Ethical investing offers opportunities for Canadian advisers

TORONTO (Reuters) - While Canadian financial advisers are struggling to lure investors, in part because of lackluster returns, those promoting “socially responsible investing” say they’ve got an edge on the competition as shareholder activism heats up.

The din of the Occupy Wall Street movement has faded, but the controversy over pipelines, oil sands and climate change remain hot topics in Canada, where C$530 billion ($536 billion) - or nearly a fifth - of investable assets have a “socially responsible” earmark.

“It is definitely a good time to be in socially responsible investing,” said Sterling Rempel, a financial planner at Future Values in Calgary, a city where the energy industry and environmentalists go head to head on a daily basis.

While ethical investment once meant cutting tobacco companies and arms producers from portfolios, investors are now turning to self-described socially responsible investing (SRI) funds to influence companies on anything from executive pay to climate change and labor issues.

Such funds often buy shares in industries as diverse as banking and oil and then lobby to force change from within as activist shareholders. The SRI industry takes credit for forcing so-called “say on pay” votes on executive compensation at 100 companies in Canada, power that was unheard of five years ago.

“A key part of our strategy ... is owning imperfect companies and then sitting down with the management of those companies, and engaging and encouraging them to be leaders within their industry,” said Gary Hawton, president of the Social Investment Organization in Canada, a membership-based group that includes banks, fund companies, financial advisors and others interested in socially responsible investment.

For committed SRI advisers and investors, true SRI funds must screen out the worst industries and companies who refuse to engage - and engage fully with those who will. Simply buying shares in green companies and waiting for returns is not enough.

That standard means SRI products remain limited, and even then, skepticism persists.

“Ethical funds are more a feel-good approach than (something that is) really affecting a significant change,” said University of British Columbia business professor Werner Antweiler, adding that funds have to hold a very big stake in a company to really get a voice in the boardroom.

“It always comes down to avoidance of the worst offenders in an industry,” said Antweiler.

Decades after the earliest SRI funds were launched, a count of SRI equity funds shows just 32 in the pool of several thousand Canadian funds overall, Hawton said.

Growth in product will come when the leaders in Canada's small industry - including NEI Investments, IGM Financial Group IGM.TO through its Investors Group unit, Industrial Alliance IAG.TO unit IA Clarington and Desardins Investments - see more demand.


An adviser who knows the industry will benefit not just from a flow of social activist investors, advisers and investors say, but also from the additional loyalty and long-term perspective such clients bring with them - attractive qualities in a tough financial market.

“My SRI clients are pretty loyal,” said Michele Jolley, an adviser at Portfolio Strategies in Calgary. “They are less willing to give up on the investment, and more willing to ride through the difficult market cycles.”

Not that SRI clients aren’t in it for the profit. Studies show little difference in returns between SRI and conventional mutual funds, with both hit by the 2008 financial crisis and gradually regaining ground.

Sustainalytics, a global analysis firm that looks at SRI research, says the Jantzi Social Index notched an annualized return of 5.36 percent since its 2000 inception - in line with the 5.44 percent return of the S&P/TSX Composite Index.

“I want to make money too. But I try to hold out for the long-range view,” said Heather Waldie, a 56-year-old retired teacher and a client of Jolley’s.

“2008 was a very scary time. I watched, as everyone else did, my investments diminish. But I go back to my belief that if you are investing in good companies with good values, in the end I think they are going to succeed.”

Loyalty and principles aside, reaching out to the activist investor typically nets advisers a client who is not being well-served, in an environment filled with disgruntled investors and advisers looking for new strategies.

“If you are trying to build your practice, why not do it in an area that surveys show investors are interested in and very few advisers are doing?” said SIO’s Hawton.

For Ryan Colwell, a financial planner at IPC Investment in Georgetown, Ontario, west of Toronto, winning SRI clients does not mean marketing himself as a specialist - a tactic he believes only appeals to the minority of investors.

Instead, he’s aiming for the fat middle of the curve, investors who might accept an SRI investment if it offers solid returns in addition to something the client believes in.

“If you lead with it, you sound like you’re way different, and nobody likes way different,” said Colwell.

Simply asking clients if they are interested in investing in a socially responsible way may be the biggest driver of growth, said Hawton, who in addition to heading the SIO is also president of Qtrade Financial Group’s OceanRock Investments, Canada’s fourth-largest SRI fund provider by assets.

In the last year, OceanRock has shown advisers in its distribution network how to ask clients about SRI, and then reap the benefit of their business. Assets in OceanRock funds have risen 31 percent in the year to September 2012 to C$297 million, far outstripping overall SRI fund growth of 5 percent and Canadian long-term mutual fund growth of 13 percent, according to figures from Investor Economics research firm.

“The vast majority of clients in Canada aren’t even aware of the option, but if asked, will say: ‘Yes I would like that,’” said Hawton, whose funds are available through the big Canadian banks as well as independent advisers.

“And then they say, ‘I can’t believe my other adviser has never mentioned it.’”

($1 = 0.99 Canadian dollars)

Reporting by Andrea Hopkins; Editing by Frank McGurty and Tim Dobbyn