More on Socially Responsible Index Investing

Here’s part two of my conversation with Timothy Nash, president of Strategic Sustainable Investments and the blogger behind The Sustainable Economist. (Part one is available here.) Next week I’ll go into more detail about specific investment products that combine passive investing with SRI principles.

Many socially responsible investors seem to think buying a company’s stock is somehow giving them capital they can use to do evil, and that’s why they’re wary about owning index funds. I’m not sure I buy that argument.

TN: I often get asked how much of a difference I’m making by owning socially responsible index funds or ETFs. And it’s tricky, because obviously when you own equities the money doesn’t go directly to the company—at least not once you’re beyond the IPO. But you can make the argument about cost of capital. When companies have a large market cap, the more demand there is for that stock, and the easier it is for them to raise capital.

There is another argument, too. With ethical consumerism—whether you’re buying fair trade, or local, or organic—you are impacting that invisible hand of the marketplace. You’re creating demand for fair trade, or local, organic produce in the marketplace, and then you’re supporting those businesses. You can make the same argument when it comes to owning mutual funds or ETFs: by contributing, even in modest amounts, to the assets under management of these funds you are showing support for this type of investment strategy, and you are strengthening that fund.

One example might be the Meritas Jantzi Social Index Fund. Its MER is well over 2%, but Meritas has been at the forefront of shareholder engagement in Canada. Some people may be willing to pay that high fee to support their efforts. That’s different from paying for active management.

TN: Exactly. And that’s why I really like the shareholder engagement approach. Because then you are having an impact by pushing the company toward sustainability. I think we’re onto something there: it’s more about the investment philosophy you are supporting. In terms of where your management fees are going, would you prefer them to go to a manager who is socially responsible? I think that’s a valid argument, though whether it will have traction with investors is up for debate.

Meir Statman makes an interesting argument in his book, What Investors Really Want. People often say you should not spend more for socially responsible investments: instead, you should simply buy a low-cost index fund and use your savings to support your preferred charities. But Statman says for some people that’s like telling an Orthodox Jew he should save money by buying cheaper cuts of pork and donate the extra money to the synagogue.

TN: I think that’s definitely true. For most of my clients, it comes down to integrity. Many of my clients work in the non-profit sector, in social justice, or in the environment. And if you are working for an environmental organization day in and day out, and then your pension plan invests in oil sands companies, there is a gap there. Many of them do not want to put their money in any fund that holds companies they would not hold themselves. It really comes down to aligning your investments with your values.

15 Responses to More on Socially Responsible Index Investing

  1. brad May 16, 2013 at 10:06 am #

    Some great points here. I’ve struggled with this issue for years, and one of the issues for me boils down to opportunity cost. If I invest $100,000 in any fund or ETF, socially responsible or not, that $100,000 goes into the pockets of investors who sold the shares that I bought. When I think of all the good that $100,000 could have done if it were invested more directly in companies or programs I want to support, it seems like a lost opportunity. Furthermore, I don’t know anything about the investors who’ve received my money, or what they plan to do with it. Maybe they’ll invest it in companies I don’t support, or they’ll take the cash and use it to do bad things. That’s another perceived opportunity cost.

    Theoretically, as the value of my investment grows, I can use some of that growth to invest in “good” companies, so this creates opportunity. But it still seems very indirect to me.

    My current strategy, if you could call it a strategy, is to maintain my equity and bond investments in a standard Couch Potato portfolio, while my cash portion (GICs) is all in impact investments, offered by my local credit union (la Caisse Solidaire, one of the Desjardins credit unions). As I shift more of my portfolio to cash (I’m in my 50s), impact investments occupy a greater share of my total portfolio. But I’m still on the fence about what to do with the equities portion.

  2. Andrew May 16, 2013 at 10:22 am #

    I favour the active shareholder approach toward better social and environmental stewardship as it has much potential bang for the buck and is focussed.
    Perspective is also needed in issues of this nature – I taught an environnmental science and leadership program for 10 years. I know that all the upgrades to the efficiency of my house, the recycling, the choice of a relatively more fuel efficienct car, all of such things are negated in terms of their environmental impact the minute I step on a plane for a single long distance vacation. One long distance plane trip consumes 12,000 kilowatt hours of energy per passenger (33kwh per day for one year) and injects about 1.5 tons of carbon pollution into the upper atmosphere per person. This is slightly less than the energy requirements of a fuel efficient car for one entire year (which averages 40 kwhrs per day energy equivalent). I think being socially responsible is all about concentrating ones energy and modifying behaviour in areas that have the most bang for the buck.

  3. brad May 16, 2013 at 10:36 am #

    The active shareholder approach sounds appealing, but I’d like to see evidence that it’s actually effective. Are there good examples of cases in which shareholder resolutions or activist shareholders resulted in changes in company policy? I imagine there could be attribution uncertainties (e.g., the company was already considering changing its behaviour before the shareholder resolution came up), but most of the articles I’ve read on this topic simply assume that shareholder activism results in change without actually documenting it. I’d love it if someone could point me to examples.

  4. Value Indexer May 16, 2013 at 11:23 am #

    Brad, if you buy shares in a socially responsible company or fund you may be buying them from someone who is selling out to invest in a weapons dealer!

  5. brad May 16, 2013 at 12:03 pm #

    “Selling out to invest in a weapons dealer” is an unlikely scenario when you’re buying shares in a fund, since someone would have to be interested in socially responsible investing if they bought those shares in the first place. But the individual stocks in the fund are another story. People buy shares in companies for all kinds of reasons; many “socially responsible” companies are also highly successful companies (in fact I’ve seen studies finding that strong social and environmental policies in a company correlate well to strong corporate management and efficiency), so many people investing in “good” companies may have no social/environmental motivation to do so. It’s entirely possible that someone could be cashing out some individual stock in order to buy shares in a weapons dealer. More importantly, the money I use to buy my shares will be used by investors for whatever they please. The same of course is true for any products and services I buy (we have no control over how anyone spends their money).

    But in the case of investments, impact investing at least lets me put my capital to direct use by companies or organizations whose mission I support. Buying shares on the stock market is a lot less direct and there’s a lot less assurance that my money is doing good things.

  6. Kelly May 16, 2013 at 2:21 pm #

    I am more concerned about the companies that I invest in and how they run their business when I look at socially responsible investing. The way I look at it, if more people are interested in a given company, by investing or buying products, the more of an opportunity that company has to be successful. So if I invest in SRI companies, the more likely they are to be successful and increase the ratio of SRI to non-SRI companies in the future.

    Of course, I am interested in companies, not sectors. For example, I believe that there are socially responsible/sustainable oil companies and non responsible ones. Tough to separate these in index funds, I know. Of course, I can always choose who I buy my products from and support the SRI companies that way.

  7. Canadian Couch Potato May 16, 2013 at 2:50 pm #

    @Kelly: You raise an interesting point here. There’s a difference between supporting a company by buying its products and supporting it by buying its stock. In the former case you really are helping the company succeed by making profits. But if you buy its stock on an exchange you’re not having any effect whatsoever: the company does not have any more capital to work with, since you simply bought the shares from someone else.

    That’s why shareholder engagement is so important in SRI. It’s not enough to own the shares: you need to make your votes count and your voice heard.

  8. Nathan May 16, 2013 at 11:56 pm #

    “People often say you should not spend more for socially responsible investments: instead, you should simply buy a low-cost index fund and use your savings to support your preferred charities. But Statman says for some people that’s like telling an Orthodox Jew he should save money by buying cheaper cuts of pork and donate the extra money to the synagogue. ”

    I’m definitely one of the former people, but that analogy is still awesome.

  9. GeoEng51 May 17, 2013 at 10:50 am #

    I like one of Kelly’s comments – the whole concept of socially responsible investing assumes you actually know something about the companies in which you invest, and are not just following what you read in the popular media, which is so often off the mark. For instance, painting all “oil sands companies” as socially irresponsible just shows ignorance of the companies and what they are actually doing. I hate to say it, but “social responsibility”, like beauty, is often very much in the eyes of the beholder.

  10. Canadian Couch Potato May 17, 2013 at 11:30 am #

    @GeoEng51: That’s the difficulty for me, too. DSI from iShares excludes companies involved in “alcohol, tobacco, firearms, nuclear power, military weapons and gambling.” There’s something wrong with lumping together brewers and distillers with companies that make cluster bombs. And a lot of people think nuclear power is potentially cleaner than fossil fuels. There’s a fund in the US based on “Catholic values” and one of its top holding is Halliburton.

    It seems clear that if you’re interested in SRI you need to really understand the products you’re using and make sure they truly are aligned with your values.

  11. brad May 17, 2013 at 1:22 pm #

    I’ve never found the negative screens to be very useful; the funds that use positive screens seem more effective. In either case, the problem I have with these screens is that they perpetuate black-and-white thinking: companies are viewed as purely bad or good, whereas the reality is far more complex. Funds might exclude companies like Monsanto and Wal-Mart, for valid reasons, but 10 minutes of research reveals that both companies accomplish a lot of good in the world as well. A number of Monsanto facilities are leaders in environmental sustainability and energy efficiency, and Wal-Mart has helped create huge new markets for organic and recycled products, plus they work with their suppliers to improve their environmental performance.

    The screening process used by funds is sophisticated, but for people who buy the funds the end result still perpetuates a simplistic black-and-white approach to viewing corporations.

  12. GeoEng51 May 17, 2013 at 2:23 pm #

    Following on Brad’s last remark abut the complexity of what companies do versus the “black or white” resolution that many people want – I couldn’t have said it better. To slag the media again, I believe they perpetuate a “black or white” approach to viewing life and making decisions, when in reality all of life’s decisions are incredibly complex.

    There are good tools around for making sound, rational decisions, but they require accurate information. I’m involved in the oil and gas, and mining, industries as a consultant – from my experience, most main line companies have both policies and practises that are socially and environmentally responsible, and it is not too difficult to demonstrate that they do much good in the communities in which they operate and in countries generally. They also make mistakes and get burned by low risk events that actually occur.

    No apologies for these things (company actions need to be improved and often are), but for my own involvement in social and environmental responsibility, I much prefer informing my self and taking direct action (writing letters, direct support or lack thereof of products, educating others, etc.), than relying on media reports and making half-baked decisions. I can’t get any traction on this type of SRI concept, as the management of the funds and the decisions made about which companies to include are too far removed from me, the investor, and from what I know.

  13. Timothy Nash May 20, 2013 at 11:49 pm #

    @brad

    Shareholder Association for Research & Education (SHARE) maintains a great database of shareholder proposals: http://www.share.ca/shareholderdb/

    There are lots of examples of impact here. A quick search for ‘carbon’ netted 39 results. Anywhere you see ‘Withdrawn’, it means that this was a successful engagement – the company agreed to the resolution before it made it to a vote. For example, Eldorado Gold Corporation (EGO) now discloses their carbon emissions under the Carbon Disclosure Project guidelines.

    Hope this helps!

  14. DaveL May 21, 2013 at 5:53 pm #

    @Andrew

    I believe that your energy claims regarding air travel have significant errors. Even though you didn’t define what a “long distance plane trip” is, I checked your calculation with the following assumptions and facts:

    1. Per en.wikipedia.org/wiki/Boeing_767, a Boeing 767-300 has a passenger capacity of 269 (in a 2-class configuration), a fuel capacity of 63,000 litres, a maximum range of 4,900 miles, and a cruise speed of 530 mph.

    2. Per http://www.unitconversion.org/energy/megajoules-to-kilowatt-hours-conversion.html, 1 Megajoule (MJ) is equivalent to .28 kilowatt-hour (kWh).

    3. Per http://en.wikipedia.org/wiki/Energy_density, the energy density of jet fuel is about 33 MJ / litre.

    Note: The values given above have been checked against other references as well.

    4. From 1) above, a rough approximation of the maximum travel time in a 767-300 is about 9 hours (4,900 miles / 530 mph). I’d say that would qualify as a “long distance plane trip”.

    4. Therefore we can calculate the energy usage per passenger as:

    63,000 [litre] * 33 [MJ / litre] * .28 [kWh / MJ] / 269 [passengers] = 2,164 [kWh / passenger]

    Comparing this to your claim of 12,000 kilowatt hours of energy per passenger: 12,000 / 2,164 = 5.5. That is, you are overstating the energy usage by about 550%.

    I have not considered the following factors that would have some affect on the calculation: load factor; the actual number of passengers divided by the maximum passenger capacity (this will increase the calculated energy usage by about 20%) and fuel reserves (this will decrease the calculated energy by about 10%).

    I haven’t checked your “carbon pollution figure”, or your claim of “energy requirements of a fuel efficient car for one entire year”.

    P.S. Per http://communityairlineinitiative.com/?page_id=17, air travel in the new Bombardier Q400 (assuming all seats full) burns only 3.5 litres gallons of jet fuel per 100 km. That’s better than a Toyota Prius V hybrid (per http://en.wikipedia.org/wiki/Toyota_Prius_v) at 5.3 [litre / 100 km] (with one person in it). Not bad considering you are traveling at over 600 kph in the Q400.

    So, good news … you can enjoy air travel with over 500% less guilt now (perhaps even guilt free in when flying in a Q400) 🙂

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