Responsible investing (RI), also known as socially responsible investing, incorporates environmental, social and corporate governance criteria into the selection and management of investments.Getty Images/iStockphoto
My wife and I have been nomadic for about eight years: We’ve lived in a camper van exploring Mexico and Central America, backpacked and rented homes across Asia and cycled around Europe. We built an eclectic network of friends in our travels; everyone from bohemians raising their children in RVs, to C-suite executives and wealthy entrepreneurs.
One thing I’ve learned from meeting and talking to so many different people worldwide is that we humans have a lot in common, especially when it comes to what makes us genuinely happy. After our basic needs are met, our incomes have little impact on life satisfaction. Other factors are far more important such as doing right by others, our communities and the planet.
But don’t take my word for it. Researchers have also discovered that happiness and ecological well-being go hand in hand.
It’s something more investors have also realized in recent years, which has fuelled the demand for socially responsible investing (SRI). Research from the Responsible Investment Association shows 78 per cent of respondents want a portion of their portfolio to be put into companies that are providing solutions to reduce carbon emissions, for instance.
I recently spoke with a handful of these SRI-minded investors, including Ann Lalancette and her partner François Desjardins, who invest their entire stock market proceeds in Horizon’s Global Sustainability Leaders Index ETF (ETHI-T). It includes stocks reported to have a low environmental impact: about 70 per cent U.S. stocks and 30 per cent international shares.
Owning an SRI ETF doesn’t directly help the environment any more than owning oil and gas ETFs destroy it. That’s because publicly traded companies don’t really use investors’ money to grow their enterprises (unless you buy their bonds). But Ms. Lalancette and Mr. Desjardins sleep better knowing they don’t profit from companies they don’t respect.
Skeptics of SRI funds say not every stock within them should be considered “green.” They also question their performance. But numerous studies over the years have shown that SRI investments do pay off. While many SRI funds have lagged in recent months, amid the resurgence in energy prices, their performance has been on par or better than the broader market in recent years.
Consider some of the ETFs in the space, such as the Jantzi Social Index ETF (XEN-T), the oldest on the market having launched in 2007. With a management expense ratio (MER) of 0.55 per cent, it charges higher fees than most ETFs. But that hasn’t hurt its performance.
According to Morningstar, it gained 28 per cent in 2021. Its annualized return was about 8 per cent over the past five years (data as of Jan. 27 close). That compares to the iShares Core S&P/TSX Capped Composite Index ETF (XIC-T), with an MER of 0.06 per cent. It gained 25 per cent in 2021 and has an annualized return of 9 per cent over the past five years.
In the future, SRI funds might compare even better. As people become more environmentally aware, many reduce what they spend on environmentally harmful goods and services while increasing what they spend on less harmful businesses. That could boost business profits for “greener” companies, resulting in faster-growing prices for such stocks.
I recommend several socially responsible all-in-one portfolio ETFs in my new book, Balance. Aggressive investors might like the iShares ESG Equity ETF Portfolio (GEQT-T). The ESG in the name stands for a focus on stocks with better environmental, social and governance practices. GEQT includes about 50-per-cent exposure to U.S. stocks, 30 per cent Canadian stocks and 20 per cent developed international stocks.
The iShares ESG Growth ETF Portfolio (GGRO-T) is slightly less aggressive. It has a similar geographic breakdown of stocks. But it includes about 18-per-cent exposure to Canadian bonds.
More conservative investors might prefer the iShares ESG Balanced ETF Portfolio (GBAL-T). It includes 65 per cent stocks and 35 per cent bonds. More risk-averse investors might choose iShares ESG Conservative Balanced ETF (GCNS-T). It includes about 45 per cent stocks and 55 per cent Canadian bonds. Each of these ETFs have an MER of 0.24 per cent.
Not only could such funds help people feel better, iShares maintains a consistent allocation. That means, as with other all-in-one portfolio ETFs, investors don’t have to worry about rebalancing.
According to Morningstar, most investors in all-in-one funds perform better than those that buy individual ETFs. That’s because investors in all-in-one funds tend to speculate less. They don’t have to sweat over what fund to buy during any given month. Nor do they have to worry about when to rebalance. In other words, they don’t have to think much about their investments. And that adds another benefit.
In a 2015 issue of the Journal of Experimental Psychology, behavioural economist Kathleen Vohs referenced 165 research studies in 18 different countries, suggesting that when we focus less on money (which an all-in-one fund allows us to do) we tend to be more helpful and social. Harvard’s eight-decade-long Study of Adult Development says good relationships with others are the most fundamental key to a happy life.
That’s why all-in-one portfolios of socially responsible ETFs might boost your happiness, your wealth and your environmental consciousness. It’s just the sort of balance you might be looking for.