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Morals over money: Low-cost options for socially responsible investors

The Globe and Mail by Lisa Kramer 09 July 2018

Do you keep your morals in mind when making investment decisions? If so, you’re not alone. Increasingly, investors are considering the broad social impact of their portfolio allocation decisions. And accordingly, a bevy of new financial products (and a mouthful of jargon) has emerged to cater to those ethically minded investing intentions.

Investing with one’s conscience has many labels. The concept of “socially responsible investing,” or SRI, may be familiar to some readers, with a goal of ensuring one’s portfolio excludes “sin stocks” from the tobacco, gambling and firearms industries. The fossil-fuel “divestment” or “divestiture” movement seeks to pressure large pensions and other managed funds to abandon their holdings in the so-called dirty-energy sector. And “ESG” investing aims to prioritize stocks that score high on environmental, social and governance criteria over those that don’t.

There is no regulatory body or widely agreed-upon set of principles that determines whether certain stocks or funds fit particular socially responsible criteria. This leaves financial institutions, fund managers and advisers free to use their own discretion when building a portfolio built around such goals, so investors must look under the hood to confirm that a fund’s definition of ethical aligns with their own. For instance, a prominent Canadian ETF in the SRI class, iShares Jantzi Social Index ETF, includes Suncor Energy Inc. among its top-10 holdings, which may not be ideal for investors who wish to exclude one of the world’s largest bitumen producers from their portfolio.

Fee-minded investors will be pleased to know there are low-cost financial products in the responsible investing space, especially for those able to invest in the United States. For instance, the Vanguard FTSE Social Index, a mutual fund that adheres to ESG principles, clocks in with a mere 0.2-per-cent expense ratio. And there are several others in the 1-per-cent-or-less range.

Fees aside, what about the claim that investing responsibly comes at a steep price in terms of lower returns or higher risk than a well-diversified broad-based index? That is a tired trope. While a grossly undiversified portfolio certainly can expose an investor to unpleasant surprises, one need not invest in the whole market to achieve both good diversification and returns commensurate with the amount of risk taken. In fact, funds that closely track a broad index, such as the S&P/TSX 60, will typically hold only a subset of the equities in the index, leaving plenty of scope for well-formulated SRI or ESG portfolios that are suitable for the responsibly minded yet conservative investor.

Furthermore, new tools are emerging for do-it-yourself investors who may seek to apply their ethical investment values in ways that aren’t met by existing financial products. For example, the website CrueltyFreeInvesting.org categorizes publicly traded U.S. stocks on the basis of whether they do or don’t exploit animals, taking into account whether the companies undertake practices that involve the harming or killing of animals. The website additionally identifies what it considers to be the 10 worst companies in terms of animal exploitation, featuring the world’s largest breeder of dogs for experiments, among others.

Whether your own moral compass gravitates to human rights, animal rights, green energy, or a combination of these and other progressive ideals, it’s no longer necessary to pick between your conscience and your pocketbook when choosing how to invest. May you sleep well at night and invest well, too.

Lisa Kramer is a professor of finance at the University of Toronto.