Clients who are interested in socially responsible investing (SRI) are generally motivated by a desire to align their investments with their core values.
By allocating some or all of your clients’ investments to SRI mutual fund firms that practice shareholder engagement – encouraging firms to improve their performance on environmental, social, and governance (ESG) issues – you can help clients achieve their SRI goals, while still helping them build portfolios of solid investments for the long-term.
“You can either let companies keep doing what they’re doing, or you can get involved, and start guiding companies to do better,” says Sucheta Rajagopal, an investment advisor and portfolio manager with Hampton Securities Ltd. in Toronto, and an expert on SRI investing.
Mutual fund firms that specialize in SRI advocate for better corporate social responsibility on behalf of their individual unitholders. They leverage the power of their ownership stake in companies whose shares they hold in their funds to put pressure on corporate boards and senior management on a host of ESG fronts.
“Many of these fund managers have engagement as a strong pillar of their SRI strategy,” says Ian Bragg, associate director of research, policy and institutional services at the Social Investment Organization in Toronto.
SRI fund managers will exercise due diligence before investing in the shares and debt instruments of individual companies, making sure they have strong ESG practices in place. As ESG issues arise, the fund managers may begin a dialogue with the company, seeking more information, advocating for improvement, and, if necessary, filing a shareholder resolution. If the company isn’t responsive in addressing its ESG issue, fund managers may choose not to invest in the shares or bonds of the firm.
“We treat ESG issues as an aspect of risk management,” says Dermot Foley, manager of environmental, social, and governance analysis at Vancity Investment Management Ltd. in Vancouver.
Companies that neglect to pay attention to ESG issues can easily be waylaid by events – consider a manufacturing firm that sources its materials from countries with a poor track record for worker safety. Negative publicity arising from a factory accident in the firm’s supply chain can easily result in a serious reputational hit for the firm.
“We’re trying to protect shareholder value and enhance it over the long term by evaluating risks as they come along,” Foley says.
In recent years, fund firms have joined other stakeholders to encourage companies to adopt “say-on-pay” initiatives to rein in executive compensation. They have also advocated for more diversity on corporate boards and within the ranks of executive management.
On the environment, SRI fund firms might encourage companies, especially in the energy and resources sector, to provide investors with more transparency in relation to emissions, or to improve their performance related to mitigating environmental damage and working with local communities in which mines or operations are located.
Most firms – especially large-cap Canadian companies – are receptive to dialogue from the SRI mutual fund firms, Foley says.
“I would say 19 times out of 20, when we file a shareholder resolution, we end up in discussions with the company, in which they address those issues, and then we withdraw the resolution,” Foley says.
Of course, shareholder engagement may not appeal to all SRI clients, some of whom might prefer to give certain sectors or industries a pass entirely.
“It isn’t for everyone,” Bragg says. “Some people don’t want to improve the performance of a company – they just don’t want to be invested. And that’s fair enough, too.”
This is the second article in a three-part series on socially responsible investing.
Tomorrow: SRI and returns.