Socially Responsible Investing: A How-To Guide

Socially and environmentally responsible investing is on the rise. Here’s everything you need to know about socially responsible investing in Canada.

Chances are you’ve heard about socially responsible investments — or SRIs— especially since Canadians have been embracing them in a big way in recent years. According to a 2018 report from the Responsible Investment Association of Canada, SRIs now represent more than half (50.6%) of the country’s investment industry, up from 37.8% just two years ago. Clearly, sustainable investing in Canada is a hot topic in the investment world.

This growth is being driven in part by millennials, who tend to be more socially conscious than their parents, thanks to growing up learning the three Rs (reduce, reuse, recycle), reading The Lorax, and witnessing the effects of climate change. This generation is super stoked about sustainable investing and socially conscious investment funds.

But responsible investing isn’t just about supporting companies that respect the environment. There’s a whole raft of values — such as human rights, labour practices, health and corporate governance — that firms can address while still earning profits and increasing value for investors. In many cases, SRIs even outperform their non-SRI counterparts.

So, What Are SRIs Exactly?

Broadly speaking, SRIs are investments deemed to meet a certain threshold of social responsibility.

In some cases, that means excluding investments in sectors considered bad for society (e.g., tobacco or firearms) and instead investing in profitable companies that have a social benefit (e.g., innovative healthcare or renewable energy).

In other cases, SRIs can include companies that are simply more socially responsible than their competitors.  So, for example, while a manufacturer may have a sizable carbon footprint, if it is comparatively much lower than others in its sector, it could still be classified as an SRI.

Some SRIs will also qualify as an ESG investment based on a company’s record on environmental, social and governance issues (e.g., executive compensation, board accountability, management structure), as assessed by an independent third party, such as Morgan Stanley Capital International (MCSI).

How To Invest in a Socially Responsible Way?

You could conduct research to find out which companies or funds are both socially responsible and profitable and then invest in them.

But, in the same way that it’s much easier to let a robo advisor guide you with a prefab portfolio of exchange traded funds (ETFs) to match your risk tolerance, you can also use the services of a robo advisor to invest in a portfolio of socially responsible ETFs. This not only gives you the benefit of diversification, but also lower fees than traditional mutual funds.

There are a couple of caveats to note, however.

First, you should be aware that socially responsible ETFs have a slightly higher management expense ratio (MER) than other ETFs, because there is more work required to screen out undesirable companies. But we’re usually talking about one or two tenths of a percent higher — a negligible fee difference for most individual investors.

Second, because there is no standard definition of what makes an investment socially responsible, you should still look carefully at the funds on offer (and what type of companies they include) to make sure they match up with your values. The website ETF.com is a good fully searchable resource of information on socially responsible ETFs, including fund performance and MSCI ESG Fund Quality Scores — which is essentially a rating of how socially responsible a fund is on a scale from one to 10.

Without further ado, here then are the best robo advisors in Canada for socially responsible investing, and a breakdown of their ETFs, fees and other pertinent details.socially responsible investing

Wealthsimple

Wealthsimple launched its SRI portfolios in May 2016, and about a quarter of its clients now have money invested in them. There are 10 risk levels for the SRI portfolios, ranging from 90% equity/10% fixed income, to 20% equity/80% fixed income. The robo advisor has also since launched a Halal Investing portfolio, for clients looking for an investment option that's compliant with Muslim law.

Wealthsimple’s SRI portfolios include the following ETFs:

  • CRBN – iShares MSCI ACWI Low Carbon Target ETF: tracks global stocks with a lower carbon exposure than the broader market
  • PZD – Invesco Cleantech Portfolio: tracks companies in the cleantech industry (e.g., clean energy, environmental, and sustainable/green, products and services) with outperformance potential
  • VIDI – Vident International Equity Fund: tracks companies from (non-U.S.) developed and emerging economies with sustainable growth, based on criteria such as human rights and low corruption
  • XEN – iShares Jantzi Social Index ETF: tracks Canadian stocks screening for ESG factors and excluding companies involved in military contracting, nuclear power or tobacco
  • ZFM – BMO Mid Federal Bond Index ETF: fixed-income exposure via Canadian government bonds only

The Fine Print

  • Availability: all provinces and territories
  • Minimum investment: none
  • Account types: RRSP, spousal RRSP, TFSA, RESP, RRIF, LIRA, non-registered, corporate
  • Fees: management fees are 0.4% to 0.5%, depending on the size of the account; the SRI portfolios have MERs ranging from 0.25% to 0.4%, depending on risk level.
  • Special offer: Young and Thrifty readers get their first $10,000 of investments with no management fees for a year when they sign up for their first account at Wealthsimple.

ModernAdvisor

ModernAdvisor was the first robo advisor in Canada to offer SRI options in February 2016.  It now has 10 different SRI portfolios that are each designed for a specific level of risk. Depending on your risk level, 75% to 95% percent of your portfolio is eligible for responsible investing.

ModernAdvisor’s SRI portfolios include the following ETFs:

  • CLF – iShares Short-term Government Bond Index ETF: fixed-income exposure via Canadian government bonds
  • DSI – iShares MSCI KLD 400 Social ETF: tracks an index of 400 U.S. stocks deemed to have positive ESG criteria
  • ESGD – iShares MSCI EAFE ESG Optimized ETF: tracks stocks from Europe, Australasia and Far East deemed to have positive ESG criteria
  • ESGE – iShares MSCI EM ESG Optimized ETF: tracks emerging market stocks deemed to have positive ESG criteria
  • REET – iShares Global REIT ETF: global index of firms involved in the ownership and operation of real estate; this ETF has received a ‘High' rating from Morningstar for sustainability
  • XEN – iShares Jantzi Social Index ETF: tracks Canadian stocks screening for ESG factors and excluding companies involved in military contracting, nuclear power or tobacco
  • ZEF – BMO Emerging Market Bond ETF: bonds from emerging markets like South Korea, Russia, Mexico and Indonesia

The Fine Print

  • Availability: all provinces
  • Minimum investment: $1,000
  • Account types: RRSP, TFSA, RESP, RRIF, LIRA, non-registered, corporate, (expects to begin offering RDSP accounts sometime in 2019)
  • Fees: There is no management fee to clients with accounts of less than $10,000. For other clients management fees range between 0.35% to 0.5%, depending on the account size. The SRI portfolios have MERs ranging from 0.21% to 0.34%, depending on risk level.
  • Special offer: Young and Thrifty readers receive $50,000 managed for free for 1 year when you open and fund a new ModernAdvisor account.

Questrade

Questrade is the most recent Canadian robo advisor to offer SRIs, added as part of the company’s November launch of Questwealth Portfolios, what the company calls the “substantially improved version” of its former Portfolio IQ offerings.

The SRI portfolios have the same diverse set of risk profiles as the five available Questwealth Portfolios: conservative, income, balanced, growth and aggressive. Questrade’s SRI portfolios are actively managed to monitor and respond to significant changes in market conditions.

Questrade’s SRI portfolios include the following ETFs:

  • DSI – iShares MSCI KLD 400 Social ETF: tracks an index of 400 US stocks deemed to have positive ESG criteria
  • ESGD – iShares MSCI EAFE ESG Optimized ETF: tracks stocks from Europe, Australasia and Far East deemed to have positive ESG criteria
  • ESGE – iShares MSCI EM ESG Optimized ETF: tracks emerging market stocks deemed to have positive ESG criteria
  • LOWC – MSCI ACWI Low Carbon Target ETF: tracks an index of global stocks with a bias toward lower carbon emissions
  • PZD – Invesco Cleantech Portfolio: tracks companies in the cleantech industry (e.g., clean energy, environmental, and sustainable/green, products and services) with outperformance potential
  • SPYX – SPDR S&P 500 Fossil Fuel Reserve Free ETF: tracks an S&P 500-based index, excluding companies with known fossil fuel reserves
  • XEN – iShares Jantzi Social Index ETF: tracks Canadian stocks, excluding companies with a poor social responsibility record based on broad ESG criteria

The Fine Print

  • Availability: all provinces and territories
  • Minimum investment: $1,000
  • Account types: RRSP, spousal RRSP, TFSA, RESP, family RESP, RRIF, LIRA, locked-in RRSP, LIF
  • Fees: management fees are 0.20% to 0.25%, depending on size of account; the SRI portfolios have MERs ranging from of 0.21% to 0.35%, depending on risk level.
  • Special offer: Young and Thrifty readers get $50 in free trades when they open an investment account with Questrade.

Wealth Bar

Although it doesn’t offer a full portfolio of SRIs, Wealth Bar does have a Cleantech add-on that allows investors to put 5% of their money into the Invesco Cleantech Portfolio ETF (PZD). As noted above, this ETF is an environmentally progressive fund with a track record for performance. It invests in businesses where revenues or operating profits come from cleantech businesses, such as those that focus on renewable energy, water purification, logistics and transportation to reduce overall impact on the environment.

The Fine Print

  • Availability: all provinces and territories
  • Minimum investment: $1,000 (in any Wealth Bar account; up to 5% of investment can be put toward the Cleantech add-on)
  • Account types: RRSP, TFSA, RESP, RDSP and more
  • Fees: management fees start at 0.6%. Total portfolio MERs (including the Cleantech add-on) range from about 0.29% to 0.37%, depending on risk level
  • Special offer: Young and Thrifty readers get up to $15,000 managed free for 1 year when they sign up and fund their account.

The Bottom Line

Socially responsible investing in Canada is easy, especially with robo advisors offering socially conscious investment funds. Using a robo advisor gives you the benefit of diversification, as well as lower fees than traditional mutual funds. Plus, you can feel good about where your money is going, while building your nest egg for the future.

Socially and environmentally responsible investing is on the rise – so why not join the movement?

socially responsible investing

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Tamar Satov

Tamar Satov

Tamar Satov is an award-winning journalist specializing in the areas of personal finance and parenting. Her work has appeared in Canadian Living, The Globe and Mail, Today’s Parent, Parents Canada, Walmart Live Better and many other consumer magazines and websites. She is the former Managing Editor of CPA Magazine, for Canada’s Chartered Professional Accountants, and contributes to other publications for finance professionals including FORUM, for Canada’s financial advisors.
Tamar Satov

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