RBC experts explain how investors can do more to help the environment and society through Socially Responsible Investing (SRI).

An interview with Jason Milne, Manager ESG Policy & Research, PH&N Investment Management and Thomas Van Dyck, Senior Vice-President and Financial Advisor, Socially Responsible Investments, RBC US Wealth Management.

What goes into creating an SRI portfolio?

Jason: There are two broad categories of mutual funds when you’re looking at socially responsible options. The first I call “Do Good” funds, which means they invest in things like green energy or microfinance projects – so these funds are really trying to make a difference in the everyday life of people on the planet. The second type I call the “Do No Harm” options, meaning we analyze companies and evaluate how they are incorporating environmental, social, and governance factors into the way they do business, and then only invest in companies that are being responsible. Examples of these types of funds are the PH&N Community Values Funds and the RBC Jantzi Funds.

Thomas: We customize all portfolios to our client’s specific environment, social and governance (ESG) issues. We have our clients fill out a financial and ESG questionnaire to determine their risk and return objectives and how rigorously they want the ESG screens applied. Our in-house social researcher will apply the ESG screens to all the managers we select for the client, which means we can use any money manager in the universe, rather than limiting our selection to those funds or managers that provide ESG screening. We also assist our clients in shareholder engagements, with impact investing and provide a full suite of products across all asset classes of public securities, alternative investments and impact investing.

Who are socially responsible investors? Is there a typical "investor profile"?

Jason: SRI has been a trend that we’ve seen slow, steady growth in over the last five to ten years, especially as more and more people are committing to live an environmentally-friendly lifestyle. When you’re talking about retail investors, SRI is a viable investment option for people who are not only interested in environmental issues but really make it a lifestyle. They believe in recycling, using environmentally sensitive products, and riding a bike to work and have a desire to incorporate those beliefs into their investment portfolio. We are also seeing an upswing with the Generation X crowd that grew up hearing about being more environmentally conscious. Most people are aware of SRI funds but may not be ready to take the next step to bet their RRSP on it. In general, the mainstream investor still needs to be shown that this is a viable investment option. However, the level of interest is definitely starting to increase and so I’m hoping over the next few years that we do start to see more growth in this area.

Thomas: To me, the SRI investor seeks to incorporate environmental, social and governance (ESG) qualitative screens into their investment portfolios. Most take a long-term view of investing and seek to incorporate these factors into their portfolios in an effort to avoidinvesting in companies that perform poorly in areas that matter to them. Socially responsible investor clients are anyone from individual high net worth investors, such as entrepreneurs, inherited wealth, and celebrities to institutions, usually family foundations, endowments, non-profit groups, religious groups and some unions.

Is the performance of SRI funds competitive with mainstream funds?

Jason: There’s a myth out there that you have to give something up in terms of performance if you’re going to have SRI products in your portfolio. At PH&N, we did a literature review – a kind of a myth-busters study of all the research available on this topic and we found there was no evidence to support underperformance of SRI funds, but rather that SRI funds tended to perform inline with non-SRI funds over the long-term.

Every investment has a certain amount of risk and what people have to do is decide what is best for them and their lifestyle. A general piece of guidance is that if you have a well-diversified portfolio that incorporates SRI, then your performance should be in line with the index or with comparable products over the long term.

What do you see as the future of the SRI marketplace?

Jason: For Canada, I think younger people are more aware of ESG issues and it’ll be a natural extension to incorporate socially responsible investing into their portfolios. A potential growth area will be the institutional side as we’re starting to see more pension plans and institutional money incorporating SRI into the way they manage their portfolio. The Canada Pension Plan is a good example of how institutional investors are building SRI into their portfolios. (Note: The CPP Investment Board adopted a Policy on Responsible Investing in 2005, which mandates that they consider ESG factors from a risk/return point of view.) So from this perspective, the institutional market will be an engine for growth going forward.

Thomas: The SRI marketplace continues to grow in the U.S. despite the recent financial crisis, even though the broader universe of assets under management has remained roughly flat. According to a 2010 report, SRI has grown by nearly 400 per cent in the last 15 years and is currently approaching almost 12 per cent of total assets under management in the U.S. ($3.07 trillion). I believe that a decade from now, SRI/ESG investing will be the majority of the market for two reasons - first, the ESG factors help identify superior management practices and teams, lowering risk to the investor and improving long-term performance; and second, the majority of investors are continually looking for ways to make money by investing in sustainable solutions.