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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.
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
"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
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.
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.
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."
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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