Socially Responsible Investing in Canada

Dancing Tango for “A Closer Look.”

Recently my friend Elijah asked me about ethical investing. His concern is that he doesn’t want any of his hard earned money going towards oil companies.

I sense that Elijah is really interested in socially responsible investing (SRI). The idea goes by other names such as: green investing, ethical investing, sustainable investing, impact investing, or socially conscious investing.

In general, Elijah and millions of others like him want to avoid investing in companies involved with alcohol, tobacco, gambling, pornography, weapons, human rights violations, or poor employee relations.

At this moment Elijah is invested in a the TD Canadian Index e with 20% allocation towards the energy sector. For this index he pays 0.32% management fees. He makes a monthly contribution of whatever he can afford.

I did a bit of searching and I found:

  • Jantzi Social Index Fund (XEN) This is a Canadian ETF with 16.82% allocation in the energy sector and 0.55% management fees.
  • iShares MSCI KLD 400 Social ETF (KLD) in the US. with 0% Energy and 0.5% management fees.
  • iShares MSCI KLD 400 Social ETF (DSI) in the US. with 0% Energy and 0.5% management fees.

In short, ethical investors don’t have much choice.

If you invest in the US and want to avoid oil, one option is to buy all the sectors except the Energy sector if this is the sector that worries him the most, but this option is a bit unrealistic if he’s only investing $100 or $200 per month. And all the other sectors have companies that would not qualify as socially responsible investing.

As opposed to the US, the Canadian market is so small that there are not ETFs or index funds which separate different sectors of the Canadian economy.

Another option is to buy individual stocks and only buy those stocks which meet his criteria. But again, this will expose him to risk of lack of diversification and he doesn’t have that much capital.

One of the problems with ethical investing is that people’s moral values are different.

Some examples are clear cut. If a company makes bombs or machine guns, there is no doubt that those weapons are for killing people and I think that most ethical investors would want to avoid those companies.

But what about companies like Walmart? Some people say that it violates human rights because it prevents workers from forming an union. Other people say that Walmart is a savior for poor people by providing good quality products at low prices.

Another example is a chicken farming company. Some people say that it provides affordable chicken and eggs to the masses. Other people say they represent cruelty against animals.

A winery in California. Millions of people see nothing wrong with drinking a glass of wine after dinner. Others see the sale of alcohol as a complete violation of their moral principles.

And to address Elijah’s distaste for oil. We depend on oil products every second of our modern life. From the plastic keyboard on our computers to the plastic toothbrush we use every morning. We can get our oil from the oil sands in Canada (this is considered dirty oil) or we can get it from the middle east where there are constant human rights violations, but there is no replacement for oil derivatives products in modern day society.

Sure, green energy is advancing rapidly but I don’t see how green energy could replace all the plastic, rubber, and other chemical byproducts which are derived from oil.

The truth is that a portfolio is not the best way to express one’s moral choices.

Let’s imagine two companies: “Good Company” and “Bad Company”

Both companies have shares in the stock market for $10 and both companies pay $1 dollar in dividends every year. In short, return for investment is 10%.

A campaign against Bad Company and in Favor of Good company moves the share price of each company. Now Good Company shares cost $20 and Bad Company shares cost $5. But regardless of their share price, they still pay $1 in dividends.

As an investor, if I pay $5 in Bad Company for my $1 of dividend, now I make 20% return on my investment. If I pay $20 in Good Company for my $1 of dividend, now I make 5% return on my investment.

In the stock market, the Bad Company shareholders will be rewarded and the Good Company Shareholders will be penalized.

How to create an impact

The best way to create an impact is to vote with your dollars. As a consumer your voice is much louder and corporations eventually listen.

For example. My friend Cheryl has been a vegetarian and then a vegan for many years. When I met her she was the odd person with the different eating habits, but little by little the vegetarian and vegan community has continued to grow. Now there are more and more vegan restaurants all over the city. Cheryl and millions of other vegans have voted with their money and corporations are listening.

Another example is the company Gucci which announced that they will no longer use fur in their designs. Obviously they are responding to demands of the consumer. The consumer has spoken and Gucci is listening.

You can have a much bigger impact as a consumer than as a stock holder

The best way to change a company’s behavior is not by buying or selling its share in the stock market, it’s by buying or not buying its products. If you and millions of others boycott their products, management will realize that they have to change quick.

Other ways to create changes is to lobby government and ask government not to buy products from those companies.

You can also express your SRI with your political vote. For example, in the US, the people voted for Donald Trump, a person who denies climate change and who wants to revive the coal industry at the expense of cleaner sources of energy. Many people who care about the environment  didn’t bother to vote, and so, they have to live with the consequences of having Donald Trump as president.

In short, you will have a bigger voice if you express your SRI by the way you consume and by the way you vote than by the way you invest in the stock market.

2 thoughts on “Socially Responsible Investing in Canada

  1. Agree with you that people have more of an impact on the consumer side than the investor side. You could argue almost every company does something wrong (e.g. Procter & Gamble makes diapers which fill up landfills). As an investor, it’s hard enough to evaluate companies based on cash flow and other tangible metrics.

  2. Hey Matt,

    Thank you for the comment.

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    Congratulations. 🙂

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