What Is Socially Responsible Investing?

Investing in what fits your values

Business activity produces a wide range of economic, social, and environmental impacts. Socially Responsible Investing (SRI) focuses on making companies better corporate citizens, using the financial incentive of directed investments.

SRI is about making money while making a difference. Many investors are looking for companies which not only generate shareholder returns, but prosper by adopting progressive corporate governance practices, treating employees well, maintaining good community relations, cleaning up the environment and becoming more accountable to society.

When it launched in 1986, Ethical Growth Fundsᶲ were the first and only socially responsible investment funds in Canada. Today, through NEI Investments, they offer a comprehensive line-up of funds to meet a broad range of investment needs, managed by the largest in-house team of SRI specialists of any mutual fund in Canada.

Four steps to deliver sustainable value

Most investment funds assign value to a company solely through financial analysis. Ethical Funds look to provide investors with a complete picture of the possible risks and potential for profit associated with every aspect of an investment, ensuring sustainable value. Using a disciplined Environmental, Social and Governance (ESG) Program, they assess potential companies using a four-step process. 

1. Evaluation

Companies involved primarily in tobacco, weapons or nuclear power are not considered for evaluation. If a company fails to meet minimum environmental, social and governance standards, it is excluded.

2. Engagement

Engaged companies are encouraged to improve their environmental, social, and governance performance. As active shareholders, Ethical Funds can communicate concerns directly to company management and directors.

3. Research

Ongoing research into emerging trends, issues, and risks informs the evaluation process and flags factors that may present significant advantages or disadvantages.

4. Public policy and standards

By engaging with the organizations and people who create the policies and set the standards by which all companies must operate, Ethical Funds promote change on a broader scale and encourage improved sustainability industry-wide.

Invest ethically, while maximining financial gains

So, can you really “do well by doing good”? Past performance suggests you can. Companies that score high on ESG factors tend to be innovative, forward-looking and have active managers and strong corporate governance—all things that typically lead to higher returns. The screening factors also tend to reduce risk which means potentially less volatility and better downside protection.

Funds can be your best SRI option

SRI may sound like something you can do on your own but evaluating a company’s ESG practices requires a lot more research and resources than most people have available: you’ll have to start by developing your own ESG screening process, based on the social or environmental goals you’re focusing on.

Then, to find appropriate stocks, you’ll have to pore over annual reports and call each company’s investor relations department to get a view of their ESG practices and how they’re meeting their goals. You’ll also have to follow up to see how these are progressing.

All of this is why for most investors it’s easier to pursue their SRI goals through a mutual fund or exchange-traded fund (ETF). In addition to convenience and a history of strong performance, SRI-focused mutual funds have something individual investors can’t match: scale.

You might be pleasantly surprised that you end up owning many stocks you are familiar with through an SRI fund. For example, some funds’ screens could pick up shares of large well known Canadian corporations, as these companies are working to reduce their carbon footprint and hit other social goals within their workforces, such as greater cultural diversity or gender equality.

Start with what’s important to you

If you’re intrigued by SRI, the first step is to think about the causes you’d like to support. Then give your advisor a call to discuss your options and how much of your portfolio you’d like to see invested in those causes.

There’s no rule of thumb when it comes to portfolio weighting—some investors are 100% invested in SRI funds; others hold 25% and some just 10%. Your advisor can help you decide on the right balance and the right SRI funds to meet your social and financial goals.