After many years of handling billions of dollars of public sector funds, Adil Sayeed knew that there was a growing desire among Canadians to make investments that not only improved the bottom-line, but kept the investor relatively guilt-free as well.
So he founded SmartGreen Financial, an investment-planning consultancy that specializes in funds that make money, but do it in a way that helps investors sleep at night.
"There are two main approaches to ethical investing," he said. "You have companies like Meritas who have an ethical index which screens out what they consider to be bad, and there's another type in which you can select funds tailored to your particular interests, like a clean energy fund."
But, he pointed out, the second type of fund is extremely rare in Canada, despite being commonplace in U.S.
"There are so many more fund options down there," he said. "And there's a longer tradition of ethics-based investment."
Much of that interest in socially responsible investments has focused on funds with an environmental bent.
"The interest in green investing has never been higher – and I've been doing this for 18 years," said Michael Jantzi, founder and president of Jantzi Research, a Toronto-based investment research firm that specializes in assessing companies' ethical practices. One of his primary clients is Cambridge-based Meritas, which was developed from an idea that started within Ontario's Mennonite community, and has become Canada's biggest ethics-based financial company. It specializes in investing in companies that are socially and environmentally responsible and follow good internal business practices. It offers seven different funds weighted to specific investment goals.
The reason Meritas offers only a few funds rather than a larger menu is because of the amount of research they do on the companies they consider.
"It's a complex auditing system; we get the opinions of employees, regulators, suppliers, customers and the community," said Gary Hawton, CEO of Meritas. "We have to make sure the company fits our criteria."
That diligence is a departure from a few years ago, when investors had only the company's word to go on. In 1991, Boston-based Franklin Research and Development – a firm specializing in business ethics – gave The Body Shop its highest rating because the company made repeated claims about its ethical practices.
But a subsequent investigation into the firm led Franklin to drop The Body Shop from its list of ethical companies in 1994.
And that kind of research is almost impossible for individual investors to do by themselves.
"It would be too much work for the individual investor to accurately determine any stock's ethical value," Sayeed said.
And since Meritas and other firms like Toronto-based Jantzi Research actually go back to the companies to tell them what they have found out about them, they have seen a steady improvement in ethical conduct.
"Companies are beginning to realize ethical practices are important to investors and they are acting accordingly," Hawton said.
So while an individual investor may not get every stock he or she hoped for with an ethical fund, they will get a broad portfolio.
"While any one of them may only represent, say, 80 per cent of what you're interested in," said Hawton, "it beats the alternative, which could be 0 per cent."
Many investors, according to Sayeed, are scared off of ethics-based funds because of a belief that since many stocks are disqualified, there won't be much diversity left over. Hawton wants to dispel that.
"There are so many stocks out there, that taking some off the list still leaves a huge number. The overall reduction is minimal."
The exception, Hawton said, is in the energy industry where business ethics must be judged on a relative scale.
"Since the energy industry is so vital to the Canadian economy, some of our funds include those stocks," he said.
But even they can be avoided.
"It used to be that if you went green you didn't get performance," said Heather Pelant, head of business development for Barclays Global Investors, which also offers Canadians ethical funds. "Now you don't have to compromise anymore, you can go green and get performance."
One of Meritas' biggest selling points, according to Hawton, is that it is the only investment firm in Canada that engages in micro credit. A concept that led to a Nobel Prize for Muhammad Yunus, microcredit is the practice of lending small amounts of money to entrepreneurs with no collateral, no steady income and no credit history. Meritas devotes 2 per cent of every fund to micro credit in developing nations.
"People think that $2,000 of their $100,000 investment goes to charity," said Hawton. "And they're okay with that; but it's not charity."
But getting every last possible cent isn't really the point of micro credit – or socially responsible investing.
"The real return is making lives better; sending kids to school instead of a factory, helping a family get a second meal every day," said Hawton. "One woman who told me that since micro credit has helped her community, women are no longer beaten there because now they have value."
