The cost of socially responsible investing

Socially responsible investing (SRI) has seen increasing attention in recent years from investors who value the environmental, social, and corporate governance (ESG) factors of the investments they purchase. 

Factors like the environmental conservation or impact of a company’s processes, and its employment equality, human rights and labour relations practices can be assessed. Companies affiliated with alcohol, gambling, tobacco, or weapons can be avoided. Religious principles may also require investments to be made based on certain principles, like Halal investing that complies with Islamic law. 

But how well do SRIs perform compared with a broader portfolio? There are some studies that show outperformance as well as underperformance for socially responsible investors relative to other benchmarks. One of the broader studies was by Michael Schröder of the Leibniz Centre for European Economic Research. He looked at 29 global SRI indices and found that “SRI stock indices do not exhibit a different level of risk-adjusted return than conventional benchmarks.”

In Canada, the MSCI Canada ESG Leaders Index has outperformed the MSCI Canada Index since it was introduced in 2007 by about 2% per year. 

Fees are another consideration for investors. SRI mutual funds and exchange-traded funds (ETFs) may have higher management expense ratios (MERs) than non-SRI funds. These funds may have lower assets under management, causing fixed fund management costs to be spread across fewer investors. At the end of 2019, the Investment Funds Institute of Canada (IFIC) reported 0.7% of mutual fund assets and 0.3% of ETF assets in Canada were considered “responsible investment funds.” There were a total of 69 mutual funds and 23 ETFs offered by 16 providers, comprising smaller fund companies like NEI Investments, as well as more established players like RBC offer ESG mutual funds, as well as many others. The big five ETF providers—BlackRock, BMO, Vanguard, Horizons and CI First Asset—all have ESG ETF options for investors. 

The investment research firm Morningstar introduced a Morningstar Sustainability Rating in 2016. The tool can be used to help investors and advisors measure a mutual fund’s or ETF’s exposure to risks related to the ESG nature of its holdings, as well as to what degree the fund is committed to ESG principles.

Working with an investment advisor, you can collaboratively construct a portfolio that limits exposure to mutual funds, ETFs and stocks that are not in line with your values. Investors working with discretionary portfolio managers who use separately managed accounts may be able to exclude certain types of companies from their portfolio as part of their investment policy statement (IPS). Guided by the client’s statement, a manager will not add stocks of companies in certain industries or subject to certain criteria. This may prove more difficult for investors working with companies that use pooled funds where personalization of a portfolio is not an option (though pooled funds may not necessarily be invested in companies that are not socially responsible).

Robo-advisors like Wealthsimple, WealthBar, ModernAdvisor and Questwealth Portfolios have all introduced socially responsible, automated investment options for investors. Wealthsimple has even teamed up with fund company Mackenzie to recently introduce two socially responsible ETFs that trade on the Toronto Stock Exchange. 

Investors should expect to see SRI and ESG investment options continue to expand. Fund companies, investment firms and even individual companies will probably also be more mindful of SRI/ESG criteria to make sure they can continue to be attractive to investors who place importance upon investing in line with their social values. 

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.


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