Friday, February 27, 2009

Sustainability is a journey, not a destination…

Wayne Roberts gave an engaging presentation to the Post Carbon Toronto Meet Up last night on the social and environmental implications of diet, eating and food in a post peak world. As a long time environmental activist and current head of the Toronto Food Policy Council, Dr. Roberts is uniquely qualified to address this multidimensional topic.

He began by telling us that since the population of the world is about 6 billion, and on average people eat 3 meals a day (maybe only one in some places but often the equivalent of 4 or 5 in North America), anything related to food will have a big impact. Imagine we do something small but problematic, and then imagine that multiplied by 18 billion. Despite this effect, food is generally marginalized in environmental discussions.

This is of interest to socially responsible investors as many of our concerns are impacted by food, but we don’t tend to focus on food companies as the cause of these problems. For example, Dr. Roberts stated that the largest cause of deforestation in the world is agriculture. And that the highest rate of child labour is in the food industry, particularly chocolate. He also discussed the negative impacts of chemical fertilizers, which was quite disturbing given that Potash appears in some SRI mutual fund portfolios.

Dr. Roberts cautioned us to beware of the quick fix. He used as an example The 100 Mile Diet, which has brought issues around what we eat to the forefront and created a new category of foodies, the locavores. While many good things have sprung from this, it has also oversimplified the debate. Rather than looking at the embodied energy in the food, we now focus on transportation, which accounts for only 14% of that energy. So while ‘food miles’ is easy and catchy, it’s not the only factor to consider. Addressing the more complex and interconnected issues is demanding, and a challenge faced by SRI professionals as well.

Other points he raised were very appealing to me as they showed further parallels between the food movement and SRI. That the food movement is an area where we as individuals can make a difference with our dollars, that food activists work on creating bridges between various sectors in their community, and that we both look for continuous improvement. In Dr. Robert’s words “we must move forward relentlessly, but incrementally”. And finally, that sustainability is a journey, not a destination.

Thursday, February 26, 2009

Banks agree to shareholder proposals on executive compensation

In a major victory for the "say on pay" campaign, two of Canada's big banks have agreed to implement a shareholder resolution on executive compensation.

At its annual general meeting today, RBC shareholders voted 54.4% in favour of a resolution filed by Meritas Mutual Funds and 56.9% in favour of a similar resolution filed by Medac (Le Mouvement d'education et de defense des actionnaires).

CIBC has not yet released detailed numbers, but the same resolution at its AGM also received majority support.

The resolution - filed at all of Canada's big banks - allows shareholders to provide an annual advisory vote to the banks' boards of directors on executive compensation. The votes are non-binding - boards will still retain ultimate jurisdiction on compensation - but advocates say today's move gives shareholders a voice on a critical corporate governance issue.

"Now we have two of Canada's big banks respecting the wishes of the majority of their shareholders by allowing them to provide the board of directors with feedback on executive compensation," said Meritas president Gary Hawton in an interview shortly after the results were announced. "Our view is that if the directors do not hear from the shareholders they represent on executive pay, they will not be able to take these views into account in their decisions."

Hawton says he's optimistic that today's votes will set a precedent: similar resolutions have been filed at the Bank of Montreal and Bank of Nova Scotia, whose AGMs are scheduled for next week. Hawton hopes BMO and BNS will follow the lead of RBC and CIBC and if that happens, TD Bank could simply scrap its vote and agree to the proposal, since its AGM won't be held until April 2.

National Bank made just such a pre-emptive move today, announcing before its AGM that shareholders would be given an advisory vote on executive compensation starting next year. "In so doing, the bank is acknowledging the developments of the past few weeks relating to this matter and fulfilling a wish expressed by many of its shareholders," National said in a statement.

This could mean a clean sweep for the resolution at the banks, a major achievement considering the same resolution received an average of 40.5% support last year. Similar resolutions have been filed this year by Meritas with Sun Life Financial, the TMX Group, Nortel Networks and Potash Corporation.

"We're hopeful that today's results will lead to other corporations accepting this model," Hawton added, noting that the issue could ultimately end up in the hands of the regulators.

Wednesday, February 25, 2009

Social risk key to losses in asset-backed commercial paper

Special Guest Blog by Eugene Ellmen, Executive Director of the Social Investment Organization

The news that Quebec’s giant Caisse de depot lost 25% of its value partly due to the collapse in the asset-backed commercial paper market (ABCP) has left people shaking their heads. Top people in government, banking and investment are now asking the obvious question: “How could they not have seen the risk in this?”

As the murky world of ABCP has come to light, it’s becoming increasingly apparent that two issues were key to this massive market failure. First, the exact nature of the underlying assets were never made public; and second, the unique social risks presented by these assets were never disclosed nor understood by the market.

This lack of transparency was caused by disclosure exemptions representing massive regulatory failure; a regulatory failure that cost investors billions of dollars in assets.

The non-bank ABCP market was worth an estimated $35 billion before it collapsed in August 2007, weighed down by concerns over the sub-prime mortgage industry in the US. Non-bank ABCP contained bundles of loans and mortgages that were not backed by the assets of Canada’s banks, unlike bank-owned ABCP. While the U.S. sub-prime mortgage market only represented a small fraction of the total ABCP market, the market uncertainty over sub-prime mortgages cast a pall over the market, destroying their value. After months of negotiations between investors and brokers, a restructuring agreement was completed just this past January, restoring some assets to investors.

While the Caisse de depot was probably the most high-profile investor in ABCP, it was certainly not alone in this market. Major corporations, mutual funds, pension funds and more than 1,000 individuals were caught in this market collapse.

How could such a thing have happened? In hindsight, it has become apparent that issuers of ABCP failed to disclose the underlying assets contained in the ABCP bundles. This lack of disclosure created a market fog, encouraging buyers to treat them as secure, highly-rated instruments.

The lack of financial disclosure was bad enough, but there was a compounding problem of a lack of social disclosure. As many observers have made clear, unethical lending practices were the norm by many of the sub-prime mortgage companies in the U.S. These mortgage companies used high-pressure sales tactics to place low-income borrowers into sub-prime mortgages, only to see these mortgages skyrocket in penalties and interest rates in the future. These penalties and interest rates combined to create such a burden in communities across the U.S. that large numbers of homeowners walked away from their mortgages, creating a cascade effect that collapsed the sub-prime mortgage market, along with real estate values and other credit

This represented a unique social risk. In fact Innovest Strategic Value Advisors identified weaknesses in the credit markets based on an environmental, social and governance (ESG) analysis as far back as 2006. The ESG analysis conducted by Innovest in a review of bank credit markets found that rising home ownership combined with lower real wages was putting the sub-prime mortgage markets at grave risk.

Yet this risk was not disclosed either in the mortgage-backed securities that were sold directly in the U.S. market, nor as part of the bundle of asset-backed commercial paper in Canada.

The main reason why issuers of ABCP and other structured finance products could escape such disclosure is that they are considered to be part of the exempt market by securities regulators. In other words, securities commissions treat structured finance products more as a debt product (that doesn’t need disclosure requirements) than a security, which is subject to prospectus provisions and continuous disclosure requirements.

The Canadian Securities Administrators – the umbrella organization for securities commissions in Canada – has just completed a consultation on this issue. There are wide ranging calls for more disclosure and tightening of the exempt market. It’s clear that issuers of non-bank ABCP need to be considered reporting issuers, subject to prospectus requirements and continuous disclosure obligations.

But more than that, the non-bank ABCP market, and securities generally need to be subject to environmental, social and governance disclosure obligations that will bring to light the unique non-financial risks that they pose.

The ABCP debacle shows the need for massive regulatory reform, so that the market can better understand social and environmental risks, integrate them into their investment decisions, and price them into securities offered for sale.

For more information,

SRI Canadian equity funds outperformed their conventional peers in January

RRSP season is rapidly drawing to a close, and unless you’re waiting until the very last minute, you’ve probably made your investing decisions for this year. Still, we thought it might be useful to take a quick look at the performance of SRI Canadian equity funds in the month of January.

According to data from Morningstar, SRI funds in the Canadian equity category lost an average of about 3.4% in the first month of 2009. Only one fund managed to buck the negative trend, and just barely, Acuity Social Values Canadian Equity, which was up 0.14% as of January 31. In the Canadian Focused Small/Mid Cap Equity category, Mavrix Sierra Equity bounced back, gaining 2.63% in January. The Mavrix fund has a lot of catching up to do from a dismal 2008, when it lost nearly 65%. Overall, Morningstar’s Canadian equity index (comprised of nearly 500 funds) was off 3.6% in January and the S&P/TSX Composite Index was down 3%.

Although it’s much too early in the year to draw conclusions, SRI investors can take some comfort from the fact that Canadian equity funds are slightly outperforming their peers. Next month, we’ll delve a little deeper into another SRI fund category.

Monday, February 23, 2009

ABCP needs transparency, disclosure: SIO

By Doug Watt.
Originally published on

The route to regulatory repair of Canada's besieged asset-backed commercial paper (ABCP) market is through mandated transparency and disclosure, according to a submission on the recent ABCP crisis by the Social Investment Organization (SIO), the national association for socially responsible investment.
Canada's $35 billion non-bank ABCP market ground to a halt in August 2007, largely due to concerns over the collapse of the U.S. sub-prime mortgage industry. A massive restructuring effort led by Purdy Crawford was finally completed in January, bringing the 17-month saga to a close.
Last fall, the Canadian Securities Administrators asked for comments on new regulatory proposals related to ABCP.
"We believe that the root cause of this market failure was a lack of transparency and disclosure by the issuers of ABCP in Canada, particularly with regard to the non-financial aspects of the underlying assets," says SIO executive director Eugene Ellmen.
Although sub-prime mortgages were a small part of the Canadian ABCP market, the panic they generated in the U.S. led to a crisis in confidence in the overall credit markets, affecting other structured products, such as collateralized debt obligations and credit default swaps.
Ellmen notes that some industry observers, such as Innovest Strategic Value Advisors, identified weaknesses in the credit market based on environmental, social and governance (ESG) issues as far back as 2006. "The analysis conducted by Innovest in a review of bank credit markets found that rising home ownership combined with lower real wages was putting the sub-prime mortgage market at real risk."
In hindsight, Ellmen says, these non-financial or ESG risks posed significant threats to the safety of the credit markets. "So we have to ask ourselves why these risks were not properly identified by the market and priced into mortgage-based securities and other structured finance products such as ABCP."
The SIO believes that if these risks had been properly disclosed and the information disseminated into the market, many analysts and investors would have been reluctant to purchase ABCP, reducing liquidity for these instruments and mitigating the impact of their subsequent collapse.
"The underlying risk of sub-prime mortgages was an ESG risk, not a financial risk," Ellmen concludes in his submission. "The lack of a disclosure framework prevented analysts and investors from incorporating such risks into their assessment of asset-back securities, resulting in a disastrous over-subscription to this market."
The SIO recommends that issuers or originators of ABCP should be reporting issuers, subject to prospectus and continuous disclosure requirements, which should include material environmental, social and governance risks, as well as key performance indicators to enable analysts and investors to assess the non-financial aspects of such offerings.
"ESG policies and practices should be outlined in the annual information form and the management discussion and analysis as part of the continuous disclosure requirements."
The SIO also suggests that while credit rating agencies, which took a share of the blame for the ABCP crisis, should be subjected to a regulatory framework, mandated disclosure of information from issuers to the rating agencies should not a be a part of this framework.
"The role of credit rating agencies is to assist investors in making a decision about a credit product, not to release all the relevant information on that product into the market. Markets only operate efficiently if issuers release all material information on their securities through a continuous disclosure basis."

Sunday, February 22, 2009

Canadian oil producer targeted by social investors

Canadian Natural Resources Ltd. has been added to a Climate Watch list by Ceres, a network of influential U.S. investors and environmental groups.

The Calgary-based company has refused to meet with investors on the issue of climate change, and, unlike other oil companies, has not made any renewable energy investments, according to Ceres. Ethical Funds filed a resolution with Canadian Natural Resources in 2007 requesting that it disclose its climate risks, but the company has not responded to the resolution.

"Leadership is what is required to address the manifold risks associated with oil sands extraction", said Bob Walker, vice president, sustainability at Ethical Funds. "We remain hopeful that Canadian Natural Resources Limited will respond to the increasing investor interest in the region and begin to disclose and dialogue with us on the risks and solutions in Canada’s oil sands."
Companies on the Climate Watch list include coal companies, oil and power producers and other businesses that advocates believe are not adequately dealing with climate-related business impacts, whether from physical changes, emerging climate regulations or growing global demand for low-carbon technologies and services. The updated list includes Southern, Massey Energy, Consol Energy, Ultra Petroleum, ExxonMobil, General Motors and Standard Pacific, as well as Canadian Natural Resources and Chevron. "These climate watch companies are ignoring a major business trend that will influence their competitive positioning for years to come," said Mindy S. Lubber, president of Ceres.

Canadian Natural Resources and Chevron were targeted for extensive investments in Canada's oil sands region, where carbon-intensive extraction technologies are being used to produce more than one million barrels of oil each day, Ceres said in a press release.

A record 63 global warming resolutions have been filed with 56 U.S. companies and one Canadian company in this year's proxy voting season. The resolutions, which seek greater disclosure from companies on their financial exposure and response strategies to climate-related business trends, were filed by some of the largest public pension funds in the U.S., as well as labour, foundation, religious and other institutional shareholders, which collectively manage more than US$1.9 trillion in assets. The shareholder filings are coordinated by Ceres and the Interfaith Center on Corporate Responsibility (ICCR), a group of faith-based investors.

"Companies in every industry, especially energy sectors, must assess and mitigate climate change risks," said New York City Comptroller William Thompson Jr., whose office oversees $115 billion in pension fund assets. “Investors require full and transparent disclosure of the actions companies are taking to address the risks and opportunities of climate change, so that they can make informed investment decisions."

"Despite the unrelenting poor economic news, we know that taking care of our environment is also taking care of the world's economy," said Jack Ehnes, Chief Executive Officer of the California State Teachers’ Retirement System (CalSTRS), the second largest public pension fund in the U.S. which own shares in virtually all of the companies targeted with shareholder resolutions. "We can’t be distracted by short-term concerns at the expense of meaningful action to mitigate the impacts of climate change."

Friday, February 20, 2009

RiskMetrics Group to acquire Innovest

Two of the world’s leading providers of environmental, social and governance (ESG) research and analysis are joining forces. RiskMetrics Group has announced plans to acquire Innovest Strategic Value Advisors. Both firms are headquartered in New York, though Innovest also has a Toronto office.

The acquisition of Innovest and its team of experts, led by co-founders Dr. Matthew Kiernan and Hewson Baltzell, enlarges RiskMetrics footprint in the environmental, social and governance research space at a time when the financial community’s interests in sustainability are growing, the two companies said in a joint news release issued on Thursday.

"A myriad of long-term sustainability factors, particularly around climate change, are playing an increasingly important role in the way funds invest and view their portfolio risk," said Ethan Berman, chief executive officer of RiskMetrics Group. "Innovest is one of the few firms that has successfully taken a quantitative approach to assessing ESG issues, thereby helping investors view what are typically intangible, compliance-oriented issues through a clearer financial lens."

RiskMetrics provides ESG research, data feeds and portfolio screening tools to global institutions that have a need to comply with clients’ investment mandates. With the acquisition of Innovest, clients will have access to an ESG analyst team of more than 50 research professionals.

"It would be an understatement to say that today’s turbulent market environment is placing an unprecedented premium on understanding the entire spectrum of investment risks – both traditional and non-traditional,” said Dr. Matthew Kiernan, founder and chief executive of Innovest. "By combining Innovest’s ESG research with RiskMetrics leading capabilities in risk management and corporate governance, we can help investors make more-informed decisions."

Innovest had $7.0 million of revenues in 2008 and is expected to contribute in excess of $2 million of adjusted EBITDA to RiskMetrics. The transaction is expected to close on March 2, 2009, pending the usual regulatory approvals.

Thursday, February 19, 2009

Can Socially Responsible Investing Help Money Managers

This was the topic of a CFA Society luncheon seminar in Toronto today. Moderator of the event, the SIO’s Executive Director Eugene Ellmen, put forward the idea that “when markets return to normal, asset managers are going to be looking for new tools and we believe that ESG analysis and integration will be one of those tools.” Then the four panellists took their turn discussing the issue from various viewpoints.

Jordan Berger, head of Mercer’s Responsible Investment practice in Canada, provided an overview of where we are now in SRI, including some historical context. He concluded with the idea that as non traditional business risks are hitting the bottom line, mission based investors and mainstream investors are moving closer together. He posited a world where all investors will use integrated investment analysis, a holistic risk/return framework and a thoughtful approach to shareholder engagement.

Next up was Al Goss, Assistant Professor of Finance at Ryerson University. He presented the results of some recent research on Corporate Social Responsibility and financial distress. After taking us through some theories and some number crunching in his usual humorous manner, he told us that a statistically significant relationship existed between good CSR practices and less financial distress, as identified by defaults and takeovers. He noted though, that he had not completed his research on the aspects of which came first, that is, do companies with better scores on CSR indicators have less financial distress, or does the fact that they have less financial distress give them more money to spend on CSR? Regardless of the outcome of that question, he feels that enough work has been done to conclude that there is important information embedded in extra-financial metrics. You can check out some of his papers at

The third panellist was Brigid Barnett, CFA, Manager, Responsible Investing, CPP Investment Board. Brigid’s presentation focused on how the CPPIB implements their Responsible Investment Policy. She began by stating that “consistent with our investment only mandate we look at ESG factors only as they affect the potential risk and return of investments”. She talked about a number of collaborative initiatives that they have joined, such as the UN PRI and the Extractive Industries Transparency Initiative, and encouraged other institutional investors to get on board. Brigid also felt that by taking an active ownership approach the CPPIB was likely to improve long term returns and identified three current engagement focus areas, climate change, extractive industries and executive compensation.

The final presentation by Michael Jantzi took a more philosophical approach. Can SRI help investment managers make better decisions? Michael said there’s no definitive answer, and even 20 years down the road there may not be, but that doesn’t mean it’s not worth asking the question. However, if the questions we ask determine the answers we get, asking ‘does SRI improve performance?’ is perhaps not the only question we should be asking. Broadening our horizons to reflect on ‘how does SRI impact not only returns, but risk?’, or ‘does SRI impact different types of investors differently?’, or many other possible considerations, may engender further interesting debate.

The time constraints of a lunch event allowed for a limited Q and A. Michael noted a couple of things that are standard in the SRI toolkit, like transparency and disclosure, are now being picked up by mainstream managers. And Jordan raised the issue of developing regulatory regimes that protect broader interests without undermining the vitality and efficiency of markets.

Wednesday, February 18, 2009

Sustainability rewards investors

Companies strongly committed to sustainability practices achieved above-average performance during last year’s financial meltdown, according to a study from A.T. Kearney.

The findings suggest that companies geared towards sustainability, including focusing on long-term health rather than short-term gains, strong corporate governance, sound risk management practices and a history of investing in green innovation appear to outperform their peers in the financial markets.

The U.S. study looked at 99 companies listed on either the Dow Jones Sustainability Index or the Goldman Sachs SUSTAIN focus list over a three-month (September to November) and six-month (May to November) period.

Over three months, the performance differential (defined by comparing the percentage point difference of average sustainability companies’ indexed performance to the market indexed performance) was 10 percentage points; over six months, 15 percentage points.

The report does sound a note of caution, suggesting that companies showing a “true” commitment (defined above) to sustainability practices are reaping the benefits. Defining that commitment requires research.

“The primary takeaway is to examine all sustainability practices and determine how genuinely committed the firm is to them,” the study notes. “If the commitment is less than complete and there is little payback, it might make sense to reduce or eliminate sustainability investments.”

However, if sustainability is transforming the business, it makes sense to maintain this commitment, the report concludes. “The most sustainability-focused companies may well emerge from the current crisis stronger than ever – recognized by investors who appreciate the true long-term value of sustainability.”

Monday, February 16, 2009

Do SRI portfolios outperform?

A review of the 2008 Moskowitz prize winning paper.

We have all listened to presentations where we hear that SRI portfolios perform just as well as conventional portfolios. You know the drill. Since it’s inception in January 2000 the Jantzi Index has matched the performance of the S&P TSX 60 over multiple time periods. And in the U.S., using the Domini 400 which is a socially responsible replica of the S&P 500 created in 1990, we have almost 20 years of data showing that SRI has no negative impact on returns. (Effective January 2009 we are seeing some underperformance from the Jantzi Index and some outperformance from the Domini Index.)

However, as socially responsible investors, we feel intuitively that companies that do well on socially responsible criteria should outperform. And indeed, studies show that on individual indicators such as governance or employee satisfaction, this outperformance is there. It makes sense to us that companies with better employee policies, including things like work life balance, should have less staff turnover, less absenteeism, a more productive workplace, all of which will contribute to a better bottom line. So, why do we only manage to hold our own, why aren’t SRI portfolios outperforming?

Meir Statman’s Moskowitz prize winning paper provides an interesting perspective on this question. Entitled “The Wages of Responsibility” and co authored by Denys Glushkov, it looks at why returns of SRI portfolios and non SRI portfolios are so similar. The goal of the paper was to “…close the gap of knowledge about returns associated with characteristics of social responsibility…”.

Using data from KLD Research and Analysis Inc. Statman and Glushkov put together portfolios for the years 1991 – 2006. They classify SRI companies by best in class industry adjusted scores and then examine whether stocks with high best in class scores outperform stocks with low best in class scores. They calculate excess returns using three different benchmarks and conclude that stocks with high social responsibility scores yield higher returns than stocks of companies with low scores. For those of you with a statistical bent a comprehensive description of their methodology is provided in the paper.

So, that leads us back to our original question. Given the above result, why aren’t SRI portfolios outperforming? It’s because of the second conclusion of the paper. Statman and Glushkov also look at ‘shunned’ stocks, those of companies involved in tobacco, alcohol, gambling, firearms, military or nuclear operations. Consistent with the results of previous studies, Statman and Glushkov find that these ‘shunned’ companies, that are screened out of SRI portfolios, have higher returns than stocks in other industries.

“The return advantage that comes to socially responsible portfolios from the tilt toward stocks of companies with high scores on socially responsible characteristics is largely offset by the return disadvantage that comes to them by the exclusion of stocks of shunned companies.”

Unfortunately, this leads the authors to suggest that socially responsible investors refrain from negative screening, something that will be unpalatable to many of us in the SRI community. However, the definitive conclusion on the return advantage provided by best in class stocks is sure to be welcomed by socially responsible investors everywhere.

For more interesting SRI research, check out

Sunday, February 15, 2009

Media keeps on spinnin’

The Globe & Mail’s mutual fund number cruncher column in last Saturday’s edition –“Clear conscience, battered returns” ­– ­left me scratching my head. The author, Shirley Won, says she turned up lots of “red ink” in her analysis of Canadian large and small cap SRI mutual funds. In her story, Won notes that most large-company [SRI] stock funds lost about a third of their value last year and underperformed market benchmarks. But can’t the same be said of Canadian equity funds in general? Of course. And here’s the clincher, from Won herself: “Their performance was not unlike conventional funds,” she concedes.

Won takes aim at two of the worst performers in the Canadian SRI world: Investors Summa SRI and Mavrix Sierra Equity, who both had terrible years, down 49.7% and 64.9%, respectively. True enough, the Mavrix fund was the worst performer in Morningstar’s Canadian Focused Small/Mid Cap Equity category, but four Canadian large caps lost more than Investors Summa SRI.

So is this a case of honest reporting or of a journalist falling for the “performance myth” – the oft-repeated notion that mutual funds managed under SRI mandates underperform their conventional counterparts?

Let’s take a closer look. 66% of actively-managed Canadian equity mutual funds underperformed the TSX in 2008, according to Standard & Poor’s Indices Versus Active Funds Scorecard. In her analysis, Won looked at 18 SRI Canadian equity funds. Of those, seven did better than the benchmark, the S&P/TSX Composite Index, which lost 35% in 2008. That leaves 11 SRI funds that underperformed the benchmark. The Social Investment Organization tracks approximately 30 funds in its various Canadian equity categories. Using those numbers, about 36% of Canadian SRI equity funds outperformed the benchmark, slightly better than the industry average of 34%. It’s not a huge difference, but that’s exactly the point advocates have been making for years: SRI funds, in general, perform comparably to their conventional peers.

We’ll expand more on this theme later this week, when SRI Monitor looks at a study on how sustainability-focused companies are faring during the current financial crisis. The answer just might surprise you.

Saturday, February 14, 2009

In today's Report on Business Shirley Won looked at the returns of SRI mutual funds. Her conclusion? "Socially Responsible Investing may be good for your conscience but there's no guarantee that it will be good for your portfolio"
Read the full article here.

Thursday, February 12, 2009

Love those car companies…

Greenwashing: the exaggeration, absurd claims or downright lies that big business makes about its green credentials. There are many definitions of greenwashing out there but that's my favourite – succinct and powerful - from Fred Pearce at the Guardian.

As the major American car companies face bankruptcy, we are witness to a barrage of greenwashing, in their ads, in their PR and from their CEOs. "There is a delicious irony in seeing private luxury jets flying into Washington, D.C., and people coming off of them with tin cups in their hand, saying that they're going to be trimming down and streamlining their businesses," Rep. Gary Ackerman, D-New York, told the chief executive officers of Ford, Chrysler and General Motors at a hearing of the House Financial Services Committee. "It's almost like seeing a guy show up at the soup kitchen in high hat and tuxedo. It kind of makes you a little bit suspicious." He added, "couldn't you all have downgraded to first class or jet-pooled or something to get here? It would have at least sent a message that you do get it."

Well, that’s what greenwashing is, people who don’t get it pretending that they do. How to tell the good guys from the bad guys? In Canada, we can do that through the Eco Logo program, which provides ‘third party certification of environmentally-preferable products’. Environmental Lawyer Diane Saxe has a comprehensive article “What does ‘green’ mean?” with lots of information and references.

Love to hate greenwashing? Send me your best examples, and I’ll post a selection of the most egregious.

Ethical Funds maps out action plan for 2009

It looks to be another busy year for the research team at Vancouver-based Ethical Funds, with today’s release of the mutual fund company’s extensive sustainable investment program annual report.

Bob Walker, vice president, sustainability, says Ethical plans to focus on three key issues in 2009. “The first is investor risk in Canada’s oil sands. The second is how companies can assess the full range of their impacts on human rights and ensure that their activities benefit impacted communities. The third will address how investors can help restore integrity to capital markets and the publicly-traded companies that benefit from the ethical functioning of those markets.”

As well as engaging oil sands companies on climate change, Ethical will ask companies in other sectors to work on emissions reduction, including continued dialogue with real estate companies on implementing green building strategies. Oil sands companies will also be asked to address cumulative water use issues and forestry companies will be encouraged to adopt sustainable practices.

On the social side, Ethical will continue to work with companies to encourage the development and implementation of human rights policies and programs when operating in risky countries. The fund company will also work towards eliminating sweatshop conditions and make an effort to ensure companies are not inadvertently supporting the use of child or forced labour.

Respecting indigenous rights is also on the 2009 agenda, particularly in the mining sector, where Ethical will support the adoption of informed consent as the standard for project development.

Corporate governance will be Ethical’s third main focus, with the company asking companies to improve their corporate social responsibility reporting and overall quality of their disclosure. Curbing excessive compensation will remain a priority, with Ethical asking that compensation be linked to positive performance on both the financial and the non-financial side.

“We believe companies that proactively address environmental, social and governance challenges have a long-term competitive advantage over companies that choose to ignore these issues,” notes Walker.

The sustainability report also includes highlights from Ethical’s work in 2008, including encouraging more Canadian companies to participate in the Carbon Disclosure Project, encouraging Canadian banks to adopt and disclose procedures for evaluating climate change-related credit risk in their commercial lending policies and raising awareness of the risks investors face from the scale and pace of development in Alberta’s oil sands.

Wednesday, February 11, 2009

Private equity firms adopt responsible investment guidelines

The Private Equity Council, a group representing 13 heavy-hitters in the private equity world, has agreed to adopt a set of responsible investment guidelines that they will apply before investing in companies and during ownership.

The guidelines cover environmental, health, safety, labour, governance and social issues and follow a series of talks between council members and a group of the world’s major institutional investors, all under the umbrella of the United Nations-backed Principles for Responsible Investment (PRI).

“Private equity is all about investing for growth and maximizing returns to our investors. To accomplish that today requires considering a range of environmental, governance, human capital, and social issues,” said Private Equity Council president Douglas Lowenstein. “Today’s announcement explicitly and formally affirms PEC members’ commitment to fully integrating these responsible investment guidelines into both our pre-investment and post-investment processes.”

“We signed onto PRI because we believe that encouraging policies and practices that help create a better society for this and future generations is an excellent way to maximize our investment returns,” said Ted Eliopoulous, Interim Chief Investment Officer of the California Public Employees Retirement Systems, which is a limited partner in many PEC members’ funds.

Under the terms of the guidelines, PEC members will consider environmental, public health, safety and social issues associated with target companies when evaluating whether to invest, as well as during the period of ownership. Members will also seek to improve the companies in which they invest for long-term sustainability and to benefit multiple stakeholders on environmental and social governance issues.

Council members are: Apax Partners; Apollo Global Management LLC; Bain Capital Partners; the Blackstone Group; the Carlyle Group; Hellman & Friedman LLC; Kohlberg Kravis Roberts & Co.; Madison Dearborn Partners; Permira; Providence Equity Partners; Silver Lake, THL Partners; and TPG Capital (formerly Texas Pacific Group).

Tuesday, February 10, 2009

Tar Sands by Andrew Nikiforuk

Tar Sands by Andrew Nikiforuk

Subtitled ‘Dirty Oil and the Future of a Continent’, this book is a must read for every Canadian. Tar Sands is packed with information about what is happening in Alberta, much of which was news to me. It’s extremely comprehensive and filled with facts, but they are clearly sorted chapter by chapter. How bitumen turns into oil, the terrible toll on the people working and living around the oil sands, the impact of the refining process on the environment including a chapter dealing specifically with water, it’s all here. At just under 200 pages in paperback, it’s affordable, portable and readable. However, the volume of information and Nikiforuk’s impassioned writing style made it easier for me to take in a chapter at a time. Nota bene - some reviewers and other entities have taken issue with some of Nikiforuk's research, and he has responded.
One of the interesting points Nikiforuk makes is that there is almost no coverage of the tar sands by the mainstream press. Likening what is happening in Alberta to a national event on the scale of the building of the railway, he finds it unbelievable that there is so little reporting of what is going on. With the election of Obama, the issue takes on a new urgency as it is central to the agenda when Obama meets Harper in Ottawa on February 19th. A recent article in Macleans says “On Monday, Canada's ambassador to the United States, Michael Wilson, suggested the perception of Canada as a purveyor of dirty oil is one of the biggest challenges the government faces with Obama's administration. Prime Minister Stephen Harper also admitted during an interview last week ‘To be frank, on the oil sands, we've got to do a better job environmentally. We hear a lot of pressure on that’.”

It’s up to us to keep up that pressure. Educating yourself by reading this book is a good first step. When I finished it I felt ‘we have to do something’ Hopefully, it will elicit that same reaction from you. More on what’s being done in another post.

Monday, February 9, 2009

Canadian SRI funds closely monitoring Barrick

The Norwegian government’s decision to expel Barrick Gold from its state pension plan for environmental reasons has sparked renewed debate over whether Canadian SRI mutual funds should continue to invest in the controversial mining company.

Barrick is a top ten holding in four Canadian SRI funds: Ethical Balanced, Ethical Stock, Ethical Index and Acuity Social Values Canadian Equity.

Bob Walker, vice president, sustainability, at Ethical Funds notes that the Norwegian pension fund uses divestment as a tool to express dissatisfaction with a company’s performance, instead of engagement, which is Ethical’s preferred approach.

Walker notes that Ethical has been talking with Barrick since 2005 and has made progress in a number of areas. For instance, Barrick has established a human rights policy, joined the UN Global Compact on corporate responsibility, hired a chief medical officer to deal with HIV/AIDS and has extended the availability of antiretroviral drugs to employees and their families.

The company also established community engagement guidelines that Walker says could have improved Barrick’s performance in a number of controversial mining projects around the world. However: “In the last two years, that hasn’t happened, the controversies are continuing.”

Ethical sent two analysts to Nevada last year to tour Barrick’s mines and meet with the Western Shoshone community. Subsequently, Ethical recommended that Barrick consider conducting a human rights impact assessment of that project, an idea rejected by Barrick.

Ethical is now in the process of drafting a shareholder proposal for Barrick’s 2009 annual general meeting in an effort to get the company to improve its human rights and environmental performance, Walker says.

So what would it take for Ethical to divest in Barrick?

“We have fairly clear rules on that,” Walker says. “We make three concerted efforts at engaging a company on any given issue and if they fail to respond with sound arguments on those three occasions then we will divest.”

The rejection of [establishing a human rights impact assessment in Nevada] would represent the first strike, Walker says. But there’s still the shareholder proposal and an upcoming meeting with Barrick’s new CEO to consider. “We’ll see how things go from there. We are pretty patient around these issues and we believe that corporate change takes time.”

Over at Acuity, Social Values Funds manager Martin Grosskopf points out that for a Canadian equity fund benchmarked to the TSX, the gold sector is impossible to ignore.

Still, he concedes that Barrick, like most companies in that sector, does not come without controversy. “The reality is that all of the gold mining companies have significant issues and Barrick has had many of these issues for years, but it still ranks better than others within the space.”

“We’re not trying to avoid the issues entirely; we know we are going to own companies that have some contentious issues and Barrick is certainly one of them.”

Of course, both Walker and Grosskopf note that socially responsible investors can avoid Barrick by investing in other Canadian Ethical or Acuity products, such as Ethical’s Special Equity Fund or Acuity’s Clean Environment Equity Fund. “We don’t own gold in that fund,” Grosskopf notes. “I don’t think you can mine gold without having significant environmental impacts, that’s the nature of that sector.”

Canada’s two other SRI-focused mutual fund companies – Inhance Investment Management and Meritas Mutual Funds – do not hold Barrick.

Friday, February 6, 2009

The bottom line on SRI

Michael Jantzi is founder and president of Jantzi Research Inc., an independent investment research firm that evaluates and monitors the environmental, social and governance performance of securities. A frequent commentator and writer on social investment and related topics, he is the co-author of The 50 Best Ethical Stocks for Canadians: High Value Investing, published by MacMillan Canada. He can be reached at

As a proponent of socially responsible investing (SRI), the past year was a challenging one for me. My firm's now nine-year-old Jantzi Social Index (JSI), as a proxy for social investment, provided little to combat the common view that socially responsible investing is not so good for your portfolio. In absolute terms, the JSI suffered with the overall decline of the market. This was also the first year in which the index lagged in relative terms to domestic equity benchmarks that do not screen for environmental, social and governance (ESG) criteria.

The JSI is a socially screened, market capitalization-weighted common-stock index of Canadian equities. It was created, in part, to be a benchmark against which institutional investors and retail advisors could measure the performance of socially screened portfolios.

The JSI lost 35.4% in calendar 2008, by far the worst in absolute terms in its history. That was 2.4 percentage points worse than the S&P/TSX Composite Index's 33% loss, and 4.2 percentage points behind the S&P/TSX 60 Index of large-cap issues.

Last year was a departure for the JSI in terms of its historical relative performance. More often than not during the first eight years since its inception on Jan. 1, 2000, the JSI has outpaced the S&P/TSX Composite Index. Indeed, up until the end of October 2008, the JSI remained ahead, posting a 4.1% annualized return since inception versus the Composite's 3.7% return over the same period.

But poor relative performance in the final two months of last year, primarily due to the JSI's underweighting in the volatile gold sector, left the index lagging the S&P/TSX Composite. The JSI's annualized return from inception to Dec. 31, 2008 now stands at 2.44%, trailing the S&P/TSX Composite by an annualized 30 basis points.

To return to the perennial questions about the bottom line on SRI: How does the application of social responsibility criteria affect long-term investment performance? Does an evaluation of ESG performance detract from the bottom line, or can it enhance shareholder value over the long term?

Critics cite modern portfolio theory in concluding that SRI takes a toll on returns. They argue that integrating ESG criteria into the investment decision-making process reduces the size of the investable universe, thereby resulting in lower returns.

My own view, which is shared by a growing number of pension funds and mainstream financial institutions, is that integrating ESG criteria into the investment process helps identify risks that often are not covered or well understood by traditional analysts. For example, ESG analysis can help identify best-of-sector oil and gas companies that are better positioned with respect to climate change risks or opportunities regarding carbon trading systems and alternative energies.
The JSI consists of 60 Canadian companies that pass a set of broadly based ESG rating criteria. These include aboriginal relations, community involvement, corporate governance, employee relations, environment and human rights. The JSI also incorporates several industry-specific exclusions (nuclear power, tobacco, and weapons-related contracting), which eliminate firms from contention regardless of what their record of performance may be in other areas.

Subsequent to creating the JSI's rating criteria, the Jantzi team analysed the ESG records of the S&P/TSX 60 companies, at which point 17 companies were eliminated from contention. To bring the JSI to 60 constituents, we then sought companies with superior ESG performance in sectors in which the JSI was underweighted relative to the S&P/TSX 60. We also favoured companies with larger rather than smaller market capitalizations.

This set of rules continues to guide Jantzi Research in overseeing the integrity of the JSI. Like any index, turnover is kept to a minimum. Most changes today result from corporate actions – mergers, acquisitions, privatizations, and the like. Aside from imminent bankruptcy, we do not remove a company for financial reasons, including stock valuation.

We will drop a company from the JSI when we determine the deterioration in ESG performance adversely affects the firm's best-of-sector ranking. As a first step, we place the company on the JSI Monitor List to convey that the review process is under way.

For example, we placed Goldcorp Inc. on the Monitor List in November 2006 following its acquisition of Glamis Gold, which was facing community and aboriginal relations concerns at its operations in Guatemala and Honduras.

We continued to monitor Goldcorp's ESG performance, including a February 2008 analyst visit to Latin America to meet with corporate representatives and other stakeholders. Last spring, we removed Goldcorp from the JSI on the basis of the firm's exposure to growing opposition from local communities in Guatemala and Honduras, and the company's poor environmental compliance record. These and other ESG-driven decisions are integral to our investment process.

That said, the JSI's recent performance has undoubtedly been disappointing to social investors, and critics will begin to voice the "I told you so" arguments. However, given its history and make-up, one can surmise that when the Canadian market experiences a broader recovery, the JSI will once again show a more competitive face.

Moreover, as calls for greater corporate disclosure and transparency continue to emerge out of the financial crisis, and demand for ESG leadership and performance are incorporated into economic recovery packages, many of the JSI constituent companies will be well positioned to compete in the new and changing marketplace.

Reprinted with permission of the author and Morningstar Canada, where this article was originally published.

Say on pay campaign gains momentum

Canada’s big banks will be under the microscope at their upcoming annual meetings, once again facing shareholder proposals on executive compensation.

Meritas Mutual Funds, with assistance from SHARE (Shareholder Association for Research and Education), has filed shareholder resolutions at all five of Canada’s big banks asking for shareholders to be able to provide to the boards of directors an advisory vote on executive compensation. Similar proposals have been filed with Sun Life Financial, the TMX Group, Nortel Networks and Potash Corporation.

“You can’t pick up any newspaper’s business section without there being some kind of commentary on executive compensation,” Meritas CEO Gary Hawton said in an interview with SRI Monitor. “And I think it’s important that we establish a dialogue with boards of directors.”

“They do report to us as shareholders and it’s a hot topic right now.” Hawton adds. “There’s a perception that pay and performance have not been linked in the past; sometimes you get paid for success and you also get paid for failure.”

The votes are non-binding – boards will still retain jurisdiction on compensation. “We’re just looking to be able to provide them with feedback that they can take or leave,” Hawton stresses.

Last year, Meritas sponsored similar resolutions at the big banks, which averaged 40.5% support. But because this is a shareholder proposal, there is no magic number. “Even if we get 100%, the board could still ignore it,” Hawton notes.

Hawton says he’s optimistic the resolution will receive more support this year. “There are a number of institutional investors who said last year it was too early, but got nowhere in their discussions with management, so they are now on board with this proposal. So that could push us over the 50% mark. And what do the boards of directors do when the majority of shareholders are asking for this?”

By next year’s proxy voting season, Hawton believes there will be some Canadian companies on board with the resolution, but adds he’s disappointed it hasn’t happened yet. “It’s already happening in the U.K. and a number of U.S. companies have voluntarily said we will provide this opportunity. It’s recognized around the world as a sign of good governance.”

“Everyone is afraid to be the first mover on this,” he says. “We need someone to understand this is an opportunity to be applauded for being a governance leader in this area.”

Thursday, February 5, 2009

Managing Without Growth

In the latest issue of Advisor’s Edge magazine, Philip Porado ponders the implications of the paradox of thrift. As people lose their jobs, or confront that possibility, they spend less and save more, thereby reducing demand and slowing the economy further. Decreased demand for goods and services leads to lower corporate earnings, which in turn cannot support higher stock prices and people worry about their future retirement savings as much as what’s going to happen to them next month.
For those of us concerned with social responsibility this new desire to reduce and reuse, and the scaling back of the ‘spend spend spend’ mentality is a positive development. The idea of consumption being a function of necessity and not one of status is integral to a world where 7 billion humans can live within the Earth’s capacity.
However, as investors we want growth and lots of it; in fact, the markets and stock prices are predicated on never ending growth. Peter Victor is an ecological economist and a professor (and former Dean) of Environmental Studies at York University. His new book, Managing Without Growth, has a radical economic prescription - he suggests gasp! a world where growth is not the overarching objective.
In a careful analysis he takes us through the traditional economic model and identifies how it fails us. He states “…we ought to take the biophysical limits to economic growth more seriously than we do. The limits are apparent in all the ways we rely on nature to support our economies: sources are becoming costly, financially and even more so, environmentally; sinks are overflowing; services are in decline, and all are interrelated. We are confronting these limits because of the growth agenda and we are not responding to them adequately.”
For those of us involved in the capital markets, the challenge is to come up with new ways of valuing companies, and more broadly, economic activity. Where replenishing existing housing stocks has more value than building new housing units, where repairing and reusing have more value than trashing and creating anew, where more is not always better. It’s a huge challenge, and Prof. Victor’s book shows us we are running out of time to meet it.

Tuesday, February 3, 2009

Vancity and Inhance top annual SRI fund survey

Vancity Circadian Monthly Income Fund and Inhance Monthly Income Fund Class A were the top two SRI mutual funds in Canada last year, according to Corporate Knights magazine’s seventh annual survey of the country’s SRI universe.

Ethical Balanced Fund placed third, followed by the Ethical Advantage 2010 Fund and the Ethical Advantage 2030 Fund. Meritas Monthly Dividend and Income Fund ranked sixth, while RBC Jantzi Balanced Fund Series A, Meritas Balanced Portfolio Fund, Ethical Advantage 2015 Fund and Ethical Advantage 2040 Fund rounded out the top ten.

Corporate Knights crunched the numbers on 64 Canadian SRI funds, using a combination of social and performance scores as well as one-to-five “shield” scores, based on the following: Performance: 40%; Integration: 17%; Engagement: 15%; Portfolio Turnover Rate: 10%; and Systemic: 8%.

Six Ethical Funds were given five shields, while Vancity and Inhance picked up one each. The relatively high performance weighting in Corporate Knight’s methodology partially explains why Ethical didn’t dominate the top ten.

The Ethical Special Equity Fund, which finished 20th in the overall rankings, had a dismal one-year return of -33.8%. By comparison, Vancity’s Circadian Monthly Income Fund lost 16.4% while the Inhance Monthly Income Fund Class A was off 16.5%.

Still, six of the top 10 SRI equity funds were from the Ethical family, thanks to their higher ranking scores in the social categories. Vancity and Inhance were the top two balanced funds, but also generated the highest scores overall as a result of their stronger performance numbers.

Corporate Knights added two new assessments to its survey this year: portfolio turnover rates and proxy voting records.

The average turnover rate of all funds surveyed was 28%. Ethical led the pack in this category: its Canadian Index Fund had a turnover rate of 0% while Ethical Advantage 2040 and Ethical Advantage 2015’s turnover rates were 1.0% and 1.5%, respectively.

Acuity Social Values Canadian Equity had the highest turnover rate at 128%, followed by Acuity Social Values Balanced Fund Class A at 104%.

“High turnover indicates that the fund manager may be missing the long-term value forest for the short-term trees,” says Corporate Knights’ Managing Editor Melissa Shin. “A whole slew of recent studies have shown that the majority of CEOs will sacrifice maximizing long-term economic value in order to avoid missing Wall Street’s quarterly expectations.”

On proxy voting, Ethical Funds, Inhance Investment Management and Investors Group each had a 100% record, “meaning that each time they had the opportunity to vote on an ESG-related shareholder resolution (that garnered at least 10% of shareholder support), they voted in favour of the resolution,” Corporate Knights says. Meritas Mutual Funds, which itself proposed several resolutions, had an ESG voting record of 90%. The survey notes that Ethical, Inhance and Meritas all publish their proxy voting guidelines.

Still no women in the boardroom...

Women make up 51% of Canada’s population but hold only a meagre 15 % of Board seats on corporations in the FP500.

SHARE, which helps coordinate the filing of resolutions and proxy voting in the socially responsible investment community, maintains a database of shareholder resolutions. In 2008 MEDAC filed a resolution with each of the major banks asking for gender parity on the Board of Directors. The resolution didn’t fare too well, with results ranging from a low of 3.29% at Bank of Nova Scotia to 7.12% at Royal Bank. Some SRI fund companies voted against the resolution raising semantic issues about the word ‘quotas.’ MEDAC has filed a similar resolution again this year asking that half of director nominees be women until a parity of men and women is reached on the Board. Hopefully this rewording has made the resolution palatable to more shareholders.

2007 Catalyst Census of Women Board Directors of the FP500 states clearly “Census interviewees said that enhancing gender diversity at the board level raises the quality of discussion around the table. This has the potential to yield real improvements in the overall quality of governance which, in turn, will be reflected in company performance. Greater gender diversity on boards also serves to constructively raise the level of stakeholder representation within companies, since many of their customers and clients are female.” Let alone the staff - at Canadian banks almost ¾ of employees are women!

Gary Hawton, CEO of
Meritas Mutual Funds says that although they did not support the resolution last year, this year they will be voting in favour of it. He also promised me that he will be meeting with the CEO of a major Canadian bank soon and “when he and I sit down to chat I will talk to him about gender representation on the Board.”

C’mon guys (and you are all men), somebody take the lead here - get together for a cause we agree on and come up with a resolution that will push banks to work harder to recruit women board members.