SRI remains a tough sell; and if investment advisors don't buy into it, how will investors?
By Elizabeth Dove and Liza Horowitz
Perhaps the most telling challenge for the Social Responsible Investment (SRI) movement was belayed at the last session of the three-day Responsible Investment Association (RIA) Conference held in Toronto last month when a panelist's request for a show of hands on investment advisors in the room produced just a few dozen from the close to 300 delegates.
While disappointing, it illustrated one of the key themes throughout the conference – responsible investing remains a tough sell; and if investment advisors don’t buy into it, how can investors?
Despite a couple of decades under our belts of profits from well-managed, “ethical” funds, a few years of impressive results from impact investing, and the power of shareholders to move companies toward policies that are better for the planet, the biggest obstacle to increasing responsible investment is the perception that responsible investments do not produce a comparable return to their traditional counterparts.
The challenges outlined at the conference revealed a patchwork of different barriers for different players.
Education of Investors and Advisors Key
For the average income investor, awareness is the first barrier.
According to research presented at the conference by Desjardins, 90 percent of surveyed investors are unaware of socially responsible investment opportunities. Interestingly, when made aware, 50-75 percent want to invest and hold these investments longer than any other in their portfolio. Many become ambassadors for SRI.
The biggest traction is with women ages 35-54 living in cities as well as young people ages 18-35. In an interesting complimentary study on Quebecers—residents of Quebec—and SRI, many surveyed expressed a fear of being “had” – which doesn’t come up with traditional investment, as explained by RI Consultant Brenda Plant.
Unfortunately for those ready to invest, there aren’t a lot of SRI products to choose from within Canada's retail sector. There are some mutual funds but impact investments require big investments and are out of range for all but those with high net worth. Additionally, many SRI opportunities are not Tax Free Savings Account (TFSA) eligible without the necessary valuations.
Then there is the case for myth busting.
For investment advisors, a number of these myths – SRIs lack diversification, yield lower returns and are only for people who are really interested – remain significant concerns. Gail Taylor, Vice President, Investment Advisor at the Taylor Remy Investment Group from CIBC Wood Gundy was quick to dispel these myths. In 2007, her team transitioned clients from traditional to responsible investing. Today, her investment practice is flourishing and exceeds client expectations with service, good product selection, a strong plan and a passionate team mission “to build our clients’ prosperity while strengthening the world through professional wealth management advice and the greatest service possible.”
Pensions Must Take More Risk; Government Encouraged to Incentivize
Pension funds were well represented at the conference.
Due to the scale of their investments, pensions can wield significant power in influencing impact investments and creating shareholder pressure for more responsible company policies. But high transaction costs on small, promising, innovative funds make for poor financial returns and, therefore, are avoided.
In fact, as a group, pension funds were characterized as being as risk averse. And even though some pensions are bold in their SRIs, less than 18 percent of Canadians are represented by a pension (2011).
Despite policymakers' short-term interests, several opportunities were highlighted for the government to get involved, including putting pressure on companies to assume more sustainable practices, creating incentives for investors and shifting regulatory barriers, such as constraints on mutual funds to invest in SRIs, and clarifying Canada Revenue Agency (CRA) rules around SRIs that currently constrain private foundation investing.
Divestment Not Always the Answer
Interestingly, several speakers did not recommend divestment in industries deemed unfriendly to the environment as the right approach. They asserted that this is not “responsible” but rather short-term thinking because you can most effectively create pressure on companies when you’re at the shareholder table on, for example, adoption of clean tech innovations or better executive pay policies.
In fact, in a session on green investing, Martin Grosskopt of AGF Investments discussed the value of investing in pipeline safety among other forward-thinking investments. For example, by investing in Tesla, you are influencing oil by reducing demand, he said. Encouraging responsible investors to consider investments in energy efficiency, he reported that every $1 spent on energy efficiency saves $2 in energy supply and $4 in future energy expenditures.
His key recommendation: long-term, thematic approaches for large investors like pensions.
Can we summon the risk and commitment required to stay within our two percent carbon budget?
Certainly investors have more opportunity than every before to use the power of their assets to direct business towards more sustainable solutions. Getting the good news out—particularly to those proven as most inclined—and opening up more opportunities to the variety of investors is the challenge.
About the Authors:
Elizabeth Dove is a specialist in strategically engaging the public, companies and government on sustainability and social change. She has worked as senior staff and consultant for initiatives that support the arts, child welfare, public health and particularly international development. Using a results-oriented approach focused on tangible measurable benefits, Elizabeth helps bridge the cultural differences between sectors to create collaborations that meet shared goals. She is a Strategist at Dove Consulting and an Associate at Open Spaces Learning, a Canadian change management firm helping companies realize business and social impact. Twitter: @EDove5, @OpenSpacesLearn
Liza Horowitz is a communication and content strategist and founder of BumpItUp, a start-up taking small businesses and making them ‘Social’. You can find Liza guest speaking at sustainability communication and social media events, or ghostwriting and blogging. Liza is passionate about sustainability communication and held various roles in this capacity. She earned her Masters in Science, Environmental Studies with a specialty in communications and writing from Green Mountain College, VT.