Socially Responsible Funds: Forcing Investors to Buy Blind

Recently, one of my kids suggested I look into Socially Responsible Investing. She doesn't want to invest in companies like Copper Mesa, which is apparently doing bad things in Guatemala to the environment and the local population near their mine.

A popular way to invest in companies that toe the SRI line is to buy one of the many mutual funds (e.g. Social Investment Organization's 2010 Guide to SRI Mutual Funds) which promise to adhere to such principles. Do you think you could actually find out whether Copper Mesa is amongst the holdings of any particular fund? Unfortunately, no. Funds seem to only publish their top ten or twenty-five holdings. An exception is the only ETF in the field in Canada, the iShares Jantzi Social Index Fund (symbol: XEN), which has a constantly updated complete list of its holdings. They are not especially noble in that since all ETFs are similarly transparent. At least one can see there is no Copper Mesa within.

Beyond the generality of statements like the following, a fund prospectus isn't a lot more explicit or detailed about its own method of stock selection.

"Positive and negative screening, such as tobacco, alcohol, environmental performance, human rights violations, community involvement and employee relations. Screening involves the application of pre-determined social or environmental values to investment selection. The aim is to screen out particular companies or sectors based on values choices, or to positively select companies considered “best of sector.”

Does Jantzi Sustainalytics, the well-established leader in SRI indexing, do any better in revealing what companies its indexes contain or the exact inclusion/exclusion criteria? Not that I could find.

To my mind, simply sticking the SRI label on a fund and asking individual investors to believe in the product is not sufficient. Most SRI investors I would guess feel strongly about specific issues or companies they wish to promote or avoid, so they need to be able to figure out if the fund is ok that way. Unlike politicians who are never to blame for anything, companies are never perfect. Indeed, as fact sheet #2 on Social Investment Organization admits, "Social investors know there are no perfect companies." SRI investors must pick their spots and be able to act on their preferences.

Copper Mesa is probably in no fund's holdings, SRI or not, given its dodgy corporate machinations and financial condition (see this post on StockHouse and the TSX delisting announcement). After all, it is investing (I doubt any SRI fund screens out companies for making too much profit, an inference I make based on the prominent presence of Canadian banks amongst top Canadian SRI fund equity holdings).

However, bigger, successful companies like Barrick Gold may be more problematic. It has attracted criticism at MiningWatch Canada. Since Barrick is a large company we are fortunately able to find Barrick among the top 25 holdings of the Acuity Social Values Canadian Equity Fund (see latest March 2010 Quarterly Portfolio Disclosure). Investors should be able to see all the holdings to decide for themselves whether the fund is acceptable or not with Barrick in it.

The SRI sector, especially given its avowed aim, needs to apply its own principles to itself and adhere to a higher standard of transparency and disclosure.