PART 1: Is SRI an uphill climb?
“Would you like a spot of tea?” I’m not normally flabbergasted, but this question caught me completely off guard. I was part of a group of 35 who had just spent six hours trekking the Cho La pass in Nepal. Not only was the terrain strenuous, but the oxygen-deprived atmosphere above 5,000 metres was also taking its toll on us flatlanders.
The day began with a four-hour ascent up 600 metres in elevation. Even after reaching the pass, going down didn’t get any easier, as we scrambled over huge boulders for almost an hour. When we finally took a break, I was asked that surprising question.
After gratefully accepting, I started thinking, where did all of this come from? We’re in the middle of nowhere, yet our guides have a cauldron, bottled water, fuel and dishes. The answer was simple: a porter had carried all of the equipment over the pass on his back. And when that porter passed us on the trail later on, he was smiling: even though his load was three times heavier than ours, it was less than half of what it used to be.
For many of the porters involved in such treks, working with tourists is the best job they can get. The pay is good, the loads are comparatively light and the hours are decent. Compare that to the porters we passed one day who were each transporting 11 sheets of plywood on their backs—more than double the weight that our porters were carrying. They took twice as long to make the same trip, and there certainly wasn’t any tip waiting for them at the end of their journey.
If you were designing a system that distributed the workload in a socially responsible way, wouldn’t you give the easiest jobs to the most vulnerable members of your society? Clearly, the answer is yes. Yet the reality of socially responsible investing (SRI) is exactly the opposite.
For example, there’s a movement afoot to ban child porters in Nepal, but the only real impact it’s having is on the tourist industry. In order to be “socially responsible,” tourists don’t hire porters under the age of 16. That hasn’t stopped child porters—but now, they don’t get the easy jobs, like working for tourists. Instead, they’re relegated to back-breaking labour, like carrying plywood.
My main complaint with SRI is that in many cases, it actually harms the people it professes to care about. Child labour is a good example. Another one is the case of Talisman Energy in Sudan. The socially responsible thing to do was to chase Talisman Energy out of the Darfur region because of the conflict there—but that hasn’t helped the locals one bit. In fact, their plight is worse now that Talisman is out of the picture.
Another problem is governance. Gandhi said, “We must be the change we wish to see in the world.” But the SRI industry seems to believe that the standards it requests of others don’t apply to its own practices. For instance, a study conducted by California’s Natural Capital Institute concluded, “While SRI investors call for corporate transparency, the industry is closed, proprietary and secret.…To put it plainly, if the SRI industry were a corporation, it wouldn’t qualify in a rigorously screened portfolio.”
From a pension plan sponsor’s perspective, these issues wouldn’t matter so much if SRI was beneficial for plan members. Because that’s really the plan sponsor’s primary concern: to do what’s best for its members and to deliver on the pension promise.
However, the track record of SRI is spotty at best. The five-year return of the Jantzi Social Index (“one of the leading independent socially responsible investing research firms in the world,” according to its website) as of May 31, 2009 was 6.67%. Over the same period, the S&P/TSX Composite Index returned 6.87%. The S&P/TSX 60, a more appropriate comparison, made 8.80%.
What’s the impact of this difference? A 2.13% improvement in returns over the life of a plan would double the pension payable. That’s real money for the plan members.
In some cases, lower returns could be acceptable if they were also accompanied by lower risk. However, when it comes to SRI, that doesn’t seem to be the case. In 2008, the year of the financial meltdown, the Jantzi Social Index lost 35.40%. The S&P/TSX 60, by comparison, lost 31.17%.
Of course, having hard data isn’t the only factor in an investor’s decision-making, particularly when it comes to SRI. As a concept and as an investment strategy, SRI should be able to sell itself. Who doesn’t want to do the right thing? Make a positive difference? Create a better world for our children and grandchildren? If achieving all of these objectives were as easy as jumping on the SRI bandwagon, there would be no debate.
But SRI is a tough sell even to a sympathetic audience. In 2007, McGill University decided to introduce an SRI option to its plan members. Even after an extended marketing campaign (an opportunity never afforded to any other investment option), members committed less than 1% of their assets to the SRI fund. If plan members won’t voluntarily choose an SRI option, why would a plan sponsor impose it on them?
As a plan sponsor, it’s critical to ask the question, If we run into funding problems and we need to increase contributions or reduce benefits, are we going to get any credit for having been socially responsible investors?
In my view, a plan sponsor’s efforts should be focused on getting the best returns for their members. Then, once you’ve achieved that goal, let them spend the money any way they want.
Fred Smith is a retired investment advisor in Saskatoon.