SRI screens have little impact on returns: study

Investing in a socially responsible manner seems to have little impact on investment returns, according to one of the most recognized SRI advocates.

A survey by Corporate Knights magazine found that half of Canada’s 28 retail SRI equity funds posted a return in the top half of the market in 2006, while the remaining 14 were in the bottom half of fund standings.

The top-returning SRI funds were not just trickling into the upper half of the table, either. In the equity category, the study claims the average one-year return on SRI funds was 11.37% — topping the 11.29% return of the average Canadian equity fund.

“There’s a fairly simple explanation for why they had the same performance as the market overall,” says Toby Heaps, editor-in-chief of Corporate Knights magazine. “They have the same holdings.”

That, he says, is a sign of how successful SRI has become, as the majority of companies now operate in such a manner that they are not screened out.

With largely the same holdings, the main difference between an SRI fund and its non-SRI counterpart comes in the form of shareholder activism. In the past, SRI funds were more likely to show their disapproval for a company by refusing to buy its stock. Now, there is more of a tendency to buy the stock and try to influence the company from the inside.

Of course, certain sectors — such as tobacco and nuclear — tend to remain off-limits for SRI funds altogether.

Gone are the days when SRI funds are the domain of specialty shops. Some of the best returns were posted by the SRI offerings of more mainstream fund companies, allowing them to take two of the top three spots in terms of returns.

Mackenzie Universal Sustainable Opportunities Class topped the chart, posting a one-year return of 24.34%, followed by Ethical Global Equity Fund (19.84%) and Phillips, Hager & North’s Community Values Global Equity Fund (18.64%).

But some investors remain skeptical of SRI funds, believing they must sacrifice returns in exchange for the “principles based” approach to investing. For instance, the Mackenzie offering has only $21.4 million in assets, according to Morningstar Canada. There are a handful of SRI funds with more than $100 million, but only one tops $1 billion — the $1.9 billion Investors Summa Fund.

While retail sales remain slow, Heaps says SRI managers are making their real money off institutional clients.

“Assets have been pretty steady over the past five years on the retail level. On the institutional level, assets allocated toward SRI have grown phenomenally,” he says. “CPP and the Caisse are both signed up to the U.N. Principles for Responsible Investment, which has a pretty rigorous reporting framework.”

The Corporate Knights study assigns a rating to each of the funds, ranging from one to five shields. A fund’s social responsibility score and its return are given equal consideration in calculating the rating.

For the 12 months ended January 31, 2007, seven funds were assigned the five-shield rating. Aside from the Mackenzie offering, the remaining top-rated six funds were from Ethical Funds.

While the environment makes up only one component of the SRI philosophy, Heaps says the increasing awareness of environmental issues can only help the sector, as investors seek to limit their personal responsibility for issues such as climate change.

“It would be a big surprise if we didn’t see an up-tick. I can see the SRI market growing by about 10% over the next year, which would be much quicker than it has been growing in past years,” Heaps says. “SRI, if it’s successful, will make itself extinct in the next decade.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(03/12/07)

Steven Lamb