A new crop of ETFs of­fer a va­ri­ety of ways to jump into so­cially re­spon­si­ble in­vest­ing

The Globe and Mail Metro (Ontario Edition) - - REPORT ON BUSINESS - ROB CAR­RICK

Look to th­ese funds if you want to put money into com­pa­nies that score well in en­vi­ron­men­tal, so­cial and gov­er­nance mat­ters PORT­FO­LIO STRAT­EGY

No mat­ter how you want to in­vest, there’s a so­cially re­spon­si­ble way to do it. Ex­change-traded funds (ETF) are your favourite in­vest­ing tool? A new crop of ETFs of­fer­ing dif­fer­ent takes on so­cially re­spon­si­ble in­vest­ing (SRI) have re­cently been in­tro­duced. You like ETFs but pre­fer to have a robo-ad­viser han­dle your in­vest­ments? A few ro­bos now of­fer SRI port­fo­lios, and hu­man ad­vis­ers are like­wise adding SRI in­vest­ing to their reper­toires.

So­cially re­spon­si­ble in­vest­ing, some­times short­ened to re­spon­si­ble in­vest­ing, or RI, means putting your money in com­pa­nies that score well in en­vi­ron­men­tal, so­cial and gov­er­nance (ESG) mat­ters.

A pop­u­lar theme in SRI th­ese days is to fo­cus on com­pa­nies with low car­bon emis­sions, but there are other themes such as gen­der di­ver­sity.

In­vestor in­ter­est in SRI is gain­ing mo­men­tum, a trend you can see in the lat­est growth num­bers for SRI mu­tual funds. Ac­cord­ing to the Re­spon­si­ble In­vest­ment As­so­ci­a­tion, SRI mu­tual fund as­sets rose in­creased 34 per cent over the past two years – to $11.1bil­lion from $8.3-bil­lion.

The in­tro­duc­tion of SRI ETFs should ac­cel­er­ate this growth in de­mand. Do-it-your­self in­vestors gain ac­cess to SRI in­vest­ments, as do robo-ad­vis­ers and hu­man ad­vis­ers who pre­fer to build port­fo­lios with ETFs. Let’s take a look at the range of SRI in­vest­ing op­tions.

ETFS

The Cana­dian mar­ket has had a so­cially re­spon­si­ble ETF since 2007, when the iShares Jantzi So­cial In­dex ETF (XEN) was in­tro­duced.

In the past 18 months or so, many other so­cially re­spon­si­ble ETFs have been listed on the TSX.

The new­est en­try is the Hori­zons Global Sus­tain­abil­ity Lead- ers In­dex ETF (ETHI), which started trad­ing last week and holds the shares of large global com­pa­nies that score well in re­duc­ing car­bon emis­sions and are not in­volved in busi­nesses such as to­bacco, guns, an­i­mal cru­elty and gam­bling.

Des­jardins Funds, a dom­i­nant player in SRI mu­tual funds, in­tro­duced SRI ETFs last month that of­fer ex­po­sure to Cana­dian, U.S. and global stock mar­kets, as well as bonds. Th­ese ETFs are branded as “low CO2” funds to sig­nify the fact that hold­ings have been se­lected be­cause of their low car­bon emis­sions. Stocks in the port­fo­lio also meet ESG guide­lines.

Mary Hager­man, a port­fo­lio man­ager with Des­jardins Wealth Man­age­ment in Mon­treal, said the new ETFs will help her re­spond to ris­ing de­mand from clients for SRI in­vest­ing.

“Th­ese funds make it a lot eas­ier to build ro­bust port­fo­lios,” she said.

XEN is the orig­i­nal Cana­dian eq­uity ETF for so­cially re­spon­si­ble in­vestors – it starts with the stocks in the S&P/TSX 60 in­dex of big blue-chip stocks and tweaks the mix to in­clude only com­pa­nies that meet ESG cri­te­ria. There are 50 hold­ings in the fund in­stead of the 60 in the in­dex.

XEN high­lights the fact that so­cially re­spon­si­ble in­vest­ing can de­liver re­turns that are close to or even bet­ter than con­ven­tional in­vest­ments, al­though this is by no means as­sured. Check out this com­par­i­son of XEN and a sis­ter prod­uct, the iShares S&P/TSX 60 In­dex ETF (XIU): XEN has a oneyear loss to Oct. 31 of 1.1 per cent and an an­nu­al­ized 10-year gain of 7.8 per cent, while XIU lost 2.7 per cent in the past year and had a 10-year gain of 7.2 per cent.

Ms. Hager­man said the lat­est gen­er­a­tion of SRI ETFs ap­pear to be bet­ter built for the long run than a group of funds that were in­tro­duced just be­fore the last mar­ket crash as a way to in­vest in spec­u­la­tive sec­tors such as al­ter­na­tive en­ergy.

“The liq­uid­ity just dried up and many of them did hor­ri­bly,” she re­called. “It was a dif­fi­cult les­son for SRI in­vestors – how much money am I pre­pared to lose to stay faith­ful to my prin­ci­pals?”

For thoughts on port­fo­liobuild­ing with SRI ETFs listed on Cana­dian and U.S. ex­changes, check out the Sus­tain­able Econ­o­mist blog at sus­tain­ableeconomist.com.

MU­TUAL FUNDS

Whereas the ETF sec­tor is only now adding the funds needed to build a prop­erly diver­si­fied SRI port­fo­lio, mu­tual fund com­pa­nies have long cov­ered all the ma­jor fund cat­e­gories with SRI op­tions. The is­sue with th­ese funds is their com­par­a­tively high fees.

The Des­jardins So­cieTerra Cana­dian Eq­uity Fund, large by SRI stan­dards with as­sets of $413mil­lion, has a man­age­ment ex­pense ra­tio of 2.3 per cent. The fee for XEN is 0.55 per cent, while the Des­jardins Canada Mul­ti­fac­tor – Low CO2 ETF (DRFC) will be in the same gen­eral area (it’s too new to re­port an MER).

An­other is­sue with SRI mu­tual funds is fuzzy brand­ing. While the lat­est SRI ETFs ef­fec­tively lay out their mis­sion in their ti­tles us­ing phrases such as low CO2, global ESG and gen­der di­ver­sity, SRI mu­tual funds are of­ten gener­i­cally ti­tled and de­scribed in the broad­est terms. For ex­am­ple, an on­line pro­file of the RBC Vi­sion Cana­dian Eq­uity Fund says “the fund fol­lows a so­cially re­spon­si­ble ap­proach to in­vest­ing.” More info, please.

ROBO-AD­VIS­ERS

Of the 14 firms par­tic­i­pat­ing in The Globe and Mail Robo-Ad­viser Guide that will be pub­lished on Nov. 17, five that of­fer SRI port­fo­lios are Mod­ern Ad­vi­sor, Mylo, Quest­wealth, WealthBar and Wealth­sim­ple. Vir­tu­alWealth says SRI port­fo­lios are com­ing soon.

The ETFs used in Wealth­sim­ple’s SRI port­fo­lios in­clude XEN, as well as a pair of U.S.-listed funds – the In­vesco Clean­tech ETF (PZD) and the iShares MSCI ACWI Low Car­bon Tar­get ETF (CRBN).

For bonds, gov­ern­ment bond ETFs are used in­stead of cor­po­rate bond funds.

Wealth­sim­ple chief in­vest­ment of­fi­cer David Nu­gent said be­tween 25 per cent and 30 per cent of the firm’s clients have an SRI port­fo­lio for at least one ac­count.

A few things stand out among th­ese SRI clients – they skew slightly to women, their aver­age age is slightly younger than the over­all aver­age age of 33 years and they tend to be slightly more level-headed as in­vestors.

“Peo­ple who have elected for the so­cial port­fo­lio ver­sus the tra­di­tional reg­u­lar one ex­hibit bet­ter be­hav­iours in mar­ket down­turns,” Mr. Nu­gent said. “It’s not as preva­lent for them to be pan­ick­ing and look­ing to get out of their port­fo­lio or re­duce the risk pro­file.”

Per­for­mance-wise, Wealth­sim­ple’s SRI growth port­fo­lio (80 per cent stocks) has out­per­formed the stan­dard growth port­fo­lio slightly in each of the past two cal­en­dar years.

For the year through Sept. 30, the SRI port­fo­lio has lagged slightly.

TRA­DI­TIONAL AD­VICE

The Re­spon­si­ble In­vest­ing As­so­ci­a­tion’s web­site will help you lo­cate an in­vest­ment ad­viser who of­fers SRI in­vest­ments (ri­a­canada.ca/ad­vi­sor-map).

Dozens of ad­vis­ers from Bri­tish Columbia to New­found­land are listed, and they’re as­so­ci­ated with a range of firms that in­clude banks, credit unions and in­de­pen­dents.

An ad­vice firm that fo­cuses on SRI is Genus Cap­i­tal Man­age­ment, which of­fers a se­ries of “fos­sil free” port­fo­lios that ex­clude com­pa­nies in­volved at any stage of fos­sil fuel pro­duc­tion, as well as com­pa­nies with strong ESG scores.

Clients with $250,000 in ag­gre­gated fam­ily as­sets can get a port­fo­lio of Genus funds man­aged for them on a dis­cre­tionary ba­sis, which means the port­fo­lio man­ager makes de­ci­sions us­ing his or her own judg­ment. Fees start at 1.5 per cent, which is low in com­par­i­son to SRI mu­tual funds.

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