No matter how you want to invest, there’s a socially responsible way to do it.
Exchange-traded funds (ETF) are your favourite investing tool? A new crop of ETFs offering different takes on socially responsible investing (SRI) have recently been introduced. You like ETFs but prefer to have a robo-adviser handle your investments? A few robos now offer SRI portfolios, and human advisers are likewise adding SRI investing to their repertoires.
Socially responsible investing, sometimes shortened to responsible investing, or RI, means putting your money in companies that score well in environmental, social and governance (ESG) matters. A popular theme in SRI these days is to focus on companies with low carbon emissions, but there are other themes such as gender diversity.
Investor interest in SRI is gaining momentum, a trend you can see in the latest growth numbers for SRI mutual funds. According to the Responsible Investment Association, SRI mutual fund assets rose increased 34 per cent over the past two years – to $11.1-billion from $8.3-billion.
The introduction of SRI ETFs should accelerate this growth in demand. Do-it-yourself investors gain access to SRI investments, as do robo-advisers and human advisers who prefer to build portfolios with ETFs. Let’s take a look at the range of SRI investing options.
The Canadian market has had a socially responsible ETF since 2007, when the iShares Jantzi Social Index ETF (XEN) was introduced. In the past 18 months or so, many other socially responsible ETFs have been listed on the TSX.
The newest entry is the Horizons Global Sustainability Leaders Index ETF (ETHI), which started trading last week and holds the shares of large global companies that score well in reducing carbon emissions and are not involved in businesses such as tobacco, guns, animal cruelty and gambling.
Desjardins Funds, a dominant player in SRI mutual funds, introduced SRI ETFs last month that offer exposure to Canadian, U.S. and global stock markets, as well as bonds. These ETFs are branded as “low CO2” funds to signify the fact that holdings have been selected because of their low carbon emissions. Stocks in the portfolio also meet ESG guidelines.
Mary Hagerman, a portfolio manager with Desjardins Wealth Management in Montreal, said the new ETFs will help her respond to rising demand from clients for SRI investing. “These funds make it a lot easier to build robust portfolios,” she said.
XEN is the original Canadian equity ETF for socially responsible investors – it starts with the stocks in the S&P/TSX 60 index of big blue-chip stocks and tweaks the mix to include only companies that meet ESG criteria. There are 50 holdings in the fund instead of the 60 in the index.
XEN highlights the fact that socially responsible investing can deliver returns that are close to or even better than conventional investments, although this is by no means assured. Check out this comparison of XEN and a sister product, the iShares S&P/TSX 60 Index ETF (XIU): XEN has a one-year loss to Oct. 31 of 1.1 per cent and an annualized 10-year gain of 7.8 per cent, while XIU lost 2.7 per cent in the past year and had a 10-year gain of 7.2 per cent.
Ms. Hagerman said the latest generation of SRI ETFs appear to be better built for the long run than a group of funds that were introduced just before the last market crash as a way to invest in speculative sectors such as alternative energy.
“The liquidity just dried up and many of them did horribly,” she recalled. “It was a difficult lesson for SRI investors – how much money am I prepared to lose to stay faithful to my principals?”
For thoughts on portfolio-building with SRI ETFs listed on Canadian and U.S. exchanges, check out the Sustainable Economist blog at sustainableeconomist.com.
Whereas the ETF sector is only now adding the funds needed to build a properly diversified SRI portfolio, mutual fund companies have long covered all the major fund categories with SRI options. The issue with these funds is their comparatively high fees.
The Desjardins SocieTerra Canadian Equity Fund, large by SRI standards with assets of $413-million, has a management expense ratio of 2.3 per cent. The fee for XEN is 0.55 per cent, while the Desjardins Canada Multifactor – Low CO2 ETF (DRFC) will be in the same general area (it’s too new to report an MER).
Another issue with SRI mutual funds is fuzzy branding. While the latest SRI ETFs effectively lay out their mission in their titles using phrases such as low CO2, global ESG and gender diversity, SRI mutual funds are often generically titled and described in the broadest terms. For example, an online profile of the RBC Vision Canadian Equity Fund says “the fund follows a socially responsible approach to investing.” More info, please.
Of the 14 firms participating in The Globe and Mail Robo-Adviser Guide that will be published on Nov. 17, five that offer SRI portfolios are Modern Advisor, Mylo, Questwealth, WealthBar and Wealthsimple. VirtualWealth says SRI portfolios are coming soon.
The ETFs used in Wealthsimple’s SRI portfolios include XEN, as well as a pair of U.S.-listed funds – the Invesco Cleantech ETF (PZD) and the iShares MSCI ACWI Low Carbon Target ETF (CRBN). For bonds, government bond ETFs are used instead of corporate bond funds.
Wealthsimple chief investment officer David Nugent said between 25 per cent and 30 per cent of the firm’s clients have an SRI portfolio for at least one account. A few things stand out among these SRI clients – they skew slightly to women, their average age is slightly younger than the overall average age of 33 years and they tend to be slightly more level-headed as investors.
“People who have elected for the social portfolio versus the traditional regular one exhibit better behaviours in market downturns,” Mr. Nugent said. “It’s not as prevalent for them to be panicking and looking to get out of their portfolio or reduce the risk profile.”
Performance-wise, Wealthsimple’s SRI growth portfolio (80 per cent stocks) has outperformed the standard growth portfolio slightly in each of the past two calendar years. For the year through Sept. 30, the SRI portfolio has lagged slightly.
The Responsible Investing Association’s website will help you locate an investment adviser who offers SRI investments (riacanada.ca/advisor-map). Dozens of advisers from British Columbia to Newfoundland are listed, and they’re associated with a range of firms that include banks, credit unions and independents.
An advice firm that focuses on SRI is Genus Capital Management, which offers a series of “fossil free” portfolios that exclude companies involved at any stage of fossil fuel production, as well as companies with strong ESG scores.
Clients with $250,000 in aggregated family assets can get a portfolio of Genus funds managed for them on a discretionary basis, which means the portfolio manager makes decisions using his or her own judgment. Fees start at 1.5 per cent, which is low in comparison to SRI mutual funds.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, November 9, 2018