As a by-product of corporate disasters such as Enron, consumers care more about where their money is going and what it is supporting – be it donations given to an emergency aid agency or extra income invested in mutual funds. In the church, where ethics take centre stage, wise stewardship of both individual and church-wide resources is a particularly hot issue. Concerns inside and outside the church about corporate performance have spawned the phenomenon of corporate social responsibility (CSR) and ethical or socially responsible investing (SRI) – issues that have their beginnings in the church and continue to grow.
Toby Heaps, editor of Corporate Knights, Canada's magazine for business ethics, said the SRI landscape is still evolving. "None of the large, publicly-traded companies are angels," he said. And socially responsible investing often entails simply choosing the companies that aren't quite as bad as their competitors. "It's like Sunchips – you don't get the trans-fats that are in regular chips, but they still aren't that good for you."
Despite increasing calls for corporations to account for their actions and a proliferation of ethical funds available for purchase, the controversies surrounding CSR are numerous and complex. A lack of standardization and government regulation makes ethical investments a challenge for individuals – as well as institutions.
The Presbyterian Church in Canada does not have a specific ethical investing policy. The problem, according to Stephen Roche, the church's chief financial officer, is that investing ethically isn't as black and white as many might think. He said staying away from companies that support typical no-go areas for churches – such as tobacco, alcohol and pornography – is a clear condition that fund managers can easily accommodate. It's when greyer areas of ethics come into play that makes it nearly impossible to devise a cohesive set of standards. "You have to define ethical and then get a majority to agree," Roche said in an interview. "What do 125,000 Presbyterians want?
"We have to balance our fiduciary obligations with what we see as the clear voice of the church," he continued, "And when the voice isn't clear, then what do you do?"
The Ontario Teacher's Pension Plan Board has voiced similar concerns in the past, worrying that incorporating social factors into their investment decisions could leave them in breach of their government-regulated fiduciary responsibilities – namely to maximize financial returns and minimize risk of loss. Non-financial factors, therefore, will not be considered ahead of "risk and return considerations," according to its policy. However, it does note that corporations can enhance long-term value by considering social responsibility issues.
In 2003, the General Assembly answered an overture from the Presbytery of Montreal, asking it to review its investment policy. The church acknowledged the need to be aware of what its investments are supporting, saying, "The principle of ethical investing reaffirms the church's long-standing belief that no economic activity is amoral: all investment decisions have moral implications."
However, its short answer was, "The investments of the denomination are held for one reason only: to fund the ministry of the denomination. If less money is earned on investments, less money is available for ministry."
The assembly explained that ethical funds could carry a higher risk of loss, and the possibility of creating its own ethical screens tailored to Presbyterian values would also increase costs. Incurring such potential costs and losses would, in itself, "cause moral consequences."
The assembly went on to say that unless its federal and provincial governing statutes are amended, trustees "are not permitted to sacrifice higher financial return, lower investment risk and lower transaction expenses" in favour of creating ethical investment guidelines "that require non-financial considerations to govern the management of the denomination's investments."
Still, the church trustees work in conjunction with Justice Ministries to resolve any investment concerns that arise. Recommendations to sell a stock or disinvest in a company can be taken provided "there are alternative investments that provide similar rates of financial return and the diversification of the investment portfolio is not affected," according to the 2003 decision.
At the November meeting of the Assembly Council, where the topic of ethical screening was raised briefly, Roche said the trustee board is very sensitive to social implications involved in its investments. "This is not a yes or no point," he said. "It's an evolving point, and many organizations will continue to struggle with what they should do. It's a question of process."
Presbyterians worked with other churches in lobbying Talisman Energy to stop its indirect support of the war in Sudan through its oil investments there. The churches, which had shares in the company, urged Talisman to halt its support of the Sudanese government. The Presbyterian Church considered divesting all of its shares, but decided to maintain a minimal amount in order to influence the company. In 2002, Talisman pulled its money out of Sudan, and the churches claimed a victory.
Eugene Ellmen, executive director at the Social Investment Organization, said as shareholders learn to voice their concerns, corporations will begin to take notice of what the public expects from them. "For companies wanting to be sustainable over the long term, they're starting to wake up to their obligations."
Socially responsible investing involves considering the impact of production on people and the earth. It considers not only the financial bottom line, but the social and environmental outcomes as well. It operates along three lines: investment screening, which prohibits investments in companies that may have a negative impact such as tobacco and alcohol, or allows investments in companies that contribute positively such as those with extensive environmental protocols; active ownership/shareholder responsibility, which involves shareholders establishing standards and encouraging or pressuring companies to adhere to those standards; and investing in community development where investments are directly channeled to such initiatives.
Corporate social responsibility can be loosely defined as companies being mindful of their actions and the impact they have on the world around them. Included in this is the practice of transparent reporting practices, good governance and positive employee relations.
Churches played a major role in the beginnings of CSR. The Taskforce on the Churches and Corporate Responsibility was established in 1975 (and is currently a part of KAIROS – a social justice organization supported by churches, including the Presbyterian Church). It was created to help churches and church agencies research corporate performance and develop strategies to address issues of social responsibility. Despite criticism from much of the business sector, the ecumenical taskforce worked diligently to bring the issues of corporate social responsibility into the public consciousness. It was instrumental in ending Canadian support (particularly bank loans) of apartheid in South Africa, with the government of Ontario ultimately passing the South Africa Trust Investment Act in 1990 allowing the disposal of and/or the refusal to acquire South African investments.
"Canadian churches, including The Presbyterian Church in Canada, provided important leadership in Canada in the corporate social responsibility movement," said Stephen Allen, associate secretary of the Presbyterian Church's Justice Ministries. "In the early days, the notion that corporations had any responsibility beyond the financial bottom line and observing the laws of Canada or of other countries had very little credibility."
Today, there is just over $65-billion in socially responsible investment assets in Canada, according to the Social Investment Organization. Likewise, a recent survey conducted by Mercer Investment Consulting found that 73 per cent of the 195 managers who responded predict that social and/or environmental corporate performance indicators will be mainstream within 10 years.
Although numerous studies indicate that Canadian investors are putting increasing importance on social and environmental factors when evaluating companies, only 26 per cent of Canadian shareholders surveyed by GlobeScan said their investments are ethically based. And according to Corporate Knights, the world gave or pledged $4-billion in tsunami relief, while it spent $950-billion on weapons of war in 2003 alone.
With the apparent contradictions, it's difficult to tell if things are really changing. Gordon Pape, Canada's mutual funds expert and author of numerous investment books, said there is still a long way to go. He said ethical investing is hardly a blip on the overall investment radar screen. "I don't see a trend in that direction," he said during an interview with the Record. "We haven't really seen any significant growth. Ethical funds continue to be on the fringe of investors' consciousness."
Ethical mutual funds, such as those offered by Meritas Financial or The Ethical Funds Company, are those that have been chosen in accordance with certain screens, or chosen for their "best practices" compared to their competitors. Meritas, for instance, will not choose companies involved in tobacco, alcohol, military contracting, gambling or pornography. Each company is different, and bases its decisions on varying criteria and values. It is up to the investor to determine which fund best suits their own standards. One fund may shun investments in the nuclear power industry, for example, while another may consider it a clean alternative source of power.
Pape said there are two obstacles preventing ethical funds from grabbing a bigger piece of the investment pie. "The difficulties are getting mainstream acceptability, and the fact that they'll never be taken seriously unless they can at least do as well as the broader categories."
Currently, ethical funds appeal to specialized markets – Christians, Muslims, women and homosexuals can all find investment opportunities tailored to their general value system. However, opinions vary on whether or not these investments can grow your money at the same rate as their mainstream counterparts. Corporate Knights magazine conducts an annual report of ethical funds gauging how well the corporations adhere to their socially responsible claims as well as their financial returns. Results vary widely, with social scores ranging from seven per cent to 100 per cent, with a similar range for financial performance. The magazine's editor, Toby Heaps, said investors must realize that all funds are not created equal. "Some of them are just paying lip service," he said. He cautioned that investors should do their homework before handing over their money.
Jantzi Research Inc. tries to help investors with that homework. The organizations rates fund performance compared to the Toronto Stock Exchange. Its most recent assessment (as of Oct. 2005) showed that the approved funds on its Jantzi Social Index actually outperform their mainstream counterparts. Since its creation in Jan. 2000, the JSI achieved an annualized return of 5.61 per cent, while the S&P/TSX 60 had an annualized return of 4.57 per cent over the same period. The JSI consists of 60 Canadian companies that pass Jantzi-chosen social and environmental screens. They do not include companies that have significant involvement in the production of nuclear power, the manufacture of tobacco or weapons-related contracting.
Ellmen said the high returns can be attributed to the fact that responsible corporations treat their employees well, resulting in higher productivity. They also stay out of expensive legal battles over product safety, such as tobacco companies, which quickly zap financial resources, and manage to avoid other reputation-damaging disputes. And even if an ethical fund doesn't pay off immediately, said Ellmen, good returns over the long-term are likely.
Currently, federal and provincial law (except in Manitoba where a recent amendment stipulates that a pension trustee who uses non-financial criteria to make investment decisions is not automatically in breach of his fiduciary duties) says that a trustee board's primary obligation is its monetary requirements. Prudence, care and loyalty are the most important criteria when handling the investments of its plan members. According to Roche, the church must show itself to be in compliance with these laws.
Although there have been no common law cases in Canada to demonstrate the consequences of doing otherwise, a case in the UK is often cited as reason enough. In Cowan vs. Scargill the decision stated, among other things, that, "trustees are not to invest on the basis of political or social/environmental beliefs."
Despite this, there are some who say pension laws have traditionally been interpreted too narrowly. According to a 2001 research paper by the Vancouver-based Shareholder Association for Research and Education (SHARE), pension trustees may have more leeway than they think when considering investment options. "Although no definite conclusion can be made without further direction from government and the courts, what emerges from a review of existing legal authorities and empirical evidence is that trustees have far greater discretion in this area than they have been led to believe," stated the report. "The use of investment practices that are socially responsible are compatible with the requirement to ensure financial security for plan members and can actually enhance plan performance when applied in a prudent manner."
This opinion was supported in an Oct. 2005 study by an American law firm and presented at the UN's Environment Program Finance Initiative in New York. It concluded that provided trustees act in prudence, with loyalty to their task of growing the pension fund, and conducting sufficient research and analysis, trustees can and should take social and environmental factors into account when making investment decisions. "Integrating ESG [environmental, social and governance] characteristics into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions," states the report.
Peter Chapman, SHARE's executive director, said the UN report is encouraging. He said the main barrier to mainstream acceptance of this outlook is a lack of clarity in the pension legislation, leaving trustees unsure of exactly what they are and are not allowed to do.
Pape agrees. He said Canada lags behind the United States on SRI legislation. He said the Ontario Securities Commission, the leading regulator in that province, "has been remarkably slow making a move on any of this."
The Canadian Pension Plan Investment Board recently adopted a new social investment policy. They maintained their obligation to fiduciary duties and therefore will not screen companies; however, the board is planning on engaging corporate management over social and environmental issues. Eugene Ellmen said that the CPP has taken this step as one of the largest stock holders in Canada with about $100-billion in assets and serving 16 million Canadians, "augers well for the growth of this sector."
When discussing the UN report, Chapman said it holds important messages for the church. First, it shows that social and environmental factors are material to the financial success of investments and that trustees may be in breach if they do not take them into account (responsible corporate practices can be a good indicator of long-term sustainability and success, and therefore, should be considered by trustees). Second, where an institution is of a single view, like the church, trustees would be in breach of its duties if it invested in something that went directly against the institution's morals and values (also called Mission-Based Investing). And thirdly, where two investment prospects are equal, social and environmental factors can be a tipping point in reaching a decision, provided sufficient research has been done first.
There are institutions that put greater emphasis on this newer interpretation. The United Church of Canada has developed ethical screens for its investment choices that are built into its investment policy. They subscribe to the Jantzi Social Index and their Canadian fund managers use it as a guide. In turn, the church receives certification from the managers that they abided by these guidelines. They also have policies regarding how to vote at corporate board meetings. For example, they oppose situations where the chairmen of the board and the chief executive officer are one person, as this can lead to limited accountability.
"We're aware of the concerns surrounding pension funds. A pension plan is owned by its members and you do have a fiduciary responsibility to maximize returns," said Ron Olsen, the United Church's Chief Financial Officer. "But we are a church, and social responsibility is implicit in our objectives and in our stance on social justice issues.
"We believe we will enhance our returns because we're invested in solid companies that are responsible and well-run," he continued.
South of the border, The Presbyterian Church (U.S.A.) employs a staff person who studies the annual reports of church-invested companies, and keeps abreast of news stories related to them. The Mission Responsibility through Investment department oversees church investments and files shareholder resolutions with companies whose practices the church disagrees with. PC (U.S.A.) also has its own investment and loans program, where investors' financial contributions are used as loans for church improvements and growth projects. The Presbyterian Church (U.S.A.) Foundation also sponsors New Covenant Funds, four professionally managed mutual funds that screen for tobacco, alcohol, gambling, firearms and defense contractors.
The federal government recently heard a recommendation to install regulations that would require corporations to abide by CSR rules. A report from the Parliamentary Standing Committee on Foreign Affairs and International Trade called for the government to create and enforce social and environmental standards on Canadian mining companies operating internationally. The government responded in October, dismissing all recommendations, and will continue to rely on voluntary operation guidelines established by agencies, government bodies and corporations themselves.
The Presbyterian Church's Stephen Allen said he is encouraged by the fact that a government department produced the original document, even though it was defeated in the end. "It may not change the world, but it becomes a benchmark," he said. He acknowledges that there is a long way to go, but said progress has been made, noting that CSR has "altered the corporate discourse."
Even though no corporation will ever be perfect, Allen said CSR is all about "raising the bar" and encouraging corporations to challenge their own performance standards and to continually increase their positive results.
"While much remains to be done, CSR is firmly established and has had a positive impact on society," said Allen. "A majority of Canadians want to work for, shop at and invest in corporations that strive to be ethical."
Heaps said perceptions are definitely changing, with socially responsible vocabulary increasingly fighting its way into boardrooms. "Corporations have to become part of the solution," he said. "They're present in everyone's lives, and they impact all of us. Corporations aren't just somewhere, they're everywhere."
