Socially responsible investing: A how-to guide
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Updated: August 11, 2023
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Canadians are embracing socially responsible investing to align their finances with their values. Find out how you can cash-in on ethical investments, too.
Socially responsible investing is going mainstream, with 73% of Canadian investors now interested in responsible and ethical investing, according to a September 2021 poll by the Responsible Investment Association (RIA).
This growth is being driven in part by younger investors, who grew up learning the three Rs (Reduce, Reuse, Recycle), reading “The Lorax”, and witnessing the effects of climate change. But it’s also because investors are catching on to the fact that socially responsible investment portfolios (or “SRIs”) make good financial sense since SRIs and ethical investment funds often outperform their non-SRI counterparts.
Of course, responsible investing isn’t just about supporting companies that respect the environment. There’s a whole slew of values — such as human rights, labour practices, health, and corporate governance — that firms can address while still earning profits and increasing value for investors.
Here’s everything you need to know about socially responsible investing, including what SRIs are, how they differ from other types of sustainable investments, and a guide to setting up a socially responsible investment portfolio with a robo-advisor or discount brokerage.
What is Socially Responsible Investing (SRI)?
SRIs are investments deemed to meet a certain threshold of social responsibility. As such, they exclude investments in industries considered “bad” for society (e.g., fossil fuels, tobacco, or firearms) and instead, include sectors that have a social benefit (e.g., innovative healthcare or renewable energy).
SRIs also encompass investments in companies (outside of the forbidden sectors) that have a good record on environmental, social, and governance issues, known as ESG investing. Companies are assessed by an independent third party, such as Morgan Stanley Capital International (MCSI), and receive a score indicating how well they comply with the ESG criteria. The higher the score, the better they are—at least as compared to their competitors—in regard to factors such as pollution, carbon emissions, human rights, health and safety, labour practices, diversity, corruption, transparency, and disclosure.
Ethical investing and impact investing are other types of SRIs, as explained below.
Understanding ethical investing
Ethical investing is an offshoot of SRI, but with a more personal view of what industries are considered “bad” for society. A Halal portfolio, for example, will exclude interest-bearing investments as well as holdings in the alcohol, gambling, and pork industries so as to comply with Islamic law. Most socially responsible investors, on the other hand, would simply screen out the worst offenders among those asset classes.
Ethical investing does not necessarily have to be linked to religious practice. It can align with whatever values are important to you—be it veganism, pacifism, climate change, or anything else.
Impacting investing and SRI
Impact investing seeks to create positive, measurable change in society, and is therefore considered part of socially responsible investing. With impact investing, you put your money into companies, non-profits, or other organizations that are actively doing good, such as providing progressive products or solutions in areas including clean energy, sustainable development or agriculture, housing, education, and healthcare.
As with all SRIs, impact investments can be assets of any kind — including stocks, bonds, or funds. The main difference is that impact investments don’t simply ensure that your financial earnings don’t come from unsavoury industries, they also lead to a constructive impact while boosting your wealth.
The easiest way to invest In SRIs
Even if you’re brand new to investing, you can easily set up an online investment account with any one of Canada’s best robo advisors, many of which have socially responsible investment portfolio options. (TIP: If you want to shelter your investment earnings from tax and have sufficient contribution room, go with a registered account, such as an RRSP or TFSA.)
After you enter a few details online including your age, comfort with risk, and investment goals (including a preference for ethical investments), the robo advisor will recommend a diversified mix of low-fee socially responsible exchange-traded funds (ETFs) that match your risk tolerance. So, for example, a more conservative investor will have a portfolio with a higher proportion of safer fixed-income investments, while a more aggressive investor will get a portfolio that skews towards riskier but potentially better-paying, equity investments.
SRI ETFs are investments that track an entire market — such as U.S. large-cap stocks, or Canadian government bonds — but exclude certain “unethical” industries, such as oil and gas, weapons, and tobacco, and limit holdings to companies or governments with the highest ESG scores. ETF investing offers a simple hands-off approach allowing you to put your money into SRI and ethical investment funds, earn decent returns over the long term with minimal risk, and pay much lower fees than you would with an actively managed mutual fund.
A couple of things to keep in mind about socially responsible ETFs:
- While it’s true that SRI ETFs have a slightly higher MER (the management expense fee charged by the fund itself) than other ETFs, it’s usually only one- or two-tenths of a percent higher—a negligible difference in fee for most individual investors.
- Be sure to look carefully at the type of companies any given SRI ETF includes since there is no standard definition of what makes an investment socially responsible.
To help you choose a “set it and forget it” portfolio that aligns with your values, we’ve outlined the SRI offerings provided by Canada’s top robo-advisors.
RELATED: ESG, SRI, and Impact Investing: How Do They Differ?
Wealthsimple recently overhauled its SRI portfolios, which it began offering in 2016. Whereas the equity portion used to be comprised of ETFs from third-party providers such as iShares and Invesco—which may have included oil and gas companies with high ESG scores—those have now been replaced with Wealthsimple’s own SRI ETFs. These funds completely screen out problematic industries, such as oil and firearms, while providing better diversification and lower fees. Wealthsimple also has a Halal Investing portfolio, an ethical investment fund of 50 stocks for clients looking for an option that’s compliant with Islamic law.
For a limited time, Young & Thrifty readers get a $25 cash bonus deposited into their account when they open and fund a Wealthsimple Invest account (min. $500 initial deposit).
- Minimum investment: None
- Management fees: 0.5% for $1 minimum, and 0.4% for $100,000 minimum
- Average MER for SRI portfolio: 0.23%
- Total fees: 0.63% to 0.73%
ModernAdvisor was the first robo-advisor in Canada to offer SRI options in February 2016. It now has 10 different SRI portfolios each designed for a specific level of risk. Depending on your risk level, 75% to 95% percent of your portfolio is eligible for responsible investing.
- Minimum investment: $1,000
- Management fees: $0 for accounts under $10,000; 0.5% up to $100,000; 0.4% for the next $400,000; 0.35% for $500K-$1M+
- Average MER for SRI portfolio: 0.24%, depending on risk level
- Total fees: 0.56% to 0.84% (or 0.21% to 0.34% if under $10,000)
Questwealth Portfolios is the most recent Canadian robo-advisor to offer SRIs, added as part of the company’s 2018 rebrand of its robo-advisor service. The SRI portfolios have the same diverse set of risk profiles as the five regular Questwealth Portfolios: conservative, income, balanced, growth, and aggressive. All of the portfolios are actively managed to monitor and respond to significant changes in market conditions.
- Minimum investment: $1,000
- Management fees: 0.25% for balances under $100,000; 0.20% for $100,000+
- Average MER for SRI portfolio: 0.15% to 0.37%, depending on risk level
- Total fees: 0.35% to 0.62
- New customers who invest with Questwealth with our exclusive link get their first $10,000 investment managed free for a year.
The lowest-cost option for investing in SRIs
If you are comfortable choosing and buying SRI funds on your own, you can do away with those robo-advisor management fees entirely. For passive investors who opt for ETFs to keep things simple, that means your fees will be limited to the MERs since online brokerages including Questrade and Wealthsimple Trade offer free ETF purchases. Selling ETFs with Questrade costs 1¢/share (min. $4.95 to max. $9.95) per trade, but you can get $50 in free trades when you fund your account with $1,000 and start investing with Questrade.
That’s as low a fee as you can get. Say, for example, you have $100,000 in SRI ETFs in your online brokerage account, with an average MER of 0.25%. That’s $250 for the year, as compared with $400 to $870 annually for the above robo-advisor portfolios, or up to $2,500 for an actively managed mutual fund account. That’s a savings of up to 90%!
Another solid choice is Wealthsimple Trade — a mobile-only app that allows clients to buy and sell stocks and ETFs for free. Here’s an excellent reason to sign-up: those who open a Wealthsimple Trade account will get a $25 cash bonus + $0 commission trades. All you have to do is fund at least $150.
Of course, with an online brokerage account, you aren’t limited to ETFs. You can also invest in other assets—including individual stocks, bonds, or precious metals—which have different per-trade costs associated with them. For more information on fees and other aspects of DIY investing, see our ultimate guide to Canada’s discount brokerages.
RELATED: Wealthsimple Trade vs. Questrade
How to DIY invest in SRIs
In most cases, even passive investors will have to put in a bit more mental energy with a DIY brokerage account, since you need to figure out what percentage of various asset classes of ETFs to buy suited to your risk tolerance. You’ll also have to rebalance your portfolio at least once a year because those allocations will drift over time as markets fluctuate.
In addition to the ETFs listed above that are included in the various robo-advisor SRI portfolios, here are a few other solid ethical funds worth looking into:
BMO Balanced ESG ETF (ZESG)
This is Canada’s first “all-in-one” ESG exchange-traded fund, which is a great option for those who want the convenience of automatic rebalancing, but without paying a management fee to a robo advisor. Basically, it combines a bunch of BMO’s ESG ETFs into a single fund, weighted 60% into equities and 40% fixed-income assets, and rebalances quarterly. With an MER of just 0.20%, it’s a very low-cost, hands-off diversified SRI solution.
Horizons Global Sustainability Leaders Index ETF (ETHI)
Tim Nash (a.k.a. the Sustainable Economist), calls this fund one of the cleanest large-cap global equity ETFs on the market, as it omits fossil fuels, gambling, alcohol, junk food, uranium and nuclear energy, armaments and militarism, destruction of valuable environments, animal cruelty, chemicals of concern, mandatory detention of asylum seekers, pornography and/or human rights violations. It has mostly U.S. tech and healthcare stocks and comes with an MER of 0.52%.
iShares MSCI Global Impact ETF (SDG)
Nash recommends this fund as a complement to the one mentioned above since it covers the areas ETHI is weak in, such as emerging markets (China, Brazil, and India) and sectors including industrials and consumer staples. SDG screens out companies with low ESG scores and opts for those in the areas of clean energy and other United National Sustainable Development Goals. The MER is 0.49%.
Vanguard ESG U.S. Stock ETF (ESGV)
With an MER of 0.12%, this is one of the lowest-fee U.S. equity ETFs that screens out sectors like oil & gas, tobacco, and weapons. However, it does include other businesses that some ethical investors may find problematic (such as pipeline and chemical companies), so weigh that into your investment decision.
Socially responsible investing in Canada is easy, especially with robo advisors offering SRI and ethical investment funds. Using a robo advisor gives you the benefit of diversification and solid returns, as well as lower fees than traditional mutual funds.
Regardless of the online SRI investment approach you choose, you can feel good about where your money is going, while building your nest egg for the future.