There are two things I know I have to get better at as I take a stab at ‘adulting.’ Firstly, I need to take control of my darn finances and invest smarter (duh, that’s why you’re reading this) and secondly, I need to give back to the world. Being a vapid, self-absorbed millennial is overrated.
I recently learned that there’s a way I could combine both of these goals. The answer? Socially responsible investing. That’s when your investment strategy incorporates environmental, social and governance factors.
RELATED Invest your conscience
It sounds like a pretty abstract concept, doesn’t it? What does it mean? Well it means that through your investments you can support the causes you care about and potentially make a difference in the world. Here’s a quick, real-life example. One simple approach would be to to invest in mutual funds that do not in any way support gun manufacturers. (Newsflash, most mutual funds will invest in just about anything that might offer a potential return; the managers don’t care if it comes from a gun manufacturer or cigarette company. To think you could be supporting something you don’t believe in and not even realize it is scary.) With mass shootings occurring with increasing frequency in North America, this option is pretty appealing—at least for me.
Mutual funds that excludes certain types of companies use what’s called ‘negative screening.’ This passive approach can allow you to saves investors the time and hassle of having to research individual companies. All an investor has to do is find a fund that adheres to the same ethical principals you believe in and the manager takes care of the rest.
My favourite example was given to me by Dustyn Lanz from the Responsible Investment Association. You can support women in leadership by investing in funds that only invest in companies that have strong female leadership in high roles. There’s a more active way of investing what you care about, called ‘impact investing.’ That’s when you invest in a company whose sole purpose is to bring about some sort of social, environment or governance change. For instance, if you invested in a company that tried to combat climate change in some way. Cool, right?
As it turns out while 77% of investors in Canada are interested in RI, a survey done by the RIA found that almost three-quarters of them know nothing, or close to nothing. On top of that, 85% of the millennials who participated in the survey said they were interested in RI compared to 69% of Boomers. Clearly, there’s interest from people in my cohort. But I can imagine how the complications of being ethical in your portfolio plus just the general complications of investing would cause people to want to hide under the covers and not think about putting their money into the stock market at all.
So, if RI sound intriguing to you, here’s how to get started.
Where to start
So far, the RIA website has been really helpful for me. You can find responsible investment products on here as well as a wealth of resources on the topic.
If you’re looking for impact investment products specifically, Open Impact is a great resource and jumping off point. Make sure to select “retail investors” under “eligibility” drop-down to see what us regular folks can invest in. Some of the products require a minimum investment of just $500 and some don’t have a minimum at all.
Still, as Norm Tasevski of Purpose Capital points out, responsible investing and social investing is highly dependent on what you’re interested in. First, you have to choose what you care about in the world, then you’ll likely have to do a lot of research and legwork on your own. The resources above should help, though.
There are a lot more products to invest in now than even five years ago, the only downside is many of these investment products don’t have much of a track record yet. Still, this PDF should help you with your research.
Oh, and the document above from RIA also compares responsible investment product returns to the average of regular products. Interestingly, the compounded five-year return of RI Canadian equity funds was 9.72% compared to regular equity funds’ 8.72%. It even outperforms the S&P/TSX Composite Index, which has a return of 8.74% in that time. I’d suggest looking through the equity sectors and funds that interest you the most in that list and then filtering out the ones that perform the lowest compared to the benchmark.
Then, you should look up the fund code provided on Morningstar to see the management expense ratio (MER). You still want to find funds with flow fees, preferably close to 1%. For instance, the Social Housing Canadian Equity Fund A has an MER of 1.17%, which is not the cheapest, but is actually a lot more affordable than many of the bank mutual funds you’ll encounter.
Invest responsibly, start slow
While it seems it’s possible, if I were to really jump into RI, I wouldn’t put all my money into these kinds of funds. You could, for instance start off by swapping out your fixed income asset allocation for perhaps a fixed income RI fund (like the RBC Vision Bond Fund Series D, which has an MER of 0.6%) that is socially responsible.
CORRECTION 10/23/17: This article previously incorrectly defined ‘positive screening.’
Be sure to check back for regular updates as Prajakta leads us on a journey as she learns what it takes to invest her own money.
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