Socially Responsible Investing (SRI): Can your investment portfolio generate above average returns and make a positive impact on the world at the same time?

Paul Borisoff - Sep 01, 2016

What is SRI?

In Canada “SRI” typically refers to “Socially Responsible Investing,” which is quite often abbreviated to just “RI” for “Responsible Investing.”  A new, modern definition describes “SRI” as “Sustainable Responsible Impact” investing – which I prefer.  All of these defined approaches typically employ ESG (Environment, Social and Corporate Governance) screening as part of their investment selection and due diligence process.


A few decades ago SRI focused on “exclusionary screening” which prevented the holding of companies involved in such businesses as tobacco and weapons manufacturers for example.  At the time SRI was viewed as a trade-off between one’s ethics and one’s investment returns - due to the assumed “return penalty” associated with narrowing your investment options.  Basically, if you were an “ethical investor” it was assumed that you had to accept less return on your money – which often turned out to be the case in the early years.  Originally, there was very limited “institutional” interest in SRI as institutional managers viewed their primary “fiduciary obligation” as to meeting their client’s investment objectives via a prudent, diversified mix of appropriate investments.  “Appropriate investments” referred to the assumed “riskiness” of the individual securities at the time - taking into consideration traditional security valuation methods and analysis (debt levels, balance sheet strength, expected growth rates, etc.).  An analysis of a company’s “ranking” on ESG (Environment, Social and Corporate Governance) issues was simply not often considered as part of the investment selection process.    


Social attitudes and norms change though, and today you can’t escape terms such as “sustainable development” and “climate change” on a regular basis.  The changing reality of our social landscape influences not only individual investors though, but also corporate decision makers, politicians and government policy makers. Laws and regulations change.  Recognition has set in by institutional investment managers that companies that rank low on ESG assessments are “riskier” investments in many cases.  Companies that fail to adapt to changing norms leave themselves open to obsolesence, excessive fines, law suits and a general lack of competiveness.  An example is the American Coal Industry that has seen industry wide bankruptcies in recent years due to not only to competitive pressure from natural gas and “renewable energy” but also to increasing emission regulations that will require large capital expenditures to remain in business.  The Canadian Oil Sands Industry is another example where the industry is now scrambling to get in front of changing government emission regulations (and public scrutiny) that will likely require very large investments into carbon capture and sequestration technology.  


An exciting aspect of “SRI” gaining significant attention in recent years is “Impact Investing”- purposely seeking out and focusing on companies viewed to make a desired positive impact on a major social or environmental challenge for example.  MSCI ESG Research recently introduced an index and measures designed to target companies whose businesses address one or more of the challenges defined by the United Nation’s 17 Sustainable Development Goals (SDGs) which were adopted in September 2015.  MSCI ESG Research has grouped the 17 SDGs into one of five “actionable sustainable impact themes”: Basic Human Needs, Climate Change, Natural Capital and Governance to form their new MSCI ACWI Sustainable Impact Index.   Blackrock’s iShares recently launched a new ETF based on this index – the iShares Sustainable MSCI Global Impact ETF – which is a key holding in our SRI Leaders Core Income and Growth Portfolio


Institutional capital specifically targeted at companies that help address major social and environmental challenges is exploding.  A recent example is Bill Gate’s “Breakthrough Energy Coalition” formed just prior to the Paris Climate talks last year.  Bill Gates, and over 20 of the wealthiest people on the planet are contributing billions of dollars to support “clean energy companies” that they view as having a chance at solving the world’s “critical energy challenges” – in the global fight against global warming and climate change.  This is the aspect of SRI investing that I find the most exciting: trying to identify “Impact Leaders” that present an attractive risk adjusted return opportunity while trying to solve an important global problem.  


According to the CFA Institute’s 2015 survey of CFA Charterholders 73% indicated that they now consider the evaluation of ESG factors as part of their fiduciary duty.  This is a key development, and a big reason why the amount of money being managed under SRI mandates has grown tremendously in recent years.  According to the UN Principles for Responsible Investment there are now more than 1,500 asset owners, investment managers and research firms worldwide that now manage in excess of $60 trillion in assets under “responsible investment practices.”  In Canada the Responsible Investment Association (RIA) reported that Canadian managers went over $1 trillion in assets managed under RI mandates in 2013 – up from $600 billion in 2011.


Another factor propelling interest in “SRI” in recent years is the growing evidence that SRI focused mandates, on average, have superior long-term financial returns for most asset classes – with lower risk (lower volatility).  The RIA just published their “Highlights from Q2 2016” – and once again the results support this trend:    

  • “RI Funds” outperformed “non-RI Funds” in 15 out of 17 “Fund Classes.”
  • The average “Global Equity RI Fund” outperformed the average “Global Equity Fund” over the one, three, five and ten-year periods based on compounded returns.
  • The average “Canadian Equity RI Fund” outperformed the average “Canadian Equity Fund” over the one, three, five and ten-year periods.
  • The average “Canadian Fixed Income Fund outperformed the average “Canadian Fixed Income Fund” over the one, three, five and ten-year periods.

The Borisoff Wealth Management Team’s SRI Leaders Core Income and Growth Portfolio was launched on June 30th this year – and is designed to capitalize on the exciting trends in SRI.  This discretionary Private Investment Mandate is expected to be a major contributor to the long-term capital growth of our clients’ portfolios going forward – with a “moderate” degree of risk consistent with a portfolio 80% exposed to world equity markets over a long time period.

The SRI Leaders Core Income and Growth Portfolio’s investment strategy utilizes a combination of active, best-in-class, 3rd party SRI portfolio managers via F-Class Funds and low-fee passive SRI Exchange-Traded Funds (ETFs) – with “SRI” screening provided by the underlying Fund or ETF manager.  This mandate is very “fee-sensitive” with a target weighted average Management Expense Ratio (MER) of below 0.85% on the underlying portfolio (currently ~0.75%). 


Please note that securities investing, including Socially Responsible Investing, may not be suitable for all investors as there are always unique characteristics and risks involved with each portfolio strategy.  Risks can include, but are not limited to market risk, currency risk, and liquidity risk.  Portfolio values fluctuate and returns are not guaranteed.


Please contact us if you would like to find out if Socially Responsible Investing is suitable for you, or if you would like to know more about our SRI Leaders Core Income and Growth Portfolio.