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Employers Offer Socially Responsible Options

By: Gary Hawton

More and more companies are now offering socially responsible investment options among the pension fund choices given to their employees. Gary Hawton, of Meritas Mutual Funds, examines this developing trend.

Asset managers saw their stake in the socially responsible investment (SRI) field increase from $11.3 billion to $16.7 billion between June of 2000 and two years later, says a recent study by the Social Investment Organization (SIO). Retail mutual funds and other investment categories were also tracked in the study that is available at the SIO’s website, www.socialinvestment. ca. Clearly asset managers (the category where many pension funds would be recorded) showed the greatest gain over a time period where investment markets were struggling and fund flows were generally non-existent or negative.

What was behind this increase in assets may have been several issues that led to increased interest from employers, either acting on their own to seek out an SRI option or acting in response to employee requests. Perhaps it was because this was the time that Enron and WorldCom were making headlines, corporate governance issues were beginning to come to the forefront, and investors were disillusioned with investing in general.

Root Cause

Whatever the root cause, i t was increased client demand that saw Group Retirement Services, a division of The Great-West Life Assurance Company and London Life Insurance Company, add four SRI options about one year ago. Bill Kyle, vice-president of Group Retirement Services, says “We had several prospects asking us about SRI options and that led us to create our SRI selections and the demand for these options has continued to grow.”

Some companies opt for the SRI option to be their ‘core or default’ option. These are usually organizations that would have a mission statement that corresponds well with some of the tenets of SRI. Pam Peters-Pries, executive secretary, support services, at the Mennonite Church of Canada, outlines the reasons they chose to favour a SRI option. “It only makes sense that we pursue what we term as mission-based investing. We wanted to ensure that everything we did as an organization was working towards the same goals as our mission statement. It made no sense to us to have our pension plan potentially working at cross-purposes to the church. We wanted to avoid investments in some sectors of the economy while favouring companies with excellent track records on the environment, human rights issues, and gender and cultural equality.” At IKEA Canada, the choice to ensure that there was a solid SRI option in their employee pension plan came down to two facts. IKEA Canada itself attempts to operate in line with what would be deemed to be good corporate social responsibility (CSR) practices because it values diversity in its workforce and wants to honour that within its benefits package. “This fits with our values as a socially responsible employer. CSR is a strong component in our corporate values,” says Shelley DaCosta, compensation and benefits manager at IKEA Canada. “We try to mirror that in how we conduct our business and in what we offer our co-workers.”

Valuable Addition

Other employers may also have begun to notice that more of their employees might be interested in an SRI option and, while not wanting to make this a focus of the plan, it is often available as a low-cost or no cost add-on for the employer. And to the employee, it has the potential to be seen as a very valuable addition to their benefits package.

Plan providers have responded in a number of ways to the demand for SRI product. Some continue to avoid the area for fear that the new products will fail to attract enough assets to be profitable. Others have added one or two options, often a SRI version of an existing option with the same manager. Still others have chosen to go to a fund manager that is a SRI specialist and have them be the backbone of the SRI selection. What the best route is likely depends on the type of client that is looking for this option.

And to address the number one question (some might say myth) about SRI: What about performance? Surprisingly, performance does not necessarily suffer under a SRI mandate, even though there is the elimination of some securities from the investment universe. This does not come as a surprise to many in the industry who point to the Domini Social Index (, a socially-screened index in the U.S. that boasts 10 year returns to the end of February 2004 of 12.12 per cent versus 11.36 per cent for the S&P 500. In Canada, similar outperformance has been recorded by the Jantzi Social Index (JSI) since its inception in January 2000. The JSI has recorded cumulative performance of 16.49 per cent to the end of February 2004 while its most comparable non-SRI index has lagged behind at 5.31 per cent over the same time period. The S&P/TSX also fell well short at 10.99 per cent over this time period.

The performance knock on SRI is often one that is fuelled by the underperformance of one or two managers on the retail side of the business where investment style, asset base, and other items can have a greater impact than the supposed Modern Portfolio Theory impact of lessening your investment universe. Supporters of SRI point to the aforementioned track record of the indices to attempt to better isolate the long-term effects of screening companies into and out of a portfolio based on SRI principles.

Shareholder Activism

But screening alone may not account for the performance difference with SRI portfolios. The shareholder activism role that some SRI managers (especially those that concentrate on SRI exclusively) embrace can also have a positive effect even though it takes extra effort and cost on the part of the manager. The business case for shareholder activism or engagement was outlined in Jim Helik’s ‘The Back Page’ article in the February edition of Benefits and Pensions Monitor. For it to have the most impact, Helik is right, more investors need to join forces on this front.

The increased interest in SRIs by pension plans can lead to more money speaking louder to corporations, but only if the investment manager has the capacity, the expertise, and the passion to ‘put their mouth where their money is.’

Gary A. Hawton is chief executive officer of Meritas Mutual Funds.

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