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January 03, 2000

The Canadian Difference

Social investors in Canada have a certain "Je ne sais quoi," based on cultural, historical, and legal differences north of the border. -- Along with being the largest economy in the world, the U.S. has arguably the largest social investment movement; but it is by no means the only show in town. Just across our northern border, Canada is pursuing many of the same goals in responsible investing, and exploring new venues that the U.S. could learn from.

In Canada, more than $5 billion ($US) are invested in 14 socially screened mutual funds and 5 broadly screened labor-sponsored venture capital corporations. This includes one of the largest socially screened mutual fund families in North America, in terms of assets, Ethical Funds, Inc., worth almost $2 billion.

While these numbers may pale in comparison to the $154 billion invested in 175 U.S. socially screened mutual funds, as reported by the Social Investment Forum, a nonprofit professional association in the U.S., social investing in Canada is an impressive movement in a country with a fraction of the population of the U.S. And what Canadian social investing lacks in size, they make up for in pluck.

For example, socially responsible mutual funds in Canada have evolved to emphasize quality over quantity. While many of the screened funds in the U.S. rely heavily on "sin" screens that exclude tobacco, alcohol, and gambling, these screens are not as common in the Canadian funds, and no fund exercises them exclusively. Screened funds are typically more comprehensive on social and environmental issues, and lack the eclectic variety of perspectives found in U.S. funds, such as those on abortion or animal rights.

At the root of these differences, and many others, is Canada's divergent history and civic traditions. The U.S. has a strong tradition in religious investing, for example, which led to a much larger South Africa divestment movement in the 1980s, and supports a variety of screened mutual funds today. While Canadian activists also mounted an anti-apartheid campaign, their focus emphasized working with governments on international sanctions.

"I believe the U.S. has a stronger tradition of individual and community action to solve social problems," said Eugene Ellmen, Executive Director of the Social Investment Organization, a Canadian professional association. "Canadians are more inclined to find government and public answers to these challenges."

The first socially screened mutual fund in Canada, Ethical Growth, was launched in 1985 by VanCity Credit Union, a very different venue than U.S. funds. The fund family has grown to include 8 funds, and continues to be distributed by credit unions all over Canada. Although these funds may have not reached the mainstream in Canadian investing circles, they are a unique genre that calls attention to Canada's divergent social investing development.

Another important difference is the heightened involvement of labor unions in social investments. A series of very successful labor-sponsored venture capital funds are supported with generous federal and provincial tax credits to individual investors, a vehicle with no U.S. counterpart. They use screens and social audits to ensure that the companies they invest in are socially responsible, and have begun to be more involved in shareholder advocacy.

The biggest disadvantages social investors face in Canada are significant legal barriers to shareholder activism. There is no national body analogous to the U.S. Securities Exchange Commission that regulates such activity, and Canadian law permits companies to reject shareholder resolutions based on social, religious, or ethical criteria. The government is currently reviewing this legislation, and social investing advocates are hopeful that it will be changed within the next few years, opening the door to shareholders with social agendas.

In addition, pension fund administrators have interpreted their fiduciary responsibility in a way that has worked against shareholder activism. But there is a growing mood of restlessness among public sector employees, such as Ontario teachers who are members of Canada's largest pension fund.

"Pension funds, charities, churches, universities, and other institutions are going to be under increasing pressure from their stakeholders to adopt screens, shareholder advocacy and community investment," said Ellman. "I expect there will be a gradual loosening of the interpretation on fiduciary responsibility to permit this, and eventually there will be case law to enshrine it."

At this point Canadians can't buy U.S. screened mutual funds, and visa versa, but with more and more U.S. and Canadian financial services spanning the borders, it will be only a matter of time before restrictions on international mutual fund sales are eased. There may be many future opportunities for collaboration between social investors in the U.S. and Canada, so the future development of the industry in Canada will be especially instructive.

Canada's geographical proximity gives them a unique perspective on the U.S. market: detached, but still strongly imbued with U.S.-based multinational culture. "Increasingly, social investment researchers are going to have to move beyond their specific, issue-based screens," said Ellman, "and begin to look at the impact that multi-nationals have on world culture, freedom of consumer choice, and world economic development."

Several developments on the horizon promise an exciting future for social investing in Canada. The year 2000 will see the launch of Canada's first socially responsible stock index, providing a benchmark for returns on responsible companies and encouraging the development of new index-based products. New socially responsible fund companies are in the works, and existing companies are bringing out new products.

Citizens Bank, a national internet-based bank, has become the first Canadian bank to adopt socially responsible lending guidelines, and it has promoted them widely. This could be an important trend in the future, as large regional credit unions adopt similar guidelines in coming years and bringing socially responsible ideals into people's basic banking transactions, a positive development in Canadian social investing.

In addition, the Social Investment Organization will be publishing the first-ever trends report in late-2000, part of its effort to achieve a higher public profile for social investment. "I think the first few years of the millennium are shaping up to be an important watershed in Canadian social investment," said Ellman. "There is going to be a critical breakthrough in size and scale during the next few years."

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