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Returns follow social investment, evidence shows, but mainstream still doesn't get it.

INVESTMENT EXECUTIVE
February 26, 2003


Pension Managers, Advisors don’t give SRI its due

Yearend results for ethical investment funds are in, and they demonstrate once again that socially responsible investing doesn’t mean sacrificing a decent rate of return to meet social or environmental investment criteria. But it seems that pension fund managers and many financial advisors still remain unconvinced.

Although interest in SRI is becoming much more mainstream, Deb Abbey, CEO of Vancouver-based Real Assets Investment Management Inc. — launched in January 2001 as a subsidiary of Vancouver City Savings Credit Union — says there are not nearly enough investment advisors providing this service to their clients.

“There is a groundswell of people who want this service,” says Abbey, “but not many investment advisors are educated in this area or understand what it ’s about.” And because of the old performance myth, she says, they tend to tell their clients not to go for it.

As for pension funds, Abbey believes, the big fear of many fund managers is they’d be failing their fiduciary responsibility if they looked at any other criteria than maximizing profit. “The argument usually goes that it’s OK for individuals to choose SRI mutual funds, because that’s a matter of individual choice,” says Abbey, but pension fund managers must be concerned about protecting returns for plan members.

That’s the position taken by the Canada Pension Plan Investment Board. “Social investing is easily applied by individuals and small groups of like-minded people,” says the board. “It is extremely difficult, if not impossible, to implement for an institutional investor representing more than 16 million contributors and beneficiaries with a wide cross-section of personal beliefs.”

But the board acknowledges that “responsible corporate behaviour — in matters such as the environment, employee practices, stakeholder relations, human rights, respect for domestic and international laws, and ethical conduct — generally contributes to enhanced long-term investment returns.”

Investment analysis, due diligence and monitoring of Canadian and foreign investments should take corporate behaviour into account, the board says. However, like many pension fund managers, the CPPIB apparently considers SRI based on “non-investment criteria.” Yet, says Abbey, the screening principles used by Real Assets and similar funds are not subjective. They’re based on covenants that Canada has ratified, such as the Universal Declaration of Human Rights; International Labour Organization conventions, such as the Declaration on Fundamental Principles and Rights to Work; and so on.

As well, she notes, over the past several years, six countries — Britain, Sweden, France, Belgium, Germany and Australia — have decreed pension plans and, in some instances, other financial institutions, must disclose information about socially responsible investment practices and proxy voting. In 2002, France also introduced mandatory social and environmental reporting for all 200 of its largest companies.

Michael Jantzi, president of Toronto-based Michael Jantzi Research Associates, says as fiduciaries, pension fund trustees have to be better educated about SRI. “Given what we’ve seen in Europe, trustees can’t ignore these issues any more,” he says.

Canada is lagging behind, but there’s no question that is changing, he says: “There’s an understanding now that you have to do at least some due diligence on what this area is all about.” It will no longer be a reasonable response to claim a fund can’t get the same type of returns by using SRI criteria, he says.

Jantzi believes the Canadian pension community cannot continue to be isolated from developments in other parts of the world, particularly in Europe and Australia. As well, legislative changes at home could have an impact, he says. Recent changes in the Canada Business Corporations Act, for example, will make it easier for shareholders to bring resolutions on social and environmental issues to the floor.

More and more pension trustees understand that proxies are an asset of the plan, he maintains, and trustees’ fiduciary duty requires those proxies be managed responsibly. This goes hand in hand with numerous studies showing environmental performance is directly linked to the bottom-line financial health of a corporation. Jantzi says there is a strong business case for using environmental criteria — so strong, in fact, that pension fund trustees who ignore it “do so at the peril of transgressing their duty as fiduciaries.”

The Jantzi social index, created by Jantzi three years ago, has done well compared with the traditional benchmarks. That’s not surprising, says Jantzi: “Given that back-testing prior to the launch in January 2000 showed that the JSI outperformed the TSE 300 composite index by more than 150 basis points between 1995 and 1999.” The JSI is a socially screened, market capitalization-weighted common-stock index modelled on the S&P/TSX 60. It consists of 60 Canadian companies that pass a set of broadly based social and environmental screens, and it is intended to be a benchmark for money managers and other investors against which they can measure the performance of socially screened portfolios.

Jantzi Research Associates reports that since its inception on Jan. 1, 2000, through to Dec. 31, 2002, the JSI decreased in value by 17.44%. Over the same period, the S&P/TSX 60 decreased by 21.72% and the S&P/TSX composite index dropped by 18.23%. “Companies that practice good governance and that integrate social and environmental parameters into business decision-making are better long-term investments than their industry counterparts that ignore the realities of the new marketplace,” Jantzi maintains.

Real Assets funds have also done well. They invest in companies that “reflect Canadians’ commitment to human rights, employee health and safety, environmental protection, social justice and sustainable communities at home and abroad.”

Abbey says Real Assets seeks to reduce the potential financial liabilities associated with social, environmental and ethical risks by working with companies to improve their practices in these areas.

“We’re not trying to be trouble-makers,” says Abbey. “We’re trying to increase shareholder value.”

But it’s a slow process — typically three to five years before changes materialize. Real Assets’ approach is to file shareholder resolutions. “We look at the resolution as a knock on the CEO’s door,” says Abbey. “It tends to get senior people in the company and on the board of directors interested in the issue.”

It’s an aggressive approach, she admits, but it seems to work.

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