Socially Responsible Investment and the Mining and Petroleum Industries

CIM Vancouver 2002
Michael C Jantzi,
Abstract Mining, Minerals and Society - A Future in Balance
Abstract: Socially Responsible Investment and the Mining and Petroleum Industries
Author: Michael C. Jantzi, Michael Jantzi Research Associates Inc.

Although the mining and petroleum sectors have faced pressure from various stakeholders to improve their environmental and social performance, this demand historically has not emanated from shareholders. This is changing; however, as an increasing number of investors around the globe understand that companies that integrate sustainable development practices into their business decision making are better long-term investments than their industry counterparts that ignore the realities of the new marketplace. But what is socially responsible investing (SRI) and how do social investment analysts evaluate mining and petroleum companies? More importantly, why should CIM members pay attention to this growing segment of the investment market?

What is SRI?
Socially responsible investment is the integration of social and environmental criteria into the traditional investment decision-making process. Its foundation rests on four pillars or strategies of action. The first pillar of SRI encompasses screening out companies from an investment portfolio if they do not pass some sort of social or environmental screen. Most institutions that practice SRI in Canada also take a more proactive approach and seek out investments in companies that, for example, have implemented leading-edge environmental practices.

Instead of avoiding problem companies, some social investors put more emphasis on SRI’s second pillar and apply direct pressure as shareholders to corporations to improve their social and environmental performance. This strategy encompasses various means, including letter writing, meetings, proxy voting, and shareholder resolutions to dialogue with management and influence corporate behaviour. Social investors in Canada have used all of these tools during the last 20 years, starting with a 1982 resolution asking Alcan Aluminium to review and report on the military implications of its South African subsidiary to more recent proposals filed with Placer Dome with respect to environmental issues.

How do Social Investment Analysts Evaluate Mining and Petroleum Companies?
A common misperception of SRI is that its practitioners avoid investing in mining and oil stocks because of the inherent environmental challenges associated with resource extraction industries. Most social investors in Canada utilize a Best-of-sector (BoS) methodology. When undertaking a BoS analysis, Michael Jantzi Research Associates Inc. (MJRA) evaluates each company's record in relation to that of its industry counterparts, thereby highlighting measurable and quantifiable differences in performance. The standard for performance is not perfection, but the best practices in the given industry.

The BoS methodology allows money managers to maintain diversified portfolios, while encouraging positive corporate change. For example, the Jantzi Social IndexTM, a market capitalization socially responsible index of 60 Canadian stocks, includes mining companies (5.38% of the index compared to 5.01% of the S&P/TSE 60) and oil and gas companies (8.59% of the index compared to 12.11% of the S&P/TSE 60).

Why should CIM members pay attention to SRI?
According to Canadian Social Investment Review 2000, a December 2000 report published by the Social Investment Organization, there is about $50 billion worth of socially responsible investment in Canada, representing 3.2% of the retail mutual fund market and the institutional investment market. The bulk of these assets represent portfolios managed by investment managers offering an increasing array of SRI options to institutional clients, including foundations, endowments, NGOs, pension funds, labour unions, and religious orders. Canadian SRI mutual funds have experienced spectacular growth during the 1990s as well.

MJRA expects that the SRI market will continue to grow in Canada, especially given the US experience. In 1984, SRI assets totaled approximately (US) $40 billion, a number that ballooned to $639 billion by 1995. SRI assets continued to grow and stood at almost $1.2 trillion by the end of 1997. By the end of 1999, the latest figures available, approximately $2.2 trillion was invested in the United States in a socially responsible manner, according to the Social Investment Forum, accounting for roughly 13% of the $16.3 trillion under professional management. The 82% growth rate in SRI assets between 1997 and 1999 was about twice the growth rate of all assets under management in the US.

The growth in SRI in North America primarily has been driven by the bottom line. As countless studies have demonstrated, social and environmental performance are increasingly recognized as indicators of financial performance. During the first ten years of its existence the Domini Social Index (DSI), a market-capitalization-weighted common stock index of 400 US corporations that pass multiple social screens, had an annualized return of 19.01% versus 17.48% for the S&P 500. In Canada, the JSI outperformed the TSE 100 and TSE 300 in a five-year backtest prior to its launch in January 2000. This strong comparative performance has continued during the last 21 months, as the JSI has lost 17.89%, while the S&P/TSE 60 has lost 18.47% over the same period.

Canadian mining and petroleum companies that seek equity or debt capital in Europe will find a similar reality there. For example, 59% of British pension funds and local municipal funds incorporate SRI principles into their investment process, either through the fund manager, through engagement (shareholder advocacy), or both. This level of involvement in SRI has been spurred in part by UK legislation, passed in July 2000, that requires all pension funds in the UK to report publicly on their SRI policies and initiatives. The Association of British Insurers (ABI), whose members control a significant amount of assets, announced in October 2001 that it will require all public companies to report on the management and verification policies they use to identify and mitigate any risks associated with their environmental or social performance.

The legislative changes in the UK have had a ripple effect throughout the rest of Europe and the world. SRI is an important component of new legislation reforming Germany’s pension system. Newly-conceived private pension schemes will have to fulfil a number of criteria, including the disclosure of SRI policies, in order to be certified and qualify for tax deductions. In France, SRI is now reflected in legislation overseeing retirement savings contributions and retirement fund regulations. The Belgian Parliament currently is considering options to thoroughly revise the country’s legislation, including a SRI provision similar to the one found in British legislation. Finally, in August 2001, the Australian government passed the Financial Services Reform Act, which includes an amendment that compels providers of investment products to disclose: “the extent, if any, to which labour standards, environmental, social or ethical considerations are taken into account in the selection, retention or realization of the investment.”

Keywords: shareholders, long-term investment, business decisions, Growth, socially responsible investing, direct pressure, Jantzi Social Index, verification policies, Screening, best-of-sector
Full Access to Technical Paper
PDF version for $20.00
Other papers from CIM Vancouver 2002