In the green

(January 2007) Everyone talks about the weather, and now people say they want to do something about it. In Canada, environmental issues top health care as our number-one worry. CEOs are getting into the scene by saying it’s time to do more to protect against climate change. Even U.S. President George W. Bush is pushing a green agenda. But are advisors thinking green?

Most advisors likely stick to the general meteorological platitudes when talking with their clients — the temperature, the rain, the wind — rather than tackle the thorny issue of climate change. Even among those few who do broach the topic, none want to be seen as pushing their values onto their clients. And even if they are able to strike a balance, can advisors marry performance of clients’ portfolios with being environmentally responsible?

Suchetta Rajagopal, a CFP with Hampton Securities in Toronto, says yes, and the current environmental disasters that dominate the news are the perfect way to strike up that conversation. “Weather is the perfect entry point,” says Rajagopal. “The weather has been dramatic this year, and people are realizing that this is real.”

More clients are asking about how they can invest their money responsibly, she says, and advisors are discovering that this is a niche to exploit. Eight years ago, when Rajagopal started focusing on this market, it was a bit of a struggle, she says, but that’s not a problem now. Today, she estimates she’s growing her book at a rate of about 20% a year.

Although a self-proclaimed Birkenstock wearer, the unofficial uniform for environmentalists, Rajagopal says clients need not be die-hard tree-huggers to have an interest in socially responsible investing. As a member of the Social Investment Organization, a national membership-based organization geared toward SRI, she attracts a disproportionate number of like-minded socially conscious investors, but she also advises clients from all walks.

SRI companies are also seeing their appeal base broadening, including from advisors who have north of $150 million in assets — both from the independents and via the bank channel. Baby boomers are the biggest converts, says Russell Moldowan, portfolio analysis manager at Ethical Funds. “The younger generation has already embraced socially responsible investing for the most part, but baby boomers identify with what’s going on with the federal government and Al Gore’s movie [An Inconvenient Truth], then they are starting to wake up and see what is available to them.”

But are average Canadians buying into the climate change pitch? SRI mutual fund companies like the Ethical Funds Co. and Inhance Investment Management haven’t noticed any appreciable uptick in sales. Still, SRI funds are finding the doors are open when they come knocking, and these fund companies are hoping to capitalize on the good will toward green initiatives.

Vancouver-based Vancity, Canada’s largest credit union, is launching a new family of SRI funds with its subsidiary Inhance, with the goal of appealing to mainstream investors. Vancity’s investment management vice-president, Steve Eccles, insists, Vancity is “not jumping on any SRI bandwagon.”

Even though investors aren’t parking their money in SRI funds just yet, the effort by some fund companies to educate advisors is starting to bring some advisors around. Al Gore is just one of the people helping the cause. The release of his film, An Inconvenient Truth, in 2006, made the former U.S. vice-president the new hero of the SRI movement.

“What he points out is it is quite easy for people to go from apathy to despair and not go into that middle step, which is taking action,” says Dermot Foley. The problem is people think they have to jump with both feet into SRI investing, but there is a middle ground. That’s largely where SRI funds position themselves. Inhance, for instance, owns BP in one of its funds. An oil company might seem like an odd choice for an SRI fund, but Inhance focuses on the $8 billion that the company invests in alternative energy sources like solar power.

Educating investors and advisors about this is the focus of SRI companies right now. Some of the dealers are setting up screenings of Gore’s movie, and Ethical Funds is invited to talk to advisors and clients afterward. The company has struck a deal with TD Bank to “pursue a formal dialogue on lending policy enhancements to address climate change, forest protection, biodiversity conservation and indigenous peoples’ rights.”

Ethical Funds also runs an SRI training program to help advisors to become more conversive with the issues and to be able to go and change their business to appeal to investors who have an interest in SRI investing. Moldowan says Ethical Funds is hoping that program will pay off in the next little while. And hopefully it will allow advisors to raise the topic of the environment, rather than waiting for a client to initiate the discussion.

Rajagopal couldn’t agree more. “Oftentimes, the advisor has to initiate the discussion because surprisingly what I find is that when I talk to prospects, they say ‘I didn’t know you could do this,'” she says.

Getting involved in SRI doesn’t necessarily mean transforming an entire portfolio, she notes. It could simply mean, say, adding a Canadian equity fund with an SRI bent to an existing portfolio. As Foley at Inhance would say, “We don’t want to be pigeonholed into SRI. From our perspective, these are good solid portfolios that are considering these extra financial risks and taking them into consideration.

As important as environmental issues are, greed is still a centring factor. “It’s a crude way of saying it, but that’s the way it is,” says Peter Loach, a mutual fund analyst with BMO Nesbitt Burns.

It’s something SRI funds are fully aware of. “Performance comes first. You can’t make any meaningful change if you are not taking care of that,” says Moldowan.

In the past few years, SRI funds have made great strides in demonstrating that they are no longer the niche products they’re made out to be. Ethical Funds and Mackenzie’s have dispelled those notions.

In 2006, Ethical Funds’ Special Equity Fund won in the Canadian Small Cap Equity category, even though there is still a separate category for SRI funds. Mackenzie’s Universal Sustainable Opportunities Class fund returned close to 24% last year and is up 11% over the past three years.

“Companies are going to outperform if they are aware of the way the winds are shifting on the environment,” says Rajagopal. “Companies that aren’t looking to the future and aren’t addressing the climate change issue — they are going to become dinosaurs, and that’s going to affect their stock price.”

SRI investing sees the environment as just another thing to consider, along with metrics like price-to-earnings, debt or price-to-book when assessing risk. Climate change is a big risk. It impacts everything from retail stories, which have been hurt by the milder than average winter Canada has experienced this year, to mining companies, which have been shut down over environmental issues.

Loach doesn’t buy that argument. “As far as an investment vehicle, I’m not sure being an SRI type of manager is going to deliver any kind of alpha versus its peers just because of its mandate.”

Still, SRI funds are just one way for investors to direct their money toward green issues. Vanessa Stenner-Campbell, senior advisor and branch manager of Scotia McLeod in Whiterock, B.C., says her office is receiving its fair share of investors looking to protect the environment.

Despite the advances in SRI funds, Stenner-Campbell still feels this area is underserved, although she has sold some of these funds to clients. “One of the dilemmas we face is there are not many ‘ethical’ funds to choose from, they are often not top performers, and everybody’s idea of ‘ethical’ is different,” she says. She recommends high quality portfolios that can have a selection of bonds, preferred shares, bank share and other stocks that investors can feel good about owning without limiting themselves.

Making a charitable donation to a favourite cause is another way to go — and receive a tax credit to boot, she says.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(01/25/07)

Mark Brown