What is Socially Responsible Investing?

The days of investing purely to make a profit could be coming to an end. Today’s investors are increasingly looking for opportunities that align with their values and shirking those that don’t.

Surprisingly, it’s not just millennials driving the trend. We’re seeing investors from all age categories following suit by seeking out socially responsible investing opportunities that support both workers and the planet.

If you haven’t started investing in a socially responsible way but would like to, then this article is for you. Here, we ask what makes an investment responsible. We then take a look at some socially responsible investing examples and how you can get started in Canada. 

What Is the Definition of Socially Responsible Investing?

Socially responsible investing (SRI) occurs when a person buys the financial securities of firms that make positive contributions to society, the environment, or both. Also called “ethical investing” and “sustainable investing,” it gives investors a sense that they are doing good in the world by contributing to the benefit of all. 

In practice, socially responsible investing in Canada is all about avoiding allocating portfolio capital to so-called “sin sectors” and directing it to “saintly sectors” instead. Ethical investors do not invest in weapons manufacturing, pornography, gambling, tobacco, alcohol, or anything else that might have an undesirable impact on society. They also tend to steer clear of fossil fuel companies and firms that provide critical services in the oil industry’s supply chain. 

Is Environmental, Social, and Governance (ESG) Investing A Type Of Socially Responsible Investing?

ESG is a form of socially responsible investing. As is the case with SRI, its practitioners aim to invest in companies that take a progressive stance. For instance, investors may seek to own shares of firms that: 

• Have an independent board of directors
• Respond to the concerns of local communities
• Allocate capital in a way that benefits shareholders and other stakeholders
• Encourage the development of diverse leadership teams
• Protect the environment, either through operational practices, product development, or both

Statistics suggest that the number of socially responsible investors engaged in ESG activities grew to 80% in the recent years. 

How To Become a Socially Responsible Investor

Becoming a socially responsible investor is probably easier today than at any time in history. That’s because many fund managers and portfolio specialists have already done the work for you, selecting companies that are doing good in the world and eliminating the rest from their menu of options. Many offer securities containing a basket of socially responsible brands.

So, what are your options? Let’s take a look. 

Socially Responsible Mutual Funds

Socially responsible mutual funds have been around for quite some time. Here, active fund managers attempt to get you the highest returns possible while only purchasing equities that meet high environmental, social, and governance standards.

To buy a socially responsible mutual fund in Canada, you’ll first want to write down a personal investment plan stating how long you want to invest and the kind of returns you hope to achieve. You’ll then need to choose the type of fund that best reflects your risk tolerance. The more you gamble, the higher the potential payoff, but also the risk of loss. 

The next step is to shop around looking for the best fees and performance. While mutual funds are supposed to beat the market, they don’t always succeed. In fact, many perform worse than the average market return.

Good mutual funds should have a consistent record of beating the market that goes back at least 20 years. Past performance can give you a clue as to how the firm will perform in the future.

Next, you’ll want to choose a mutual fund company. Anyone selling mutual funds in Canada must register with their provincial securities regulator. For instance, if you want to buy a fund based in Ontario, the Ontario Securities Commission should formally recognise it. 

The last step is to file your application. To complete the process, you’ll need to provide the fund with some additional information, including how much risk you’re willing to take, so they can select an appropriate strategy for you. Following a law introduced in 2016, all mutual fund owners must provide you with a “fund facts” sheet telling you exactly what you’re buying. Once you have this, they can then begin giving advice. 

Socially Responsible ETFs

Buying socially responsible ETFs is considerably easier than purchasing mutual funds (which often have high fees and minimum investment amounts). All you need to do is log onto your trading platform of choice, select the ETF you want, and order shares of it. 

ETFs are a great investment vehicle because they allow you to buy a basket of assets in a single security, avoiding the need to hunt around for individual firms that meet your corporate social responsibility standards.

Socially responsible ETFs you may want to consider include:

• iShares ESG Aware MSCI USA ETF ESGU
• Vanguard ESG U.S. Stock ETF
• iShares Global Clean Energy EFT
• iShares MSCI KLD 400 Social ETF
• Xtrackers MSCI U.S.A. ESG Leaders Equity ETF
• Invesco Solar ETF
• First Trust NASDAQ Clean Edge Green Energy Index Fund
• SPDR S&P 500 Fossil Fuel Reserves Free ETF
• KraneShares Global Carbon Strategy ETF

According to ETF.com, there are more than 209 socially responsible ETFs trading in 2024, each offering investors a slightly different way to invest their capital ethically and sustainably. 

Robo-Advisors

Lastly, you may want to consider using robo-advisors to help you make more socially responsible investments. 

Robo-advisors are algorithms that automate and optimise investment choices. Because they are computers, they are generally low-cost and efficient.

Robo-advisors follow modern portfolio theory to help you develop an optimised portfolio across multiple asset classes. For socially responsible and ESG investing, robo-advisor algorithms assign weights to various companies based on their ESG scores. They will then seek to maximise returns, given your risk-return parameters, while minimising the incidence of non-ESG-friendly equities in your portfolio. 

Of course, this means that some bad companies may remain in the portfolio, even if their share is small. Fortunately, there appears to be a workaround. Instead of using robo-advisors to select individual stocks, investors are now using them to choose from a range of ETFs that human beings have already fully vetted for SRI purposes. The robo-advisor can then improve the investor’s portfolio position by buying low-cost or better-diversified ETFs than the ones the investor is currently using. 

Examples of Socially Responsible Companies

You can, of course, just buy shares in socially responsible companies. But which firms fit the definition? Here are the top 10, as rated by Investors Business Daily: 

1. Microsoft - ESG Score: 76.30
2. Linde - ESG Score: 76
3. Accenture - ESG Score: 75.95
4. J.B. Hunt - ESG Score: 74.14
5. Xylem - ESG Score: 73.89
6. Texas Instruments - ESG Score: 73.14
7. Salesforce.com - ESG Score: 72.92
8. Gildan Activewear - ESG Score: 72.84
9. Metropolitan Bank - ESG Score: 72.68
10. IHS Markit - ESG Score: 72.60

Remember, even if you live in Canada, you still have access to international stocks via most trading platforms. If you buy US stocks, you may have to complete a W8-BEN form.

You’ll notice from this list that no company is perfect. Hence, the definition of socially responsible investment isn’t as simple as you might hope. 

How To Find the ESG Fund that’s Right for You

Two funds claiming to provide investors with socially responsible options can differ radically from each other. Therefore, it’s up to individual investors to decide what they consider to be an ethical, sustainable, or responsible investment. In most cases, that involves educating yourself about company activities and learning more about what the organisation does.

Just because a fund describes itself as an SRI or ESG, that doesn’t necessarily mean it will fulfil your criteria. An investor, for example, could argue that buying shares in Philip Morris is ethical on the basis of the company’s transparent governance and excellent management, despite the fact that it manufactures tobacco products.

The same goes for companies accused of pollution. A power operator, for example, might have a diverse board with plenty of women, but it may also be poisoning the local water supply or filling the air with dangerous sulfur dioxides. 

There are also issues regarding fossil fuels. While the mainstream view is that they are universally bad for the environment, many ESG ETFs and funds are quite happy to include them. iShares ESG MSCI Canada Index ETF, for example, allocates more than 16% of funds to the energy sector, with Enbridge and Suncor among its top holdings. 

If you’re worried about the climate impact of your investment strategy, then you may want to explicitly search for low-carbon funds. These focus on companies that emit minimal carbon (because they use renewables instead) or that actively seek to develop technologies that will reduce dependence on fossil fuels. Good examples include CI First Asset’s MSCI World ESG Impact ETFs, and Desjardins Fund's low-CO2 options. 

Remember, though, if you prioritise some ESG criteria, you may be doing so at the expense of others. Low-carbon businesses, for example, may eschew diverse workplace policies. 

Are There Socially Responsible Faith-Based Investments?

The majority of SRI investment ethics are humanist. However, there is also a growing cadre of faith-based funds (sometimes called “faith-consistent funds”). 

For instance, Catholic ESG investing involves eschewing firms that:

• Manufacture weapons of mass destruction
• Make pornography or other forms of adult entertainment
• Support birth control or abortions
• Conduct work on embryonic stem cells

Similarly, protestants may want to avoid investing in firms that: 

• Make weaponry
• Encourage addictive behaviours
• Clone embryos 
• Lend money at high interest (such as payday loan companies)

Islamic investing follows Sharia law, and seeks to:

• Avoid short-term speculation or gambling
• Eliminate investments that pay interest (such as savings accounts)
• Avoid investments in the pork industry
• Avoid companies with heavy debt that have to pay interest on loans

In Conclusion

Socially responsible investing is a way of investors taking back control of their investments. Ethically aware investors want options that let them avoid evil and do good in the world. 

As we’ve seen, though, pinning down what constitutes socially responsible investing is notoriously difficult. Not everyone can agree.