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Retail investors embrace ‘ethical funds’

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Published Tuesday February 15th, 2011
By DEREK SANKEY

CALGARY – When Torontonian Gray Taylor decided to invest in a “microfinance bond” several years ago, it was a move that satisfied both his need to do good in the world and to make money in the process.

“The return on investment was adequate and the side benefits were immense,” said Taylor, a corporate law partner and chairman of Bennett Jones LLP’s climate change and emissions trading group.

“I try not to give away my money, but I think if you do good in the world and if you do good in the process, that’s great.”

He’s not prepared to give up his returns on his investment – he still has to retire some day – but the microfinance bond allowed the fund managers to target loans to entrepreneurs in developing countries to start small businesses.

Today, he said, he believes his strategy is all about managing risk.

Taylor doesn’t consider himself an “ethical investor,” per se, because to him the concept is all about sustainable investing – looking for companies that evaluate all of their risks, including from an environmental, social and governance (ESG) perspective.

“This world is changing very rapidly and you can see the things that take people down and make people profitable,” said Taylor.

“In some ways, this is a different way of thinking about the world.”

Whether you call it ethical investing, green investing, social investing, sustainable investing or any other label, the bottom line is that the broad ESG investing trend is going mainstream.

“It’s an area that has garnered a lot more traction and is going mainstream,” said Michael Jantzi of Sustainalytics, a Toronto-based, global investment organization that analyzes corporations using ESG screens.

The institutional investors – large pension plans, asset owners, sovereign wealth funds – are becoming much more vocal in shareholder meetings in pressing executives for answers about how they address ESG factors as another layer of risk to the long-term sustainability of the company, said Jantzi.

“Unless you’re looking harder, looking differently, that risk-return equation gets out of whack,” he said . “What ESG is doing is providing another perspective, another lens.”

Retail investors are jumping on board, but ethical investing still comprises a relatively small portion of the investment market – about three per cent, according to Ron Robbins, an investment industry veteran and author of Investing for the Soul.

“There’s been a tremendous interest in sustainability,” Robbins said.

“The ethical investor is really there for very strong ethical reasons – social reasons – whereas the sustainability-green investor takes a rather different tack.”

Everybody seems to have a slightly different definition of it, but you can’t argue with the numbers.

The Social Investment Organization did a study in 2008 and found that assets under management in socially responsible investments (SRIs) in Canada surged to a total of $609 billion, up from $503 billion two years earlier.

In Europe last year, $1.8 billion (Cdn) in new investments flowed into SRIs even in a global downturn, according to Sustainalytics.

Laurie Glans, an investment counsellor with RBC Global Asset Management Inc. in Calgary, said recent studies have shown that ESG funds are comparable to non-ESG funds in terms of return on investment.

“It’s almost indistinguishable,” Glans said. “It has neither hurt nor helped their performance.”

What it does is address a broader range of risk and, in the process, eventually create a greener, more socially responsible and more sustainable organization, he said.

The problem right now is size, and size matters.

Despite numbers that sound big, SRIs are still a relatively small portion of the investment market, although there are a growing number of ethical funds available to retail investors.

Glans and his team manage between $40-50 billion in assets, yet its community values bond has just $120 million in it. Part of that reason has been a reluctance to incorporate ethical investing into average investors’ portfolios.

“The biggest obstacle to this whole area is still this really stubbornly persistent myth that you can’t be a social investor and make money at the same time,” said Jantzi.

Some investors simply decide to directly invest in entrepreneurs that are supporting a social or environmental cause.

Others opt to go the philanthropic route to achieve their ethical goals.

Investors such as Taylor are convinced that ethical investing is what the future of investing will be all about.

“If you focus on the communities you’re in – every body – that’s real business in my view, not rip-and-grab business,” he said.

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