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Confused by ethical investing? Here’s a primer

Responsible investing, in which investments are bound by environmental, social and corporate-governance considerations, rather than merely financial performance, is growing in Canada.

Brent Lewin/Bloomberg

Investing ethically can feel like standing in a grocery aisle, reading egg cartons. Some are labelled free range. Others say organic.

Which are more ethical, or cruelty-free, or better for you (let alone which might be more delicious)?

It can feel the same when considering ethical investing, which comes in many forms: impact investing, socially responsible investing (SRI) and investing based generally on environmental, social and corporate-governance concerns (ESG).

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Each label has a somewhat different approach and tends to be geared toward different kinds of investors and strategies. But there is a lot of overlap, and as more socially minded funds and investment vehicles gain popularity, the labels can be confusing.

Here's a primer.

Responsible investing, in which investments are bound by environmental, social and corporate-governance considerations, rather than merely financial performance, is a booming business. About $1.5-trillion in assets are under some kind of responsible investing strategy in Canada. This is up 49 per cent from two years prior, and responsible investing represents about 38 per cent of the Canadian investment industry, according to the Responsible Investment Association's 2016 trend report.

"We have been seeing very significant growth in responsible investment assets over recent years, both in Canada and internationally," said Jason Milne, below, vice-president of corporate governance and responsible investment at RBC Global Asset Management, based in Vancouver. He is also chair of the Responsible Investment Association board.

Jason Milne, chair of the Responsible Investment Association board. Responsible Investment Association Sandra Leung Responsible Investment Association

(Sandra Leung/Responsible Investment Association)

He adds, however, that responsible investing is a large umbrella term. It includes, for example, SRI funds using screens for filter investments. Shares in renewable energy companies or stocks in companies making electric vehicles might be screened in, while shares in heavy polluters might be screened out.

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"I think that SRI funds are still considered specialty funds, but an interesting trend is that we are starting to see many of the features of how SRI funds are managed being incorporated into what would be considered mainstream funds," Mr. Milne said.

As environmental, social and governance considerations seep significantly into the mainstream, the idea is that shares in companies that are not attuned to corporate governance matters or have not adjusted their business to meet climate-change risks are simply bad investments over the long term.

The difference in strategy, though, is that while SRI funds will screen out companies like these, mainstream funds might continue to hold onto them, "but will want to make sure the returns justify taking on those risks in the portfolio," Mr. Milne noted.

Then there is impact investing, an area opening up more to ordinary investors, which seeks to implement more of a direct ethical change through investment dollars. Often this has tended to be limited to private direct investment, typically wealthier investors learning about impact investments through a financial adviser who is highly specialized in, say, funds working toward providing affordable housing or renewable energy, or other initiatives.

Yet, this, too, is going more mainstream. As more of these private investments become popular, there is a move to introduce more of these to the broader market, through financial co-ops.

Kelly Gauthier, senior consultant at Purpose Capital, an independent investment advisory firm in Toronto specializing in responsible investment, said that there are about 200 impact investment products in Canada, mostly private debt and private equity.

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One example is Montreal-based CoPower's loans for clean energy projects for which ordinary investors can buy bonds. Its five-year green bond has an annual 5-per-cent return, while its three-year green bond is 3.5 per cent.

"That's where the leading edge of this sector is right now, looking at how these things actually blend," Ms. Gauthier said. Traditionally you had SRI in the public equities side, and impact investing on the private side. "And some of the most interesting work done by investors right now is around considering the concept of impact investing on public equities."

The Centre for Impact Investing at the technology innovation centre MaRS in Toronto is working on an investment platform that will corral impact investing projects for investors to pick and choose.

"This would be the ability to invest directly in companies, in particular, that have a positive impact, as well as deliver the potential for financial returns," said Adam Spence, director of Social Venture Connexion at MaRS.

It would be a grouping of different projects from independent platforms in Canada. Some of those may include, Mr. Spence noted, co-operatives such as SolarShare in Toronto, which allows investors to invest in bonds specifically to finance solar-power projects in Ontario. ZooShare is another, also in Toronto, enabling investors to help finance the construction of a biogas plant at the Toronto Zoo to use manure and waste for generating renewable power.

"There are entities that are doing it on their own, but we are looking to aggregate that and provide a single access point for investors," Mr. Spence said.

This is where most investors will pause and ask the obvious question: What about risk and return?

With smaller co-operative investments, such as SolarShare's bonds, the return is fixed. SolarShare's five-year bond's annual rate of return is 5 per cent. Its 15-year bond is 6 per cent. Note that these kinds of investments can vary as to whether they can be invested through a registered retirement savings plan, and there is typically not a market for these investments outside of the co-operative. They are meant to be bought and held for the duration.

On the other hand, SRI funds, or simply funds with a more conscientious, ESG-minded philosophy are regular investment funds, and those that tend to have broad holdings – "plain vanilla," as RBC's Mr. Milne describes them – generally post returns similar to other broader market funds over the long term. The Responsible Investment Association cites research showing more than 2,000 studies that suggest "a positive correlation between ESG investing and financial outperformance."

Performance can differ, though, in the short term with more specialized funds. "Over recent years we have started to see some more thematic SRI funds being offered," Mr. Milne said. "These funds can be more focused on a particular sector [for example a water- or climate-focused fund] and can often invest in smaller companies, which means they tend to be higher risk."

At the same time, there is also the argument that responsible investing can provide shelter from broader market cycles. As Ms. Gauthier said, "Because you're investing in aspects of the market or in themes and sectors that are quite different than what a traditional portfolio might look like, they are very counter cyclical."

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About the Author

Guy Dixon is a feature writer for The Globe and Mail. More

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