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© Copyright 2000 Rogers Media. The following article first appeared in the June 2001 edition of
BENEFITS CANADA magazine.
On shaky ground
Socially responsible investing offers more vices than virtues. Considering retirement income is at
stake, this may actually be an irresponsible strategy.
By Dian Cohen
pension asset managers look for investmentsthat, first and foremost, are sound. They analyze companies
using various financial and economic screens, including capitalization, price-to-earnings ratios and
debt-to-capitalization. Even the best managers have been caught in the sea change of market behaviour over
the past year (momentum investors more than value investors) and virtually all of them have had a devil of
a time making positive returns.
What, then, is the rationale for compounding the already difficult task of stock picking with a panoply of
non-economic screens--how companies hire and promote women and minorities, how they treat employees and
whether they're involved in the sin industries (tobacco, alcohol and weapons-related production) or produce
nuclear energy (even though it has killed far fewer people than fossil fuels)?
VIRTUOUS INVESTING
According to Don Walcot, chief investment officer of Bimcor in Montreal, an increasing number of pension
plan members want to be virtuous investors. They want their pension money to do good in addition to doing
well. Walcot believes that this trend is being driven by attitudinal changes as plan members age.
"When you're young, you're idealistic--you may not want to invest in companies whose values conflict with
yours," he explains. "Then, in middle age, as people near retirement, they want the highest possible
return. After that, people seem to want to give back to the community, and that means not having money
invested in companies whose activities may clash with their values."
Socially responsible or ethical investing has been around for decades. It began in the 1960s when nuclear
energy was frowned upon. Then in the 1970s, many individuals wanted to show their disapproval of apartheid
in South Africa.
Since then, the definition of socially responsible has broadened considerably. In the U.S., you can find
mutual funds catering to every sensibility, from vegetarianism to funds that follow the precepts of Islam.
This latter fund won't invest in financial institutions because of the Muslim prohibition on charging
interest.
In Canada, Michael Jantzi Research produces a social index that excludes all companies that have
significant involvement in the production of nuclear power, the manufacture of tobacco products, and
weapons-related contracting.
WORDS OF CAUTION
Elaine Hamilton, senior investment officer with the $925-million fund of the United Church of Canada, says
that the fund's trustees and managers have initiated a policy of ethical investing, but have never done a
survey of plan members (ministers of the Church) to see whether they approve. She has some cautionary words
about ethical investing. "Our rate of return has been good because we've been invested in media, telecom
and technology. But these [investments] haven't been tested through a full market cycle."
Hamilton makes a valid point. Most of the so-called ethical funds have been created within the past dozen
years, and their returns have kept pace with the indexes in Canada and the U.S. But it's logical to believe
that socially responsible investments will do worse than average over the long run because economic
analysis is restricted by social criteria.
Having looked at the practice of socially responsible investing, I am able to draw two sound conclusions.
First, the social criteria for investing or not investing in any particular company is arbitrary and
subjective. Second, people need to know that their rate of return over a full business cycle is likely to
be less than it would be if financial and economic analysis alone were what determined whether a company
was a buy or a sell.
Dian Cohen is an economics consultant with a special interest in pension issues.
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