The University of Western Ontario will take a ‘best-in-class’ approach to socially responsibly investment (SRI) portfolios, and will not use negative screening or exclusion of specific companies.
Taking all competing firms in an industry and ranking them in terms of their environment, social, governance, and ethical performance (ESG), the university feels its portfolio would be tilted towards strong ‘social’ performers, with gains from this active strategy offset by the cost of reduced diversification.
In 2008, the Board of Governors Investment Committee was asked to investigate opportunities with respect to social responsibility investment funds.
Socially responsible investing has been addressed by the Investment Committee on a number of occasions. In these most recent discussions, the committee has reviewed what is happening in the industry and within other institutions, considered research conducted on the topic and articles in professional publications, along with consulting the active managers for the university’s Operating and Endowment Portfolio.
There are four main approaches to socially responsible investment portfolios:
· Negative screening or exclusion – avoidance of specific businesses or sectors, usually when products are perceived to do harm if used as intended, such as defense and tobacco firms.
· Engagement – involves a constructive dialogue between company management and shareholders, where the shareholder acts like an owner of the business.
· Advocacy/activism – involves organized support of a specific cause, similar to engagement but involves acting with others to influence management.
· Best-in-class – takes all competing firms in an industry and ranks them in terms of their ESG.
“The Investment Committee does not support the first three approaches to socially responsible investment,” says Lynn Logan, Associate Vice-President Financial Services and chair of the university’s Investment Committee. “What the committee does support is the best-in-class approach which incorporates ESG factors into the analytical process used by managers.”
The first three approaches also conflict with the board’s and the Investment Committee’s duty of ‘undivided loyalty to the beneficiaries’ of the funds invested.
Logan says the areas where the university expects managers to add value are the actively managed parts of the portfolio, currently Canadian equities and a portion of U.S. equities and EAFE equities.
“We know that our active managers do use ESG factors as part of their security selection process and that they have increased resources allocated to ESG factors,” she says. Active management comprises about 55 per cent of the university’s investment portfolio.
“Western is concerned about where its investments are going and our Investment Committee has spent a significant amount of time over the past 18 months discussing this issue and will continue to monitor the evolution of industry research to ensure our active managers’ processes are aligned with best practices.”
Investing
SRI – Socially Responsible Investing, sometimes called ethical investing, a strategy that seeks social good as well as financial return.
ESG – Environment, Social, Governance and Ethical, the broad areas of concern most often assessed in SRI investing.