Let’s also assume you’re not swimming in disposable income, you’re not an accredited investor, and you don’t have a lot of time to devote to researching the activities of a company, its paid directors, the company’s subsidiaries, its supply chain, or its management.
My guess is that this describes the vast majority of working Canadians who may want to make an ethical investment but don’t know where to turn.
What are your options? What are the risks? Where is there information? What kind of return can you expect, both financial and social? Below are a series of options.
The venerable Guaranteed Interest Certificate. Low risk. Low reward. Low social impact. But at least you’re not investing in something that requires vetting. Generally, however, your investment in a GIC is simply a way to invest in the issuing financial institution, as they will take your money to loan out at a greater interest rate to a borrower—over who that borrower is you have no control--in order to make money. If you like to support the banking sector, but don’t want the risk (or reward) of investing in banking stocks, then this is a good way to avoid making any real decisions on socially responsible investing, but at least you won’t lose a dime.
Examples: visit any financial institution...
2. Philanthropy and Charitible Giving
Well, this is where I suspect most Canadians "invest" to address social and environmental issues. I myself have been part of the charitable sector for most of my career, seeking money from individuals to support various causes. Philanthropy is marvelous for responsible investors….oh, scratch that. Rather, philanthropy is a great mechanism to make a difference (in my opinion) if the donor takes the time to research their chosen charities. I'll acknowledge that donations can be made strategically, in the same way that one might decide on a sound investment. However, donations are not investments for two perhaps obvious reasons: one, you don’t get your principal back (let alone a financial return on investment); and two, your contribution has to be used (well 80% at any rate) in the year you give it to a charity in the fulfillment of their mandate. This means, in most cases, that your “investment” is actually not invested, but spent on a deliverable. It is a one shot deal. There are exceptions, of course. For example, you can donate to a foundation, and then your money can be invested in socially responsible investments (refer to an earlier post on Program Related Investments), or it can later be granted to a worthy charity. In this option, social return on investment may be high, but financial return on investment is punitive in that you lose your principle too!
Examples: see The Canadian Revenue Agency’s list of charities (>84,000 and counting!) Also take a look at some of the resources that are becoming available for those who wish to see their philanthropy as more of an investment decision.
3. Microinvestments
There is a growing trend--particularly online--to attract individual "financiers" to offer small loans to individuals or groups in need of microfinancing. These portals, typically run by charities, offer individuals the chance to make small investments in worthwhile social businesses, either in their own city or across the world. The loan is eventually repaid by the small business recipient and the investor can choose to either re-invest or withdraw (or augment!) the initial capital. This mechanism is immensely popular, has almost no minimum investment level, and credibly purports to directly provide financing to those who need it most. The social impact may be small, but it is directly affected by the investor, and there is relatively small risk. However, there is typically no financial return on this investment.
Examples: KIVA , ChipIn, or Community Lend .
4. Community Investment Funds (CIF’s) or Community Loan Funds
There are a growing number of urban communities in Canada that are developing investments funds that market themselves as a place to invest (and they will often offer a low fixed rate of return). Those investments are then pooled by the fund owners who then will make targeted community investments, typically in social enterprises or occasionally in entrepreneurial charities. The challenge with these investments is that they are like a mutual fund: the initial investor allows the final community investment decision to be made by the fund managers. These community funds are like a hybrid between a charitable foundation and a for profit mutual fund. They are aggregators of assets that are then invested in the social economy. Sadly, these types of funds do not have a clear legal status. They are neither a charity (in the truest sense), nor are they a for-profit corporation. They offer securities (debentures, bonds, etc) and they issue loans, but they are not a bank or trust company. They are not private social venture capitalists, as they are “managing” other people’s money. These are wonderful entities, but they offer limited investment opportunities, limited financial returns and have a geographically limited social return on investment.
Examples: Montreal Community Loan Fund, Ottawa Community Loan Fund, Access Community Capital Fund, or The Jubilee Fund.
5. Ethical Mutual Funds
This is where many Canadians start when we begin to have assets to invest “in the market.” It is easy, brings automatic diversification to our portfolio, and we assume that SOMEONE has taken the time to research the ethical background of the stocks held within our chosen fund. These funds are now readily available in all shapes and sizes from financial institutions and investment companies. There is frequently no minimum, and the risks appear small. The challenge is that mutual funds require management, and even if they are “no load” funds, the management fees have to come from somewhere (ie from you). Returns on ethical funds are typically modest , although in fairness, they offer an easy, albeit perhaps passive, solution to your dilemma for social investing. Be sure to visit the Social Investment Organization for lots of insight into these sorts of investments.
Examples: Meritas, IA Clarington Investments, or NEI Investments (formerly Northwest and Ethical)
6. Stock in Corporations with SRI policies
Virtually every major corporation, from banking to mining and from hotels to manufacturing, now report on their corporate social and environmental successes and policies. Some are doing considerable good work, and others might simply be providing a good news story to compensate for what may be very dubious or unpleasant business (blood diamonds anyone?). To make a responsible investment in major corporations requires some research, but the good news is that there are many independent organizations doing this research for you, like Janzi Sustainalytics, SHARE, or the Global Compact. The screens, or criteria, used to determine a company’s policies and performance in environmental, social and governance (ESG) practices can be pretty broad, however; No child labour, no ammunitions, no tobacco, no alcohol, and no environmental catastrophes. It is worth noting that many of the ethical mutual funds comprise stocks from major corporations who have passed these screens. The challenge for the average investor is determining the actual practices of a company, including wholly or partially owned subsidiaries, suppliers and other trading partners. This information can be available, but might require attendance and a question at an annual stockholders meeting; such engagement is recommended, but for a $10,000 investor, that is a pretty significant time requirement, and may not be sufficient to learn what is necessary to feel comfortable about the ethics of your investment.
Examples: There are many examples of listed companies doing socially beneficial work, but it is up to the investor (or their advisor) to do the research to satisfy themselves.
7. Private investment in the social economy.
If not big companies, then what about little companies doing good, like the local organic food distributor, the fair trade importer, the local financial cooperative? It is relatively easy to learn about their business practices, and most would welcome potential investors, especially those who could provide financing at a lower interest rate than (and subordinate to) bank loans. The return on investment might be modest, and there maybe some risk in investing in a small and medium enterprise. It may also be difficult to make an investment as many small businesses wouldn’t offer “shares” per se, but would perhaps be interested in issuing a debenture, or negotiating a medium to long term loan. The real benefit to this sort of investment might be that you really see the tangible social benefit of a local businesses work, whether in poverty alleviation, public housing, environmental policies or community involvement. Investing in the social economy is actively promoted in the US, the UK and other regions of the world through tax incentives and supportive legal structures (B-Corps and L3Cs). Canada lags behind, however, as we still think of social well-being as being the domain of charities or government.
Examples: La Siembra Cooperative, Windshare, or the Centre for Social Innovation. Also, you can visit Clearly So, where social enterprises are advertising that they need financing.
8. New Company Stock investment /Angel investment
There are lots of new companies that are seeking investment for social business, particularly in the energy sector, with the introduction of feed in tariff programs and other financial incentives. Sadly, your $10,000 may not be sufficient to help these companies get launched, as they may be seeking more substantial “angel investors” to get them off the ground. Again, with energy sector companies, the initial capital costs of building wind turbines, solar panel arrays, or micro hydroelectric installments can be significant. The benefit of this sort of investment is that you can be in “on the ground floor” of a company that is doing really substantial social or environmental work. This can be lucrative, and it can be enormously gratifying. It can also be risky, and it is likely difficult to find some of these companies before they go public and are listed on a stock exchange.
Examples: To become a social venture capitalist, you may consider joining The Toronto Funding Network, or Social Venture Partners or become part of the angel venture capitalist network across North America
9. Do nothing?
Is it any wonder that many people who WANT to make a socially responsible investment actually do nothing?
What is needed, then, to make it possible for investors of modest means and strong social justice or environmental beliefs to put their money into something worthwhile?
The charitable sector has many portals of information: canadahelps.org, canadagives.org, charityvillage.com, foundation databases, even private companies that will offer philanthropic consulting.
The for profit sector also has many points of access: every financial institution, financial planner, stock exchange and newspaper offers ideas, commentary and avenues to invest in a listed company or mutual fund of listed companies.
I have several ideas to stimulate awareness and generate greater small-scale private investment in the social economy:
1. Build (and even regulate) a social stock exchange for social enterprises to advertise their investment opportunities.
2. Strengthen and support the work of aggregators like ClearlySo, or Community Investment Funds.
3. We should all encourage consumers of social products and services to contact the company directly to offer financing.
4. Generate template financial agreements for download to facilitate private investments in non-listed companies.
5. Create appropriate legal structures for a social business that allows them to operate with tax incentives (or exemptions) and to issue and advertise private investment opportunities.
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