DO WELL-DO GOOD

DO WELL-DO GOOD

The ethical investing movement promises returns with a social conscience

KATHERINE MACKLEM March 22 2004
DO WELL-DO GOOD

DO WELL-DO GOOD

The ethical investing movement promises returns with a social conscience

KATHERINE MACKLEM March 22 2004

DO WELL-DO GOOD

Business

The ethical investing movement promises returns with a social conscience

KATHERINE MACKLEM

FROM THE BACK of the room, the Bank of Montreal’s annual general meeting is a sea of a few hundred grey and white heads, punctuated here and there by a bald pate. The audience of investors, mainly of the generation that has time to sit for a few hours, listens politely to the CEO and chief financial officer as they deliver their prepared speeches. About two hours into the meeting, shareholder proposal No. 4 is presented, calling on the board to report on environmental issues, including how it ensures that it lends money to “environmentally responsible borrowers.” The resolution creates barely a ripple. Still, signalling

its significance, none other than Tony Comper, the bank’s CEO, seconds the motion, to brief applause. “The bank is proud of its environmental policy,” Comper tells investors, reminding them the board recommends they vote for the proposal. Within a few minutes, the motion’s moment is over, and 91 per cent of shareholders vote in its favour. Hardly a revolution. But for shareholder activist Deb Abbey, it’s a breakthrough. Her proposal is the only shareholder-backed resolution to be adopted.

CEO Comper is proud of the Bank of Montreal’s environmental policies

IN AN ERA when Martha Stewart contemplates a jail sentence for lying to the FBI and U.S. Securities and Exchange Commission about suspicious stock trading, and oncepowerful Conrad Black’s extreme arrogance, including his disdain for fellow shareholders, is revealed, ordinary investors are increasingly leery of corporate corruption. Enter ethical investing, known also by a handful of other names, including socially responsible investing (SRI) and sustainable investing, which promises investments that not only do well, but do good. It’s a heady and seductive claim, particularly to investors who, miffed over widespread corporate malfeasance, also feel weary from the rollercoaster ride of the stock market of the past couple of years. They are keen to find a place to put their money that’s safe, and clean as well. But what is ethical investing? How does it work? What it boils down to, says Abbey, is common sense. “It’s seeking out companies that are good corporate citizens.”

Abbey is a money manager. She’s also an author and activist. A project director for the David Suzuki Foundation in the early ’90s, she turned to investment management in 1995, joining a prestigious bank-owned brokerage. She devoted her business to ethical investing, earning from her colleagues the nickname “Little Commie.” She took it, she says, as a compliment. Abbey didn’t last long at that firm, and she skipped through a couple of others before establishing her own company, Real Assets Investment Management Inc., which now operates in conjunction with Vancouver City Savings Credit Union. Real Assets is not only focused on the environment, nor just on the Bank of Montreal—it’s made 25 shareholder proposals since its launch in 2001 on issues as diverse as human rights, corporate governance, the glass ceiling, and HIV/AIDS. “In a postEnron world,” Abbey says, “this is about looking at non-traditional risks to shareholder value.”

The overall numbers are small. Ethical investing is the organic food business of the investment industry: with roughly $50 billion invested in socially responsible funds in Canada, it represents a minuscule three per cent of the broader market. Most of the money invested in these funds is institutional money, for instance, a union’s pension fund. For individuals, there are only 55 socially responsible funds out of a field of about 5,000 mutual funds, according to the Social Investment

MORE and more investors are keen to find a place for their money that’s not only safe, but clean as well

Organization, an industry association that began closely tracking SRI only in 2000. Between 2000 and 2002, the pool remained fairly constant at three per cent. Abbey’s Real Assets is just one of the firms offering SRI funds. But proponents say interest from investors is increasing, as illustrated by the jump in the number of Canadian SRI mutual funds: in 1999, there were just 19. In the U.S., where the trend is more entrenched and more closely tracked, socially responsible investing has jumped in value from US$1.2 trillion in 1997 to US$2.2 trillion in 2003. In the past two years, despite sluggish markets, socially responsible investments grew by seven per cent, according to a U.S. industry association, compared to a four-percent decline for the broader universe of funds.

The phenomenon has its roots in the late ’60s and ’70s, says Eugene Ellmen, who runs the Social Investment Organization. At the time, student organizations and church groups pushed governments and universities to divest their holdings in companies that did business with apartheid South Africa. In the ’80s, the trend broadened to include so-called “sin stocks,” but continued to be driven by negative screening: that is, funds ruled out investing in, say, tobacco products or military manufacturers. More recently, the movement has given way to more sophisticated analysis, Ellmen says. Rather than just screen out the negatives, socially responsible investors are looking for ways to push for change on a positive scale.

Not everyone is convinced. “Socially responsible investing is a hoax,” says Dan Ahrens a Dallas, Tex., portfolio manager and author of the recently released book Investing in Vice. It’s mostly hype, says Ahrens, whose advice is to invest instead in products such as his Vice Fund, which he describes as the “recession-proof portfolio of booze, bets, bombs and butts.” In theory, socially responsible investing is a laudable concept, but in practice, it’s a “mess,” he says. Different screens are used by different companies, so the SRI world is an apples-and-oranges one. By eliminating some stocks right off the bat, such as tobacco and gambling companies, he says the funds limit the pool of available stocks and can result in portfolios heavy in volatile sectors, such as tech. Ahrens’s main message: if you’re going to invest, go for what will make the most money, and then, if you want, use some of your profits for charitable donations.

In a report that asks whether socially responsible investing is better for your soul than your bottom line, Stephen Foerster compared the few SRI funds invested in equities to a benchmark Toronto Stock Exchange index. A finance professor at the University of Western Ontario, he found that while the SRI funds trailed slightly, the difference was not statistically conclusive and was more than made up for by the lower risk associated with the SRI funds. The Jantzi Social Index, another measure that tracks a set of Canadian socially screened stocks, outperformed the stock exchange’s benchmark between 2000 and 2003, but trailed it slightly in the month of February, the most recently available data. “SRI investors are neither giving anything up nor gaining anything in terms of financial returns,” Foerster says.

Perhaps to deflect criticism that she’s just an activist, Abbey insists her focus is on the long-term returns of the companies she invests in. The Bank of Montreal’s shareholder proposal No. 4 is all about potential problems the bank could encounter as a lender, she says. “If BMO doesn’t pay attention to the environmental risks its borrowers may face, the bank puts itself at a potentially huge liability risk,” she says. “As shareholders, our resolutions aim to mitigate the negative impacts on financial performance.”

NOT everyone is convinced-one expert says the best option is still a portfolio of ‘booze, bets, bombs and butts’

Abbey has found a way to use her clout

as an investor, to hand off to the bank the job of pushing companies it does business with to treat the environment with caution. She’s almost forcing the bank to become an environmental activist itself. The resolution adopted this year was included in the bank’s 2003 circular, but it lacked the board’s support. Still, 30 per cent of BMO shareholders voted in its favour last year—not a win, but a moral victory nonetheless that led BMO’s board to change course this year. In her book, Abbey says she began Real Assets to “help investors leverage their capital for social change.” She’s certainly managed to get BMO’s CEO on side. “The quality of our lives improves when the pursuit of economic growth and financial performance is integrated with respect for the environment,” Comper said at the meeting, sounding like a stiff, but lefty, activist.

That lefty mantle is a handicap, and a reason Abbey focuses on financial performance and shareholder value. “Socially responsible investors aren’t necessarily political,” she says. Even if, fundamentally, their goals are. H5I

katherine.macklem@macleans.rogers.com