Constructing an investment portfolio based on socially responsible investing (SRI) principles doesn’t mean your clients have to settle for inferior investment returns, say proponents of SRI investing. In fact, the very nature of socially responsible investing means the emphasis is placed on achieving long-term value, a solid strategy for any investor.
“Some new clients say to me, ‘I don’t mind sacrificing performance to do SRI,'” says Sucheta Rajagopal, an investment advisor and portfolio manager with Hampton Securities Ltd. in Toronto. “I tell them, ‘There’s no need.'” Rajagopal’s book of business is focused exclusively on SRI investing.
Most research done on the performance of SRI investing vs traditional investing has reached the conclusion that, in general, there’s no significant difference in performance between the two.
As an example, the Jantzi Social Index, an index comprised of 60 Canadian companies that have passed a set of environmental, social, and governance (ESG) criteria screens, has posted an annualized rate of return of 5.48% since inception, on Jan. 1, 2000, to April 30, 2013. Over the same period of time, the S&P/TSX 60 has achieved an annual rate of return of 5.06%, while the broader S&P/TSX composite index has posted a return of 5.34%.
SRI proponents argue that screening a relatively small number companies out of a given index or sector, due to the fact that they may not meet ESG guidelines, is unlikely to have a significant effect on performance overall.
“Our portfolios remain well-diversified across all sectors,” says Stephen MacInnes, a portfolio manager with Vancity Investment Management Ltd., a sub-advisor for the Inhance family of SRI funds offered by IA Clarington Investments Inc. “There’s enough of a universe out there [in all categories].”
Proponents also argue that companies that take care of their ESG responsibilities are less likely to find themselves waylaid by reputational or other issues that could threaten the core business. SRI portfolios winnow out weaker ESG performers, adding to portfolio strength.
“We look for companies that are leaders in progressive practices, and believe that by incorporating ESG analysis, along with traditional financial analysis and portfolio management, we can provide superior returns, through an extra level of risk mitigation,” MacInnes says.
Some SRI investors also see solid ESG performance as an indicator that a company has operational strength and good long-term prospects.
“It’s seen as a proxy for good management, for forward-thinking management, management that isn’t just struggling to cope with the day-to-day problems of running the company, but has the organizational wherewithal to manage longer-term issues, and report on those, and show that those are important to their corporate culture,” says Ian Bragg, associate director of research, policy and institutional services at the Social Investment Organization in Toronto.
With little difference in performance between SRI and non-SRI funds, choosing the right SRI products for your clients, then, comes down to what fits best for his or her individual portfolio, SRI proponents say.
“Not all SRI funds are the same,” Rajagopal says. “Some SRI funds are higher risk because they have a lot of clean-tech and other small-cap holdings, some SRI funds will be low- to mid-risk because they hold a lot of big dividend players. It’s up to you as an advisor to choose what you like, do the research, and make your recommendations, just as you would do with a non-SRI client.”
This is the third article in a three-part series on socially responsible investing.