Written on June 25, 2015 – 7:56 am | by Paul Fensom
It seems like every month, a Charity or a pension plan is making an announcement about how they have changed their investment mandate to incorporate ‘Socially Responsible Investing’ (“SRI”) standards. There is no question we are witnessing a real growth in these types of investment mandates. In fact, a 2015 report prepared by the Responsible Investment Association (RIA) and Royal Bank of Canada indicated that Canadian assets under management using responsible investing strategies has increased from $600 billion in 2011 to over $1 trillion.
I would like to take the opportunity to use my next couple of blogs to explore SRI investing in the context of estate and trust administration.
The principal SRI strategies that I will refer to include;
• Negative screening: In addition to the usual investment goals, a negative screen will eliminate certain types of investments. For example an investor can choose to eliminate investments in tobacco companies, gambling, alcohol or companies with a negative impact on the environment
• Positive screening: A positive screen generally makes use of a scoring system to rank the best of class within any industry. The scoring system focuses on matters such as Board Governance, the companies’ environmental footprint and its social or human relations policies.
• Direct or Impact Investing: active investment of capital in business and funds that generate positive social and/or environmental impacts, as well as financial returns.
A Testator or Settlor can expressly permit or mandate investment choices. However, in my experience this is rarely done and, when it is, the Testator or Settlor will mandate a form of negative screen. The interesting aspect of a negative screen is that it limits the choice of investments and could potentially adversely impact the financial return. I believe this is the principal reason why we don’t see many trusts with negative screens. If the main reason for the trust being established is to generate a financial benefit then why potentially direct a mandate that possibly limits those returns.
In my next Blog I will discuss the growing use of positive screens as an SRI investment strategy and the growing body of evidence that suggests this strategy does not limit financial returns. I will also draw attention to the legal cases that govern how trustees should behave when there is no express language and the Trustees are faced with the question about incorporating an SRI strategy.