Dossier, Volume 14 #5: Three Economic Alternatives in Action

Have Ethical Investors Lost Their Bearings?

The Canadian ethical investment movement is a product of two cultures: the politics of protest and the business of investment. But with corporate confrontation giving way to investment marketing, has ethical investment lost its ability to be the conscience of corporate Canada?

Ethical investing, or social investing as it is also known, is the investment of money in ways that express people's social values, convictions and commitments. Inspired by church activists battling corporate abuse, the movement has grown into an industry of mutual funds, investment advisers, consultants and information-providers. Ethical Funds Inc., the largest distributor of ethical mutual funds, has become one of Canada's fastest-growing mutual fund groups, increasing last year by 77 per cent. In total, more than $2.3 billion is invested in ethical mutual funds and socially responsible labour funds, with further millions in community funds and screened pension funds.

But ethical investment is coming to a crossroads. In this era of downsizing and restructuring, the public mood has changed. Canadians are less concerned about social issues, and their attitudes have taken on a harder edge. Some even say Canadians are developing a class consciousness. To be relevant in this increasingly polarized world, ethical investment may have to rediscover the culture of dissent that gave it life.

SOCIAL INVESTMENT HAS ITS ROOTS in the social action movements of the early 1970s, when Canadian churches felt uncomfortable about their tacit involvement in South African apartheid through investment of their pension or operating funds. In 1973, the YWCA of Canada and the churches published Investment in Oppression, which showed how foreign investment in South Africa supported apartheid. Two years later, the churches founded the Taskforce on the Churches and Corporate Responsibility (TCCR) to use church influence to make Canadian companies more responsible. South Africa was the first issue on the agenda.

Using the mechanism of shareholder resolutions, TCCR challenged Massey-Ferguson over its operations in South Africa and the Canadian banks over loans to the apartheid regime. Member churches owning shares in these companies would circulate shareholder resolutions to force the issue onto management's agenda. Debate of these resolutions at corporate annual meetings produced media attention. In spite of regularly losing votes at annual meetings by huge margins, TCCR had an uncanny knack for turning these losses into public relations victories.

Over the years, TCCR delved into other issues. It confronted Noranda over plans to enter Chile following the 1973 coup d'état, challenged Placer Dome on pollution from its Marcopper Mining subsidiary in the Philippines (an issue that continues to haunt the company to this day), and advocated sustainable forestry in Canada. More recently, TCCR has taken up corporate governance issues, pushing for more representation of women and minorities in management and boards of directors, and championed the cause of minority shareholders, pressuring corporations to adopt secret ballot voting procedures.

But the late 1980s proved to be TCCR's high point. In 1987, the courts upheld a decision by Varity Corp. (formerly Massey-Ferguson) to refuse to circulate a Jesuit resolution on South Africa. Citing a clause in the Canada Business Corporations Act, the courts ruled that the company could exclude the resolution, effectively killing it for discussion or action at the annual meeting. Two years later, Shell Canada applied to the courts for permission to exclude a resolution filed by three churches requiring management to urge the parent company to withdraw from South Africa. Because of the legal costs involved, the church shareholders did not defend their position in court. These rulings, combined with tighter restrictions on shareholder resolutions by the U.S. Securities and Exchange Commission, have effectively ended the use of these resolutions for social justice purposes.

Just as the social change work of ethical investment became more difficult, the movement began to transform itself. Canadian financial advisers looked enviously at the success of social investment promoters in the United States, and wondered whether there was a similar market in Canada.

Vancouver City Savings Credit Union, the largest credit union in Canada, was the first to test the waters, setting up Ethical Growth Fund in 1986. Ethical Growth announced that it would screen investments for racial equality, industrial relations, tobacco, military production and nuclear energy. An environmental screen was added later. The fund took off, raising $7 million within a few months. It is now valued at $250 million, and fourteen other funds have followed.

Victoria stockbroker Larry Trunkey took up the cause, attracting national media attention during a cross-Canada speaking tour in 1986 and 1987. David Nitkin, a strategic planner, founded EthicScan Canada, a professional ethical consulting company. Researcher Michael Jantzi set up his own corporate social research company. And in 1988 and 1989, I wrote the first Canadian books on ethical investing.

At the same time, a group of organizers--myself included--started to think about a national organization to advance social investment. It started in 1988 with an ethical investment workshop at the alternative summit coinciding with the Group of Seven meeting in Toronto. The workshop led to the first Canadian Social Investment Conference, which agreed on the need for a national organization. Putting in countless hours of volunteer labour, Marc de Sousa-Shields, a University of Toronto master's graduate and researcher, organized the Social Investment Organization in 1990. Since then, the SIO has grown to four full-time staff, organized international conferences and generated spinoff activities in book distribution, economic consulting and project development.

THIS PROFESSIONALIZATION HAS HAD SOME major benefits. Tens of thousands of Canadians are now involved in sorting out their investments to match them with their personal values, a process that has led to some measure of reflection and a commitment to social change. In addition, social investment has helped develop community loan funds and other local economic development tools. And while shareholder activism has waned, it is now a lot more acceptable and commonplace to question corporate executives about social and environmental issues.

But many social action people treat social investment with cynicism. Bread and Roses Credit Union in Toronto, for example, refuses to sell Ethical Growth Fund and its related funds. "Bread and Roses has a social and justice mandate and we feel at this point that the ethical funds are not ethical enough," said B&R supervisor Salim Essop.

Investors, like consumers of all kinds, are becoming increasingly aware of "greenwashing," the use of often dubious environmental or social claims to sell products or services. Ethical funds have been targets of some of this criticism. The top ten investments of Ethical Growth Fund, for example, include three of the chartered banks, three major oil companies and printing and paper companies. Ethical Growth's managers defend these investments, saying that they represent the best companies in their sectors. Indeed, Ethical Growth dropped Placer Dome from the portfolio earlier this year after its environmental spill in the Philippines.

Is this good enough? Is ethical investment changing corporate behaviour? Ethical investors have helped turn the tide on international issues, as South Africa shows. But on many domestic issues, the ethical investment movement seems to be silent. It has not objected, for instance, to the downsizing of Bell Canada by an amazing 20 per cent. Canadians are getting desensitized to economic bad news, and the ethical investment movement has little to say about it.

To become an effective tool for social change once again, the social investment movement needs to rediscover its roots in the culture of protest. One way this can be done is to get back to the notion that ethical investors are stewards, with ethical responsibility for the consequences of their investment decisions.

Former TCCR coordinator Moira Hutchinson says there is some hope for this. She points to increasing interest among unions in using their power to influence large pension funds. In one recent example, a British Columbia Federation of Labour initiative is helping member unions launch shareholder actions. In addition, there is some interest in forming new ethical funds that will take active shareholder positions. Unlike the current ethical funds, active shareholder funds would file investor resolutions and hold meetings with management on issues of concern. Hutchinson is also working on a project with Michael Jantzi Research Associates and the Canadian Friends Service Committee to change federal legislation to make shareholder resolutions easier. "There still is an important role for any kind of mechanism that takes you into the heart of the corporate world and forces people to deal with issues," she says.

These activities, along with increasing investor diligence, can help ethical investment once again live up to its promise as a tool for social change.