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How to discover if your portfolio is aligned with your ethical principles

CityNews with Lisa Kramer 8 August 2019

Many Canadians who recoil at media coverage of mass shootings and the internment of migrant children in the U.S. are likely unaware of a link between these ongoing tragedies and their retirement portfolios.   

Anyone who owns shares in a broad-based fund may be surprised to learn that among the dozens of names in their portfolio are the weapons manufacturers and operators of detention centres that profit from such grim situations. 

In the wake of a pair of mass shootings last weekend in El Paso, Texas, and Dayton, Ohio — the deadliest yet in a year that has seen more than 250 such tragedies in the U.S. — a growing number of investors are taking stock of their options.

Broad index funds that track the S&P 500 or TSX 60 are ethically “agnostic,” says Lisa Kramer, a University of Toronto finance professor.

“It’s going to be just a broad basket of all the stocks that are out there. If an investor has specific preferences with respect to where their money is invested, then a generic index fund probably isn’t going to fit the bill,” Kramer says.

The U.S.-based BlackRock Inc. and the Vanguard Group, two of the world’s biggest investors with holdings that include gun makers American Outdoor Brands Corp. — owner of Smith & Wesson — and Sturm, Ruger & Co., offer broad indexes and exchange-traded funds (ETFs) popular with Canadian investors, she noted.

 

BlackRock and Vanguard are also among the largest holders of private prison operators CoreCivic and GEO, whose role in the Trump administration’s controversial detention of asylum seekers has put them under the spotlight north of the border as well.

The Canada Pension Plan Investment Board took heat after it was revealed that it increased the number of shares in the two companies to nearly $6 million from less than $350,000 in a 12-month period, according to U.S. Securities and Exchange Commission filings.

As a starting point, investors can search their mutual funds’ top 10 holdings, which are listed online. Semi-annual filings offer a snapshot of all holdings held on a particular day, but do not serve as a comprehensive tally of the stocks, bonds and real estate held over the past year.

ETFs, however, typically list all holdings up front. In both cases, investors may want to consult a financial adviser on the industries and companies in a given fund.

Funds that cater to a range of ethical leanings have proliferated over the past few years, screening out sectors and corporations that run the gamut from fossil fuels to tobacco, gambling and landmines. And contrary to conventional wisdom, they don’t lag behind standard funds in terms of returns.

“There is a myth, and 30 years on I’m told this myth regularly. But there are so many studies and academic evidence that this is not true,” said Tessa Hebb, who researches socially responsible investing at the Carleton Centre for Community.

A Sustainalytics report last year found that the vast majority of companies that make or sell assault weapons to the civilian market trailed the Financial Times Stock Exchange Global All Cap Index on a three-year total return basis.

However, mutual funds that apply a screening process based on environmental, social and governance (ESG) factors often charge fees that top the 2.5 per cent Canadian average, said Tim Nash, a financial planner at Toronto-based Good Investing. ETFs, meanwhile, typically tout fees of about 0.2 per cent, while their socially responsible cousins can ring in at three times that rate.

The premium may pay off, however.

“A lot of these social or environmental issues can actually be quite material for investors,” said Dustyn Lanz, CEO of the Responsible Investment Association in Toronto.

Lanz cited the BP Deepwater Horizon oil spill in the Gulf of Mexico, which killed nearly a dozen people and amounted to the worst offshore oil disaster in U.S. history.

“After that environmental catastrophe happened in 2010, the stock price of BP dropped by 55 per cent,” he said, adding that hundreds of health and safety violations in the three preceding years should have served as red flags.

“If they’re not addressing these things, they can become a serious financial risk,” he said.

ESG investment has surged recently, partly in response to that growing recognition. Assets in Canada managed using one or more so-called responsible investment strategies increased nearly 42 per cent to $2.13 trillion between late-2015 and late-2017, according to a report from Lanz’s association.

For those who want to go beyond merely avoiding companies that fall afoul of their morals and encourage those that promote their own, Nash recommends ETFs and companies that actively work toward particular social goals — such as renewable technology, clean technologies or water infrastructures.

As for ETFs that are slightly less socially-active, he recommends those offered by Quebec-based Desjardins Group, Toronto-based Horizons ETFs or the BlackRock-managed iShares Jantzi Social Index, made up of 50 Canadian companies that pass a broad set of ESG criteria.

Careful scrutiny is required. One in four ETFs and 15 per cent of all mutual funds are invested in at least one of the 40 publicly traded companies in the firearms industry — most of which cater to civilians (rather than the military or law enforcement) — according to Sustainalytics.

“Everyone has their own definition and is going to want to draw the line differently,” Nash said of ethical boundaries.

“Some [funds] are only doing the minimum and I would say paying lip service to this notion of socially responsible investing, versus those that are actually finding the companies that are true leaders in sustainability.”