As surely as October marks the beginning of hockey season, January marks the launch of RRSP and TFSA season. Financial institutions roll out their ad campaigns, hoping to coax investors to open new accounts or top up existing ones.
While Kermit the Frog noted it wasn’t easy being easy being green, back in 1970, things are considerably easier today, at least with respect to investing. Interest in responsible investing has blossomed in the past decade, meaning that Canadians have more “green” options to add to their RRSPs and TFSAs than before.
Here are five strategies to help you get started:
1. “Green” Companies
Some investors invest in publicly-traded cleantech companies they believe can - and will - revolutionize the world. It’s a high-risk strategy that offers handsome profits for those smart enough (or lucky enough) to place their bets correctly, and disappointing losses for those who don’t.
Many cleantech enthusiasts, for example, own Tesla stock. The shares are highly volatile, rising and falling depending whether investors are focused on dramatic growth prospects (semi trucks; the Model 3) or equally-dramatic business metrics (eye-watering losses; breathtaking executive turnover). As of early January, those who bought five years ago have seen their shares rise tenfold, though this included a five-week stretch in late 2015 / early 2016 when shares tumbled almost 40%. (1)
While most cleantech stocks are less volatile and some people seem to have a knack for stock-picking, many other investors prefer the basket approach with their savings.
2. Socially Responsible Mutual Funds
Canada’s first Socially Responsible Investing, or SRI, mutual fund -- the Ethical Growth Fund -- launched in 1986. The issuing company, Ethical Funds, now offers a comprehensive range of SRI funds.
Other financial institutions have followed, in recognition of growing demand for SRI options. Generational effects may be in play; in a 2016 survey of more than one thousand Canadian investors, 58% of millennials expressed an interest in investments dedicated specifically to solving social or environmental problems, as compared to only 25% of boomers.
No longer considered niche, more than $1.5 trillion of Canadian assets integrated Environmental, Social and Corporate Governance (ESG) factors into investment decisions in 2015, representing 38% of the Canadian investment industry. $1.5 trillion is roughly the size of Canada’s mutual fund industry -- ESG totals have been boosted by pension funds and institutional investments, with asset managers’ top priority being to reduce risks over time.
For many investors, more important than who else is investing, is research showing that companies working to improve their ESG performance goals tend to enjoy higher operational (and stock price) performance. For example, a Harvard study found that for the 17-year period from 1993 to 2010, a value-weighted portfolio of so-called “high-sustainability” companies outperformed a comparable portfolio of “low-sustainability” companies by over 46%.
3. Socially Responsible Index Investing
Index investing has soared in popularity in recent years as savers have flocked to investment choices combining often-better returns with generally-lower fees than managed funds. (Getting a vote of confidence from The Wealthy Barber author and Dragon’s Den dragon David Chilton probably didn’t hurt, either.)
The same trend has played out in the SRI space, birthing a number of index funds and ETFs, or exchange-traded funds (mutual funds that trade on a stock exchange, like regular stocks). Canada’s first socially responsible investing ETF was the iShares Jantzi Social Index ETF, which launched in 2007. Notably, the Jantzi Social Index, on which the ETF is based, has outperformed the S&P TSX Composite and S&P TSX 60 indices over an 18 year period.
4. Fossil fuel-free funds
Socially responsible investing has the potential to catalyze change in an industry by shifting investments from ESG laggards to leaders. Their reasoning, which has merit, is that this will incentivize executives at the laggard companies to become ESG leaders themselves. Having socially responsible investment funds buy their stock would benefit the company’s share price and make the executive stock options much more lucrative.
One criticism of socially responsible investing, which also has merit, is that SRI funds, depending on the screening criteria used, may still invest in destructive industries. They simply restrict their investments to the most progressive corporate citizens in those sectors. Some investors would prefer to divest from certain industries altogether.
As of last February, web platform, Ethiquette had identified 17 fossil-free investment funds (mutual funds or exchange-traded funds) available to Canadians. Their list can be downloaded through the links at this post on the blog of sustainability-minded non-profit group Equiterre.
5. Impact Investments
A commonly accepted definition of impact investments is that they’re investments made with the intention to generate measurable, beneficial social and environmental impacts, along with a financial return. If socially responsible or fossil fuel-free options can be likened to harm reduction, impact investing would be strength training.
Green bonds such as those offered by CoPower are an example impact investment. Typically, bondholders provide capital for renewable electricity (e.g. solar or geo-exchange) which generate returns based on the electricity generated, or energy saved, in the case of an energy efficiency project.
While still in the early stages -- according to the Responsible Investment Association, Canadians held over $9 billion in impact investments in 2015 -- the sector looks poised for growth, particularly as investors become aware of this newest “green” option for their savings.
With these investment options now available, it’s become decidedly less difficult for Canadians to be green with our RRSPs - and to make green doing so. Sure, the boilerplate disclaimer applies (“past performance is not a guarantee of future returns”) but it’s as true for investing as with ice cream that the more choices we have, the likelier we are to find one to our taste.
As appealing as some of these options may seem to readers, it should also be emphasized that individuals should always do their research before making any investment decisions. Impulse buying is best left to the grocery store cashier line-up, and even there it tends to work against one’s finances!
1. March 2013: share price approx $34. Share price on weekend: $316. Dec 27, 2015 share price: $240. Feb 7, 2016 share price: $151.