I’ve seen the future of socially responsible investing, and it’s here. Well, if you live in Europe it’s here, but we’re still quite a bit behind the times in Canada, if you’ll let me explain.You see the traditional, and still prevalent approach to socially responsible investment in Canada, is to purchase an ‘ethical’ fund from one of the four or five companies in Canada that provide this kind of investment. There is nothing wrong with this strategy, and one can put together a top-flight portfolio by selecting from amongst the best offerings of Acuity, Meritas, Ethical Funds, and others.
Yet there is a certain vanilla-like quality to what is available in the Canadian marketplace, because virtually all of these funds begin constructing their portfolios with the same basic foundation. That is to start with every stock that is listed on Canadian, or US, or foreign exchanges, depending on the mandate of the fund, and then apply various screens to weed out those companies that derive their income from what are deemed to be ethically unsupportive pursuits. Think bombs, cigarettes, sweatshops, etc. Take out the bad guys, choose those companies that have demonstrated best practices and profits from what’s left, and v’ila, you have an ethical mutual fund.
Now I don’t mean to diminish the fine work these fund companies are doing, particularly where it involves engaging with corporations on the social and environmental impact of their activities, but the screening approach described above leaves many investors unfulfilled. No major fund company in Canada is devoted to a proactive strategy that would seek out companies in sectors of the economy that are specifically focused on issues of sustainability. If the demand from investors in Canada were sufficient, this need would be met, but as it stands, we are left with some very good socially responsible funds that all look somewhat similar in their constituent ingredients.When it comes to providing innovative, leading-edge solutions to socially responsible investors, few can measure up to Henderson Group plc, based in London, England. Founded in 1934, Henderson Group manages nearly Cdn $150 billion on behalf of investors in Europe, Asia and the US, and they have, in my opinion, developed one of the most forward-thinking investments available today (See www.henderson.com/home/sri/).Henderson Group calls this new offering the Industries of the Future Fund. Rather than beginning the investment selection process with a choice of all companies operating across all industries, they have narrowed their starting point to include only those companies that operate in one of ten so-called sustainability industries. These industries range from high-growth areas such as renewable energy and medical technologies, to more defensive industries such as sustainable transport, water, organic foods and social property, and extending to education, resource efficiency (such as products and processes that reduce energy consumption), safety, and quality of life.
According to Henderson’s Director of SRI Development, Mark Camanale, ‘What we wanted to do is make the ‘core service’ of the company recognizable as having social or environmental benefits, instead of trying to work out whether Megabank A because it is more CSR (corporate social responsibility) compliant than Megabank B. We are not aware of any manager that has investigated the total size of the universe of core social investment themes, and then built an investment portfolio exclusively from these ideas.
So it sounds good in theory, right? But how might such a fund perform? Well, seven of these ten industries significantly outperformed the MSCI World Index in a back test over the one, two, three, five, seven, and ten-year periods ending December 31, 2004. The other three industries outperformed the benchmark the majority of the time in these same periods. The portfolio is outperforming the benchmark currently, returning 16.3 percent over the three-month period ending July 31, 2005, while the MCSI World Index returned 15.4 percent during that period.
Henderson examined over 4,800 companies around the globe operating in the 10 sustainability industries that they identified, and then winnowed this list down to their best 100 investment opportunities. There are a few Canadian companies included in their current portfolio, including Canadian Pacific Railways in the sustainable transport category, Westport Innovations for their technology that allows diesel engines to run on alternative fuels, and notably, Victoria-based Carmanah Technologies for their prominent role in developing solar-powered LED lighting.
Other companies you will find in the Henderson fund include Shimano, one of the world’s leading bicycle parts manufacturers, Ocean Power Technologies, a manufacturer of equipment that generates electricity from the movement of ocean waves, McGraw Hill, a leading publisher of school textbooks, and Ranbaxy Laboratories, an Indian pharmaceutical company that provides generic medicines to developing countries.
Henderson’s investment team has done a great job of putting together a portfolio that would appeal to many socially responsible investors. Let’s hope that the Canadian market will one day evolve in the same manner.