Socially Responsible Investing
The SRI (Socially Responsible Investing) Fund is an investment available to active members of the Western Pension Plans. It was added to Western’s portfolio of investment choices in 2008, and was managed by Mackenzie Financial until May 2012, when Mackenzie served notice that they had terminated the fund that constituted Western’s SRI fund. Aberdeen Asset Management (a company that had provided portfolio advice to Mackenzie for this fund in the past) took over management of the fund. In October 2016, management of the fund was transferred to MFS Investment Management (“MFS”).
What is socially responsible investing?
The definition of socially responsible investing has evolved over the years, in part due to the increased public interest on issues such as climate change and the inclusion by major Canadian public pension plans of environmental, social and governance (ESG) factors in their investment analysis. Socially responsible investing is broadly defined as the integration of ESG factors in the selection and management of investments.
It has several components:
- Negative and Positive Screening
Negative screening involves avoiding investing in companies doing business in industries that are detrimental to society, such as: tobacco, alcohol, military or weapons, gambling, pornography, nuclear power, etc. Positive screening implies investing in companies that have superior practices in the area of human rights, workers’ rights, environment, corporate governance, corporate citizenship, gender and cultural equity, etc. These screens may apply to equity and/or fixed income investing.
- Community Investment
This involves the investment of money into community development or micro-enterprise initiatives that contribute to the growth and well being of particular communities. These projects may include providing loans to entrepreneurs with low income, high risk loans or equity in not-for-profits projects, lending for social or affordable housing, etc. Although some of these initiatives provide an expected return commensurate with the risk of the project, others would not pass a purely economic test.
- Integrating social and sustainability factors with stock portfolio analysis
Historically, most SRI assets were managed according to negative screens, but increasingly, asset managers are using much more complex techniques in their analysis and now include social and sustainability analysis to improve their investment decisions. This process does not necessarily involve screening out particular holdings based on pre-determined social or sustainability choices. The companies targeted can either be established ones or new start-ups.
- Shareholder Advocacy
This is the process by which a shareholder uses its power to influence the behaviour of a corporation, through corporate communication, shareholder proposals, proxy voting and divestment.
New SRI Portfolio Management - October 2016
In concert with Western's plan to improve pension operations and services for members by consolidating a number of services at Sun Life Financial Western has also moved to a new advisor for the Socially Responsible Global Investment Fund - MFS Investment Management. On October 1, 2016, MFS replaced Aberdeen Asset Management which has managed the fund since March 2008.
Aberdeen’s performance in this equity fund had fallen short of expectations in the past few years, underperforming significantly against the market and their benchmark. The Joint Pension Board made a decision to investigate and evaluate alternative managers (nine managers were reviewed), and selected MFS as the best provider for Western members. Some of the reasons:
- Fees paid by members will be much lower with the MFS fund. At current asset levels, fees are expected to decline from 1.00% with Aberdeen to 0.62% with MFS.
- The fund managed by MFS has produced strong value against its benchmark over the past few years, with less volatility than most of its peers, and has provided good resilience during market downturns.
- Western is already familiar with MFS, which is owned by Sun Life Financial, as they manage more than $160 million for the Pension Plans and the University Operating & Endowment Fund. This relationship began in 2007, and MFS has proven itself to be a reputable and stable organization with a disciplined investment process.
The MFS fund is well diversified by sectors and they seek to invest in companies that have:
- A high-quality and solid financial condition
- An attractive valuation compared to peers and/or expected earnings growth
- Favorable expected return versus expected risk
- Undervalued franchise versus current market value
- Strong free cash flow generation
It is to Western’s advantage that the MFS fund is already on the Sun Life core platform, so no additional administrative set up is required.
Members may wish to consider continued or new investment in this fund. The screens are similar to those used by Aberdeen, and involve screening out companies that generate more than 10% of their revenues from the manufacture of alcoholic beverages and tobacco products, the manufacture or sale of weapons, gambling operations and production or trade of pornography. They also eliminate companies with poor labour practices and poor environmental track records.
For more information contact Martin Bélanger, Director, Investments at firstname.lastname@example.org or call extension 80314.