Mainstream seen moving beyond ethical investing

(January 31, 2005) The pieces of the puzzle are falling into place for mainstream investors to embrace some form of socially responsible investing. But it won’t be based on personal values or ethics, according to consultant Tim Gardener of Mercer Investment Consulting.

“We’re not talking about tobacco, alcohol, gambling — indeed you could argue that these are socially quite acceptable things to do,” Gardener said last week at a Toronto CFA Society lunch.

Rather than using the words “socially responsible or ethical,” Mercer speaks of “Environmental, Social and Governance Issues” (ESG). This label includes sustainable and responsible investment, engagement with companies and shareholder activism, and it is a bit difficult to define. Gardener has discussed the topic in many parts of the world.

“We don’t take positions on these matters,” he says. “But I’ve concluded that the time is such that it is commercially sensible for us to build expertise in this area because there are enough institutional clients asking questions and we believe there will be more over time.”

He added that, in the past, most of the interest in so-called socially responsible investing has come from mission or faith-based investors, and from the “more vociferous players who think funds should use their financial muscle to influence and change society.”

“That’s not what I’m talking about. I’m talking about interested mainstream investors and this is the change I’m seeing taking place. Five years ago, it was just the mission-based players, but now we have a growing number of mainstream investors who believe these issues can have an impact on long-term investment performance.”

The reasons for that are fairly obvious, Gardener explained. Environmental concerns have taken on greater importance in the last several years and the ability of government to control the corporate sector has been greatly reduced.

“In essence, all the critical enablers are in place to allow mainstream investors to get involved in this area. There is government support and a perceived need. People are beginning to believe the message that, in the long-term, those companies who act in a socially responsible fashion will be rewarded for it.”

While Mercer believes ESG is a trend, they haven’t been able to define exactly when it will start to take hold in a meaningful way. “There’s an element of self-fulfilment, in the belief that once things get going at a certain pace, it will achieve its own momentum.”

Mercer’s annual 2005 “fearless forecast” of investment managers revealed that while only 5% believed that the integration of ESG factors into investment analysis will become mainstream in the next one or two years, fully 70% felt such practices will be mainstream within three to 10 years.

Screening is another issue, though. Although 60% indicated that screening for ESG factors will become mainstream within 3-10 years, 30% said it will never happen.

“This has gone beyond ethical investing,” Gardener concluded. “There is a small, but growing number of mainstream investors who believe that these issues can be material, particularly if they are long term investors. The trend is underpinned by globalization and increased awareness of environmental issues. It’s just beginning, but it’s here to stay.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com