Financial commentators are raising questions about the role of socially responsible investment in the affairs of three major Manitoba financial institutions -- the Crocus Investment Fund, the Workers Compensation Board and the Teachers Retirement Allowances Fund. But while these critics suggest that socially responsible investment has hurt investor returns, they are ignoring a wealth of evidence to show the benefits of incorporating social and environmental issues into the investment process.

Tom Ulrich, former president of the Teachers' Fund, has suggested that socially responsible investment -- or SRI, as it is known -- would put the retirement security of teachers at risk. Conservative finance critic John Loewen says it's wrong to invest on any other basis than the best returns for shareholders.

Even investment guru Gordon Pape has weighed in on this issue, saying "anybody that has a mandate to invest public money on behalf of the public should not be hindered by any constraints."

Do Manitobans have reason to be worried?

Unfortunately, the statements from Ulrich, Loewen, Pape and others ignore a growing consensus in the financial community. The evidence of SRI and investment returns shows that you can invest with social and environmental considerations without impairing profits.

And, rather than compromising good investment management, SRI allows managers to take a longer-term, more comprehensive look at the companies in which they invest. SRI gives managers the necessary tools to understand the social and environmental context of the companies in which they are investing. The result is better and more complete investment decision-making. The concept of SRI, while relatively new, is quite simple. Rather than looking solely at the traditional financial factors of risk and return, SRI takes a broader look at companies' social and environmental records. SRI analysts look into issues of how companies treat their employees, how they help or hinder environmental sustainability, how they operate in developing countries, and how they are regarded in their communities at home.

In some cases, SRI investors employ "screens" to rule out certain choices (tobacco stocks, for example, in some hospital foundations) or to direct portfolio managers to invest in certain sectors or companies. But, more commonly among mainstream investors, SRI is used as an analytical tool to assess the valuations of companies.

Analysts are looking at issues such as global warming, identifying companies like Suncor which stand to benefit from investments in renewable energy, and flagging companies such as Imperial Oil, which is committed to an oil-only strategy. These analysts examine how the Kyoto Protocol, the Canadian government's one-tonne greenhouse-gas reduction initiative and carbon-trading markets favour companies that intend to reduce their climate-change impacts.

Such an analysis allows investors to properly value companies, looking for signs of over-valuation in socially or environmentally risky stocks, and undervaluation in companies that will benefit from social and sustainability trends.

Major international financial institutions are starting to embrace this way of looking at investments. Recently, a group of European institutional investors managing more than $590 billion in assets launched an initiative on "enhanced analytics," encouraging brokerage firms to look at non-financial factors in stock evaluation.

In Canada, some large pension funds are beginning to use SRI tools. The $18.7-billion Hospitals of Ontario Pension Plan, for example, considers environmental, social and ethical matters to assess risks that could affect future returns and shareholder value. The plan also applies this approach to voting its share proxies to encourage disclosure in the areas of environmental, social and ethical matters. One of the reasons why institutional investors are looking at these issues is that they are linked to favourable investment returns. In the U.S., for example, analysts have been tracking the performance of the Domini Social Index (a basket of 400 socially responsible stocks) for more than a decade. In the 10 years to the end of Dec. 31, 2004, the DSI has produced annual returns of 12.9 per cent, considerably higher than comparable returns from Standard and Poor's 500 at 12.1 per cent.

The analysts are still at work studying the exact relationship between social responsibility and investment performance. But when Gordon Pape suggests that investment portfolios should be free of non-financial "constraints," he is turning his back on a useful and prudent investment tool.

To those of us in the SRI community, it only makes sense that companies which treat their employees well, behave in a respectful manner at home and abroad, and contribute to environmental sustainability will be the companies that perform well for investors over the long term.

Rather than worrying that social and environmental tools have hurt investment returns at their major investment funds, Manitobans and the provincial government should encourage their financial institutions to continue to look at this sensible and far-sighted approach to investment.

Eugene Ellmen is Executive Director of the Social Investment Organization, based in Toronto. The SIO includes financial institutions, asset management firms, investment funds, advisors and investors with an interest in socially responsible investment. Winnipeg-based Crocus Investment Fund is a member of the SIO.