Building a socially responsible investment portfolio

Two years ago, a client asked me to design an investment portfolio that could help support a caring economy – one that treats people and the environment with respect and contributes to change where it’s needed most. The portfolio also needed to grow at a reasonable rate to support the client’s age-related expenses. Here are a few of the key considerations I worked through on my journey to implement this mandate.

A quantitative analysis
In building a portfolio like this, I needed to balance the idea of “doing good” with achieving the required rate of return. So, I started with the traditional negative screens to remove the typical “sin” sectors like guns, tobacco, defense and adult entertainment. I then filtered out certain undesirable sectors or businesses that have clear adverse effects on society and the planet. Recently, I’ve improved this process so I can see into a company’s operations to determine sources of revenue from various sectors or business lines, representation on its board, its diversity across employees, or its share voting structures.

A qualitative review
Next, I moved to a more qualitative review of the sectors and businesses I wanted to invest in. As I allocated capital to these companies, I implicitly wanted to support what they were doing. This required lots of research on which companies were contributing to moving the needle on caring for our environment and making society a better place. Clearly more judgment and less number-crunching were required at this step and frankly, it was the most difficult.

Fundamental analysis
Once I filtered down through the layers, I ended up with a list of companies to perform traditional security analysis on. Namely, what was the business model and growth plan? Who were the key players and managers? What were the valuations and growth expectations and was the company trading at an attractive entry point? I ended up with some companies I could watch for the time being and ones I’d be confident owning.

Building the right portfolio
I then assessed the client’s risk tolerance, goals and time horizon to decide on an asset allocation and deployment of this capital. I blended these carefully selected companies together with specific green bonds (ones required to use proceeds in specific ways that “greenify” a company’s operations or invest in clean sectors) and with traditional alternative investments (such as real estate, market-neutral hedge funds and commodities like gold) to build a robust and diversified portfolio.

The last step was a clear and disciplined monitoring process. This involved refreshing the quantitative data on how a company adhered to these socially responsible investing criteria but also to valuation and growth metrics. (And, on a periodic basis, I’m now rebalancing the portfolio to keep risks in line and to add new ideas or remove ones that aren’t working.)

Did I succeed in fulfilling my client’s initial ask? In the end, I believe I did – creating a portfolio that can achieve solid and consistent returns as well as satisfy the objective of investing capital that contributes to making our world a better place by supporting businesses and people working their best to do just that.

Brent Vandermeer is a Portfolio Manager with HollisWealth®, a division of Industrial Alliance Securities Inc., which is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. The opinions expressed herein are those of Mr. Vandermeer alone and may not be aligned with the opinions and values of Industrial Alliance Securities Inc. or any of its affiliated companies.