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Socially responsible investment:a myriad of strategies

By Sophie Boltz | April 12 2011 01:43PM

 Investors care about environmental and social issues. The proof: many consumers are seeking socially responsible investment (SRI) funds. Are some socially responsible investment funds “better quality” than others? Hard to say, because selection criteria for investments vary widely.

There are no standard practices, Olivier Gamache CEO of Groupe Investissement Responsable, told The Insurance and Investment Journal in an interview. Firms use different filters. For example, some exclude controversial sectors such as tobacco, alcohol, firearms, nuclear energy, and pornography, explains Brian Barsness vice president, sales, Eastern Canada for Meritas Mutual Funds. There is also the “top of the class” selection process, which singles out companies that outperform their peers, either in environmental management, social involvement or governance.

Active shareholding is another common feature. Such funds invest in companies and use their voting rights at shareholder meetings. The object is to influence company policies in key areas. Choosing this filter implies engaging in dialogue with the company and raising firms’ awareness of certain subjects, says Rosalie Vendette, socially responsible investment advisor, wealth management and life and health insurance at Desjardins Group.

Some investment funds emphasize solidarity and community investment. They support local entrepreneurs that would have had trouble finding financing elsewhere. They can also focus on companies in sectors such as renewable energy or water management. Managing these filters is a lot more complex than it appears. This is why specialized firms such as Meritas turn to expert analysts from Jantzi Sustainalytics.

150 indicators

The company has gathered information on 2000 companies listed on stock exchanges around the world, along with nonlisted entities such as development banks. To establish company profiles “we use about 150 indicators depending on the company’s sector,” Laurence Loubières, associate sustainability analyst at Jantzi Sustainalytics, says.

Whether or not a company has adopted the United Nations’ principles for responsible investment (PRI) is one of the indicators. For now, these are the only principles that govern socially responsible investment. “The PRI govern more and more investors, particularly institutional players,” Ms. Loubières adds.

At Jantzi Sustainalytics, nearly 60% of the selection criteria are common to all sectors. The remaining criteria are sector-specific.

“Producing the profile of an oil company and an airline demands specific indicators defined based on the issues in that sector,” Ms. Loubières continues. To satisfy investors that embrace an exclusion policy, we also have to determine the company’s presence in other sectors. For instance, a large financial corporation may hold alcohol companies.”

The Jantzi team is made up of 70 professionals, including 45 sustainability analysts. “Our specialties are varied. Some are petroleum specialists,” says Ms. Loubières, who is in charge of evaluating about 100 insurance companies.

NGOs step in

A similar process unfolds at Groupe Investissement Responsable, where 15 specialists with varied backgrounds sketch companies’ profiles. “We have a large database on the Internet. We use more than 350 sources of information. NGOs help us out onsite to flesh out our analyses. We also scrutinize the local media to better size up companies,” Mr. Gamache says.

All these filters and indicators amount to a myriad of selection methods. As a result, investments funds cannot be compared equally, nor the funds they form. On top of that, “some mutual funds accumulate a combination of several filters,” says Eugene Ellmen, executive director of the Social Investment Organization (SIA), an umbrella group for many companies operating in this field.

Even choosing an approach is not easy. Mr. Gamache underlines that “It’s a question of strategy because the firm has to position itself. If it is a purist, investments will be poorly diversified. On the other extreme, they may be overly diversified. This is how a company like BP ended up in several socially responsible investment funds.”

No label

In Canada, there are no labels or certifications to guide investors. However, the specialists interviewed by The Insurance and Investment Journal believe that a label for methods would be more useful than a label for funds.

“It would be interesting if professionals adopted a homogenous approach on a national scale,” Ms. Loubières says.

Mr. Ellmen adds that “to certify a selection process, you have to recognize a methodology. This hasn’t been done yet—it would take a few years. Certification will happen sooner or later, because retail and institutional investors are demanding it.”

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