, because there are no clearly established standards for social responsibility.  There are, however, widely accepted patters of approved behaviour, which companies looking to be more socially responsible can use as guides.

Several fund companies have attempted to create a standard for their industry and market socially responsible funds (we will call them SocRes Funds).  We have spoken with these companies to learn about their process for selecting investments that they are comfortable including in their SocRes Funds.   Most have a system to rank corporations on various sensitive areas, including gaming, weapons, nuclear power, tobacco, energy, environment, business practices, community, employee relations and human rights.  In many cases companies are automatically excluded if they hit certain sensitive categories.

However, companies that have passed most categories but are weak in some of the less sensitive areas are not necessarily excluded.  These are, in fact, the very companies that SocRes Funds attempt to change.

As an example, fund companies might write letters to corporations that they know do not recycle.  The letters would outline improvements that they would like to see the company make.  If those improvements are made, the company’s shares would become eligible to be held within the SocRes Fund.   If no response is received to letters sent and if positive changes do not get made, the company in question might be excluded from the SocRes Fund.

This kind of pressure from fund companies is forcing corporations to pay attention, and in many cases make positive, socially responsible changes.  However, many SocRes Funds have a relatively small staff and limited resources.  There is only so much they can do, and at that point it may be up to specific investors who care about socially responsible investing to play their part.

Have a specific meeting with your investment advisor and discuss what is important to you.  Prior to this meeting you should spend some time thinking about how you define socially responsible investing.  This will help your advisor understand the issues that are important to you, and he or she will be in a better position to provide you recommendations that meet your needs.

There are a number of questions to consider.  Do you want your advisor to focus more on excluding companies?  As an example, if you are against war, then it is easy to exclude companies who manufacture weapons.

How strongly do you feel about socially responsible investments?    If you want to purchase companies focusing on socially responsible investments, how do you see this happening?  Would you like to purchase a SocRes Fund or individual companies?

The top holdings in many SocRes Funds are generally large well-known Canadian companies.  The holdings are similar to most large capitalization Canadian equity funds that do not claim to be socially responsible.  We hope that investors do their research and do not purchase an investment just because of its name.  It is important to look past the name to see if the underlying investments meet your definition of socially responsible.

If your approach is focusing on individual socially responsible companies it becomes even more difficult.  Some of these companies are small and unknown to most investors.  These same companies may not currently be profitable and may never be.  Furthermore, there may be few or even no analysts covering the companies that meet your socially responsible investment standards.

Investment advisors tend to rely on many different pieces of information when researching companies, such as internal research reports, third party analyst reports, company financial statements and other filings.  Advisors need these third party, unbiased reports to provide the appropriate due diligence for recommendations.  Smaller less well known companies may not have these analyst reports.  As a result, most of the options available for socially responsible investing is through SocRes Funds or index shares holding a basket of larger companies.

All of which is to say that in terms of socially responsible investing, these are still early days.  It will almost certainly get easier over time, but it is already something that can be done.  The best way to go is to talk to your advisor, keep the lines of communication open, and be clear in your own mind about what socially responsible means to you.