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Navigating the expanding world of socially responsible mutual fund investing

Published on: November 5th, 2021

Do you know your SRI from your ESG? Or is “impact investing” a better fit for you? According to a survey conducted for the Investment Funds Institute of Canada (IFIC), just 50% of mutual fund investors say they are either “very knowledgeable” or “somewhat knowledgeable” about responsible investing.1 As more and more of us become interested in how our money is invested, not just for personal gain but for the good of society and the environment, the world of ethical fund investing has expanded. So has the terminology. Here’s an introduction.

No official definitions

It’s important to note that the definitions, terminology and marketing surrounding socially responsible or ethical investing in Canada are not regulated or prescribed by law. The onus is on the investor and their advisors to sift through the jargon and the approaches to ensure that the funds they are investing in match their intentions. Nevertheless, there is some consensus around the key terms below:

Ethical investing is a broad term that means any kind of approach that takes ethical values, as well as investment objectives, into account.

Socially responsible investing (SRI) is a similarly general term that encompasses a number of different approaches.

Environment, Social and Governance (ESG) investing, an increasingly common term, refers to ethical screens used to identify companies by their performance in each of the three areas. Environmental screens refer to how they enhance or harm the natural world. Social criteria include policies towards employees, customers, and the communities that the company operates in. Finally, governance refers to corporate issues such as a company’s leadership, executive pay, internal policies, and shareholder rights.

Impact investing takes a more proactive approach, with a desire to promote specific outcomes in such areas as health care, education, or green energy. Often this approach is achieved through schemes outside of the public investment markets – such as microfinance initiatives – and it may be difficult to find mutual funds that invest in this way.

How to decide

There is no one answer for all investors as each of us has different ethical objectives and investment goals. Deciding on the right approach for you starts with examining your own attitudes and goals about social responsibility.

For example, if you are adamant that you don’t want to put your money into certain industries such as tobacco, armaments or fossil fuels, then you may want an SRI fund that uses “negative screens” to filter out such companies. You could also simply examine the holdings of any good quality equity fund to ensure they don’t invest in such companies. This approach would require constant monitoring, however, as fund holdings change over time and the fund’s mandate may not include such prohibitions.

Some funds use a “best in class” approach that will invest in such companies if they lead their industry in improving their practices. In fact, some fund companies work with the companies they invest in as shareholder activists to drive positive change and monitor their performance against key ethical measures. Perhaps this activist approach is a fit for you.

Keep in mind that ethical investing doesn’t have to be an “all or nothing” scenario. If you’re new to this idea or unsure, you can devote a certain percentage of your portfolio to SRI funds to have some of your money working specifically towards these goals. It’s worth noting as well that most large Canadian corporations that you would find in more traditional mutual funds have policies in place already guiding their environmental stewardship, employment equity and diversity, community investment and corporate governance.

If doing good with your money is as important as doing well, let’s review your mutual funds to ensure that your investments are in lock step with your values.

1 Investment Funds Institute of Canada. 2020 Canadian Mutual and Exchange Traded Fund Survey. Conducted May-July 2020.

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