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June 21, 2006
Canadian SRI Funds Perform On Par with Mainstream Funds
    by Bill Baue

A survey of Canadian socially responsible investing funds finds a broad range of rigorousness in assessing corporate social and environmental sustainability.

Earlier this month, Toronto-based Corporate Knights magazine released its survey of 54 Canadian socially responsible investing (SRI) mutual funds, ranking the 43 funds with more than a one-year history. The survey ranks the funds on a 100-point scale, basing half of the score on the strength of their social and environmental practices, and the other half of the score on one- and three-year financial performance. Top-ranking funds include the Ethical Canadian Dividend Fund (94), Dejardins Environment Fund (84), Inhance Balanced Fund (82), and Ethical Special Equity Fund (80).

Corporate Knights initiated the survey three years ago with a dual purpose: first, to test the assumption that SRI automatically underperforms, and second, to differentiate funds calling themselves SRI.

"Some people didn't like the idea of investing in SRI because they thought it would automatically lower their returns due to reducing the investable universe," Corporate Knights Editor Toby Heaps told

This year's survey debunks this assumption. It finds that three-quarters of the SRI funds surveyed outperformed the broader universe of about 3,800 Canadian funds on a one-year basis as of March 31, 2006, according to the Fund Library Research Group and Funddata Canada. The analysis compared SRI funds to their peers in the same sub-asset class--for example, SRI special equity funds to the roughly 120 special equity funds in the broader Canadian fund market, according to Mr. Heaps.

"On a three-year basis, exactly half the socially responsible mutual funds outperformed their peers and half underperformed, indicating that over time socially responsible mutual funds perform no better or worse than the average fund," said Mr. Heaps.

As for the second purpose, the Corporate Knights survey seeks to give social investors a sense of the range of rigorousness and commitment to social and environmental sustainability of the various funds labeled SRI.

"In Canada, the definition for socially responsible investment products is that it's just called one in its prospectus, so lumping all SRI funds into one basket isn't really a fair characterization," said Mr. Heaps. "Our survey is meant to give a good indication of who's got their ducks in a row versus who doesn't have any kind of systematic approach at all to social responsibility."

The 100-point Corporate Knights Social Score assesses such areas as integration of environmental, social, and governance (ESG) factors into research; community investment; proxy voting transparency; and engagement with companies. The Mavrix Sierra Equity Fund scored a mere 7 points, while the Inhance Balanced Fund scored 96. However, Mr. Heaps admits limitations in the survey's tick-box methodology.

"A company like Inhance, which has gone through significant transition from its former incarnation as Real Assets, has a lot less resources than Ethical Funds, which justifiably considers itself the leading SRI fund company in Canada and has a whole team of analysts and engagers," explained Mr. Heaps. "Inhance's scale of engagement is maybe one-tenth of the scale of a firm such as Ethical Funds, but Inhance can still tick the engagement box because it does do it."

"It's an unfortunate byproduct of any survey where the criteria don't perfectly reflect reality," he added.

Concurrent with its release of the survey results, Corporate Knights published an article by Globe and Mail personal finance columnist Rob Carrick. Mr. Carrick advances the Paul Hawken line of criticism that SRI fund holdings do not differ significantly from the broader universe of funds. He cites one example--the Ethical Canadian Index Fund, whose top 10 holdings as of November 30, 2005 overlapped with seven of the top 10 holdings of the RBC Canadian Equity Fund, a generic bank mutual fund.

"Carrick made his case not by an exhaustive study," said Mr. Heaps. "And obviously, he missed the whole engagement aspect."

"The Canadian SRI mindset, led by Ethical Funds, is that social change will come about by engagement as opposed to screening, which is not as de rigeur for SRI credibility in Canada as in the US," Mr. Heaps pointed out. "For example, Ethical Funds invests in a lot of companies with questionable human rights records because they feel they can engage with them to create change."

This distinction is driven in part by the differences in the market landscape between the US, where the S&P 500 is filled with traditional sin stocks that fail SRI screens, and Canada, where the TSX 60 has a relative dearth of sin stocks.

"The fact is you're not going to save the world with Canadian SRI--you're not investing in Mother Theresa's convent," said Mr. Heaps. "You're investing in more or less the same companies as everyone else--but, you're supporting SRI firms that will engage with companies and bring to light issues they might not otherwise consider, such as human rights and climate change."

"Engagement by the leading Canadian SRI firms helps companies understand these issues from more of a long-term, fiduciary perspective, and hopefully inspires them to take action," Mr. Heaps concluded.

Disclosure: Bill Baue wrote an article published in the most recent edition of Corporate Knights.


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