Check out our seventh-annual Responsible Investing Guide.

There’s going to be a lot of bad news this year. But amidst the creative destruction of a year of portfolio carnage, there is an upside.

The days of an economy powered by debt-fueled consumerism are done, and the dawn of a new economic engine is on the horizon. The trick for investors is to figure out what that engine will be, and which companies are best positioned to rev it up.

Investor George Soros, dubbed ‘the man who broke the bank of England’ for a 1992 exploit in which he short-sold the pound sterling and made $1 billion in a single day, is making another prediction. He thinks trillions of dollars of investment in green infrastructure to combat global warming will be the engine that will power the twenty-first century economy.

Moving beyond the quarter
Who knows which companies are poised to capitalize on this new economic order? The analysts with the most credibility right now are the non-traditional investment research houses, like Innovest and Jantzi Research, which take a beyond-the-quarter approach to analyzing companies.

Innovest senior analyst Gregory Larkin made headlines by accurately forecasting the subprime mortgage sector collapse in October 2006, nearly eight months before the crisis shifted into high gear. More recently, Larkin downgraded Bear Stearns to below investment grade nine months before it collapsed.

Larkin bested established Wall Street analysts because he took a 360-degree approach to investing. Using tactics pioneered by the best social investment houses, analysts burrow down to the social, environmental, and governance (ESG) elements of a company, often providing crucial insights into who will collapse in the near term and who will succeed in the long term.

“As financial markets begin to focus on longer-term perspectives, the value of evaluating ESG as part of the due diligence process will become clearer and better understood,” predicts Jantzi Research president Michael Jantzi. “The socially responsible investment community has been blazing the trail in many areas [so] I expect our credibility will rise in the eyes of many mainstream and regulatory players.”

Jantzi points out that KLD Research & Analytics, Inc., Jantzi’s US-based partner, also identified sub-prime lending as a risk before most sell-side analysts. Jantzi Research had also long recommended that Maple Leaf Foods, whose meats were the source of a nationwide listeria outbreak in 2008, be considered ineligible for socially responsible investment portfolios due to environmental, community relations, and employee health and safety concerns.

With the market madness in play, we increased the rigour of our analysis to include two new indicators that offer insight into a fund manager’s long-term perspective: portfolio turnover rates and proxy voting records.

Exposing casino capitalism
Portfolio turnover rates measure how actively the fund’s portfolio advisor manages the portfolio investments. A portfolio turnover rate of 100 per cent would indicate that a fund has bought and sold all of the securities in its portfolio once over the course of the period. While prospectuses state that portfolio turnover rate is not an indicator of fund performance, sustained high turnover does generate trading costs, reducing return.

In 2000, the Canadian investing website The Fund Library found that the average Canadian diversified equity fund has $200 million in assets and a portfolio turnover rate of 80 per cent. Using a conservative transaction cost estimate of 0.6 per cent, this turnover rate causes a drag on return of about 1.08 per cent. The Fund Library calls this a “substantial burden.”

High turnover also indicates that the fund manager may be missing the long-term value forest for the short-term trees. A whole slew of recent studies have shown that the majority of CEOs will sacrifice maximizing long-term economic value in order to avoid missing Wall Street’s quarterly expectations.

The long-term value destruction caused by the investment community’s casino-style, high-stakes betting mentality will allow savvy sustainability investors to rise on a new wave of ESG-minded industries and companies.

Investors at the ballot box
The other addition we made this year was to include a fund’s proxy voting record in our criteria to highlight the funds that vote consistently with the stated socially responsible themes of their investment prospectus.

Ethical, Inhance, and Investors Group’s RI funds had ESG voting records of 100 per cent – meaning that each time they had the opportunity to vote on an ESG-related shareholder resolution (that garnered at least 10 per cent of shareholder support), they voted in favour of the resolution. Meritas’s RI fund, which itself proposed several resolutions, had an ESG voting record of 90 per cent. Ethical, Inhance, and Meritas’ RI funds have prominently published their proxy voting guidelines.

The RI funds of traditional firms like PH&N, Desjardins, iShares, and RBC voted against resolutions asking for disclosure of company participation in hedge funds and high-risk mortgages. ESG-focused Acuity’s RI funds voted against such resolutions as well.

RBC’s voting record, the lowest of all funds we examined, was roughly consistent with the proxy voting trends of the Big Five banks’ fund management arms. Although we understand that all of RBC’s proxy votes were carefully considered, voting against adopting advisory shareholder votes on executive compensation raises eyebrows. RBC also voted against an Ethical Funds-filed resolution asking Power Corp. of Canada to issue a report on the implications of investing in Burma. Interestingly, while RBC tended to vote against Board of Director gender parity resolutions, it voted for such a resolution during Power Corp.’s AGM.

Check out the ranking here.