Most discussions about socially responsible investing (SRI) seem to revolve around stocks. If you’re an index investor with an interest in SRI, there are a number of ETFs that screen companies according to their environmental, social and governance report cards. But what’s an SRI investor to do when it comes to fixed income?
You might argue that bondholders need to be even more discerning than stock buyers if they’re concerned about investing in irresponsible companies. After all, when you buy a company’s bond, you’re lending it your money (though you’re usually picking it up on the secondary market rather than infusing the company with new cash). And bondholders don’t even get a vote like shareholders do, so they can’t exercise any influence on management.
But there’s a problem for Couch Potatoes with a conscience: there simply are no bond index funds that screen issuers according to SRI principles. You’ll have to choose a different option:
Use government bonds only. Instead of using a broad-based bond index fund—which will include about 20% to 30% corporates—you might select one that includes only government bonds. BMO offers half a dozen ETF options (both federal and provincial, with your choice of short, mid or long terms), while the RBC Canadian Government Bond Index will do the trick for mutual fund investors.
Build a GIC ladder. There’s nothing wrong with forgoing bonds altogether and using a five-year GIC ladder for the fixed income side of your portfolio. In fact, SRI investors may prefer to work with their local credit union, and these often offer the best rates.
Use a low-cost active fund. Since there is no index fund that fits the bill, the PH&N Community Values Bond Fund is the best alternative for those seeking an SRI bond fund. It includes about 40% corporates and uses positive screening for companies with socially responsible business practices. Those involved in tobacco, alcohol, gaming, pornography, military weapons are eliminated. With an MER of just 0.61%, it’s cheaper than any bond index fund in Canada with the exception of TD’s e-Series. Over the 10 years ending April 30, the fund returned 5.5% annually, compared with 5.8% for the iShares DEX Universe Bond (XBB).
Consider “impact bonds.” At this point you’ve moved out of indexing and into impact investing, where the goal is to provide financing for projects you support while also expecting a financial return. Timothy Nash of Strategic Sustainable Investments mentioned a few examples during out recent interview:
- Oikocredit offers five-year bonds with a yield of 1.75%. Issued in units of $250, the bonds provide microfinancing for entrepreneurs in developing countries.
- SolarShare is a not-for-profit that issues five-year bonds with a 5% yield. The funds are used to promote community-based solar electricity generation in Ontario, so the qualify for that province’s generous feed-in tariff.
- ZooShare is building a biogas plant that will generate electricity using manure from the Toronto Zoo and food waste from grocery stores. They’ve announced a bond issue with a 7% yield.
Clearly there’s significant risk in going this route. Renewable energy projects (at east in Ontario) typically benefit from government support, so the default risk may not be particularly high with these bonds. The biggest risk is illiquidity: you’re locking up your money for five years with no way to access it in an emergency. Any investment like this requires an extra dose of due diligence.
Great series, thank you!
A few other options to consider:
1. In Québec, the Caisse Solidaire (one of the Desjardins credit unions) offers the Placement à rendement social, which is a GIC used to fund local environmental and social programs and projects. It’s pretty popular, with over $600 million currently invested. The downsides are the less than competitive rate (currently 1.75% for a five-year GIC) and the aggressive tactics by Desjardins counselors to market the GICs that are more advantageous to Desjardins rather than you (e.g., market-linked GICs, “stepper” GICs, etc.).
2. Anyone in Canada can invest in the La Siembra fair-trade cooperative, based in Ontario, which offers an RRSP that pays dividends in chocolate for the first few years and then 5% thereafter. Investors also get a discount on chocolate and other products purchased through the cooperative. Chocolate dividends sound good to me!
I’m able to stomach the lower rates of return by broadening my definition of “return on investment” to include the social and environmental benefits achieved as well as the financial returns. On the other hand, these investments put me further behind than I otherwise would be in reaching my retirement goals. It’s a trade-off that you have to consider carefully; in my case I’ve decide that I’m willing to put off retirement for 5-10 years or work part-time in retirement in exchange for the satisfaction of knowing that my investments are being put to good use today to help make the world a slightly better place.
@brad: Thanks for the great info. Sorry to hear that even the credit unions are marketing their GICs with the same bafflegab as the big banks.
I’m a bit surprised to hear you feel your SRI choices will set you back 5 to 10 years in your investment plan. It seems to me that it’s quite possible to invest with an SRI mandate and still expect returns that are very close to those of a more traditional investor. The real challenge seems to be adequate diversification and liquidity, not significantly lower returns.
If the chocolate dividends come from South America, are they subject to foreign withholding taxes—as in, someone takes a bite out of them?
Haha on the dividends!
I do think that in the case of both equities (due to the higher MERs) and fixed income (not considering bonds here, but rather GICs), socially responsible investments tend to provide lower financial returns. Not enough to set me back 10 years, but perhaps several years at least, simply because I won’t get as much growth as I would expect with a standard couch-potato portfolio.
In my case, though, the penalty for thinking too much about this stuff might be greater. I work for a company that was private when I started working there, but then went public and our shares are now traded on NASDAQ. The transition from private to public was an eye-opener for me, and left a lot of us disenchanted as we saw the company become more focused on growth at all cost. Benefits that used to make us feel happy to come to work gradually disappeared, and those of us who’ve worked there a long time have been rewarded for our decades of service by having our vacation time cut by a third in the name of competitiveness. Every business exists to make a profit, but I think the pressures are different when you have all those shareholders expecting you to outperform last year’s results. The experience has left me wondering whether I want to keep investing in the markets. I’m not anti-capitalism, but I do feel uneasy about contributing to a system that exerts such intense pressure on companies to keep growing and growing.
This uneasiness has shifted my attention (and my asset allocation) toward the fixed-income side of the equation, so in that sense it is setting me back on my goals.
The SolarShare bonds are appealing, but you can’t currently put them in a TFSA or RRSP, which is a deal-breaker for me. That’s unfortunate, as I’d happily sacrifice some liquidity to help the solar power industry out.
http://www.solarbonds.ca/faqs
@Tom: If you’re comfortable with the liquidity, the TFSA and RRSP eligibility shouldn’t be an issue. With a 5% yield, their after-tax return would still be higher than that of a tax-sheltered five-year GIC or investment-grade bond at current rates.
I’m embarrassed to say I hadn’t thought of that. Thanks!
I find these articles to be quite amusing. Replacing evil-corporations bonds by governments bonds … wow ! So someone who’s against investing in let’s say Suncor because they deal with oil sands would have no problem investing in the country and provinces authorizing Suncor to operate its oil sands refining activities ? How many wars did Suncor was part of ? Did Manulife sent soldiers in Afghanistan ? My response is not about politics but about how short-sighted it is to see governments as being more “socially-responsible” than corporations.
I work in a company in the defense sector. We design and manufacture parts that are used by weapons manufacturers to build offensive and defensive weapons. As such, we were ranked near the bottom in those “socially-responsible” rankings. It’s pure BS since we don’t manufacture weapons, another company does it. And guess who’s that other company biggest customers ? Governments. In our case, it would be like ranking Agrium or Potash Corp near the bottom since their fertilizers are used for drugs harvesting.
And just to add to my previous comment since I press Enter too quickly.
These socially-responsible rankings usually have problems with alcohol producers like Molson Coors, Diageo, etc. but based on this article, it would be OK for the “socially-responsible” to replace that with provincial governments bonds ? So alcohol is evil but there’s no problem investing in those governments who have a monopoly over its distribution ?
Most sponsors of these “socially-responsible” investments scheme are just like banks. They’re building stories as to justify how gullible investors should pay a premium for their products.
I know the risk is not the same as bonds but it may be useful to look into microcredit loan enterprises around the world. They are like bonds in that you are loaning your capital.
I do not know of the ones that are the most legit but these programs offer small loans to individuals and small groups in developing countries to start small businesses. From what I have read there can be some issues like high rates charged due to high costs of implementation and higher default rates.
Two I remember are Zidisha and Kiva.
@Andrew: I use Kiva myself, but it it’s important to understand it’s not an investment. You lend the entrepreneurs money and they pay it back (usually in full), but you don’t get any interest: the institutions that administer the loans get it. So all you’re doing is redeploying the same capital over and over to help others. There’s no financial benefit to you.
In this regard, Oikocredit is more like a bond or GIC version of microcredit, since the money you invest is loaned out to projects in developing countries, but you do get interest (about 1.75% currently).
As with charitable donations, an evaluation of the effectiveness of different social investment instruments would most likely reveal that projects in developing countries provide the greatest social/environmental bang for the buck, although they probably also carry the highest risks of failure.
Any updates on this topic since 2013?
@Byron: https://canadiancouchpotato.com/2017/05/18/podcast-8-couch-potato-with-a-conscience/