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FAQ’s

What negative screens do the Ethical Funds have in place and why?

Our approach to investing does not lend itself to wholesale exclusion of industries or sectors, but we do exclude companies that have specific types of involvement in tobacco, weapons and nuclear power.

Tobacco: Exclude all tobacco companies. Exclude companies that derive 5% or more of their revenue from tobacco-related products such as filters, rolling papers or packaging, or from the sale of tobacco or tobacco-related products.

Our tobacco screen is based on the belief that it is not possible for a tobacco company to operate in a socially responsible manner. The health, social and financial impacts of tobacco consumption are well documented. We do not see the efforts that tobacco companies have made to mitigate those impacts as credible and we find it difficult to envision anything that tobacco companies could do — short of ceasing production of their products — that we would view as credible.

Weapons: Exclude all companies that derive revenue from military contracts that violate International Humanitarian Law (IHL).

Our weapons exclusion is grounded in our concern that a range weapons that are explicitly prohibited under treaties that many nations, including Canada, have ratified continue to be produced and distributed. It rests on two distinct but closely connected pillars: (1) the emerging and increasingly accepted doctrine of Responsibility to Protect and (2) the historical and ongoing development of International Humanitarian Law (IHL) and treaties and statutes related to the waging of war.

The Responsibility to Protect is the result of an international effort that has been undertaken to protect civilians in armed conflict and to prevent genocide, crimes against humanity and war crimes.

IHL is a legal framework applicable to situations of armed conflict. IHL can be described as the laws and principles aiming to limit the effects of armed conflict for humanitarian reasons. IHL seeks to limit those effects principally by protecting persons who are not, or who are no longer, participating directly in hostilities and by restricting the means and methods of warfare.

Weapons that are explicitly prohibited under IHL include anti-personnel mines, cluster munitions, weapons with non-detectable fragments, landmines, booby traps, incendiary weapons and blinding laser weapons. In addition, while there is no comprehensive or universal ban on the use of nuclear weapons, in July 1996 the International Court of Justice issued an advisory opinion in which it concluded that the use of nuclear weapons would generally be contrary to the principles and rules of IHL.

Nuclear Power: Exclude all companies that derive 5% or more of their revenue from nuclear power, uranium mining or the supply of products or services to nuclear facilities. We do not exclude companies for buying electricity generated by nuclear power, or for involvement in decommissioning nuclear sites or nuclear medicine.

Our nuclear exclusion is based on an assessment of the costs and benefits of nuclear power, including its possible role in mitigating climate change. We determined that the case for nuclear power remains far from compelling. The main reasons for this are:

  • Nuclear power is not financially sustainable.
  • Nuclear power is not safe enough.
  • The disposal of nuclear waste is in question.
  • Nuclear weapons proliferation would become even more of a problem.
  • There are better options.
What is Ethical Funds’ position on Fossil Fuel divestment?

We recognize that the current path of the fossil fuel industry is unsustainable and there is an imperative to move toward an energy system that is renewable and sustainable if we are to avoid the worst impacts of climate change. However, our economy is dependent on oil and gas and there are no easy alternatives in the short term. This dependence has impacts in the here and now that we have an obligation to address.

NEI has been tracking the fossil fuel divestment campaign carefully. While we support the intent of the campaign we do not support a divestment-only strategy. We believe the current “divestment as solution” approach will not be effective because:

  • It will not impact demand for fossil fuels. Fossil fuel free funds are still invested in the other industries that are driving the demand.
  • It will not necessarily lead to increased investment in renewables, in large part because the renewables sector is not yet ready for a massive scale up of investment. Fossil fuel free funds have so far been more likely to invest in “low emission” sectors such as the banks (who finance the oil and gas industry) or sectors that service the oil and gas industry.
  • It will not impact the fossil fuel companies themselves. Most research has shown there will be negligible impact felt by fossil fuel companies because there are sufficient numbers of investors who don’t consider climate change when making investment decisions.
  • It will have no impact on overall production of fossil fuels. Eighty per cent of global oil reserves are state-owned (e.g. Saudi Arabia, Venezuela) so they will not be impacted by a divestment campaign.

Rather, we believe that investment institutions should divest from specific fossil fuel companies – the worst performers – while also putting in place a range of strategies to engage both the supply and the demand side of the energy equation. We also believe that investors should work in collaboration with other stakeholders (other investors, companies, environmental organizations, academic institutions and First Nations) to advance viable strategies for change. Finally, we believe that investment institutions should engage governments to seek enhanced protection for forestlands and other carbon sinks, a meaningful price on carbon and vastly increased funding for development of new energy solutions.

Our four-pronged approach to the energy sector is as follows:

  • Exclude the least progressive companies and industries (e.g. coal).
  • Engage companies to encourage more innovation, diversify and lower the demand for fossil fuels.
  • Advocate for progressive policy that contains a price on carbon.
  • Collaborate with stakeholders and build consensus on how best to approach and transition to a low carbon economy.
Why does Ethical Funds focus on engagement?

At Ethical Funds, we are committed to using the special rights that come with shareholder status to create positive change on behalf of our investors. We believe the best way to affect change is by staying invested in companies and using the tools available to investors to encourage corporate change. That is why we have built the largest corporate engagement program and are the most active investor in Canada. Our objective is to reduce risk to the long-term investment value of companies from environmental, social and governance (ESG) challenges, while helping to build an economy that works for people and the environment.

The centrepiece of our corporate engagement strategy is the Focus List – an annual program of targeted, in-depth dialogues on specific ESG topics. Focus List companies can include sector leaders capable of breakthroughs in corporate sustainability practice and disclosure, sector laggards that need to catch up with the leaders, and companies facing major sustainability challenges that are under special observation for continuing inclusion in Ethical Funds. Each fall the ESG Services Team reviews Ethical Funds holdings and targets at least 20% of portfolio assets for corporate engagement in the coming year. The companies selected for engagement are chosen based on a systematic review of:

  • ESG risk,
  • exposure to these risks within the funds, and
  • where we can be most effective.

Specific objectives are established for the year and reported on our website. Regular updates on each company are published as well as an annual compilation of accomplishments on corporate engagement and other program areas.

Does Ethical Funds invest in companies that do business in countries with repressive regimes or that have a record of human rights abuses?

Our Country Risk Assessment tool is designed to identify involvement in countries of concern and assess the capacity of companies to manage the human rights and other risks that accompany such involvement. We assess country risk on four measures:

  1. 1- Freedom: An assessment of political rights and civil liberties published by Freedom House.
  2. 2- Conflict: An assessment of disputes, non-violent and violent crises, and wars published by the Heidelberg Institute for International Conflict Research.
  3. 3- Failed state: An assessment of state vulnerability based on four social, two economic and six political indicators published by the Fund for Peace and Foreign Policy Magazine.
  4. 4- Corruption: An assessment of how corrupt public sectors are seen to be published by Transparency International.

In order to qualify for inclusion in the Ethical Funds portfolio, a company with operations in any country that scores high or extreme under any of the four risk measures must demonstrate that it has credible policies, systems and programs in place to manage those risks.

What is Ethical Funds’ approach to Animal Welfare and testing?

Ethical Funds has long been concerned about the way in which companies address animal welfare in their operations and throughout their supply chains. When we evaluate companies for inclusion in the Ethical Funds portfolio, we include baseline expectations related to animal welfare for companies operating in certain sectors. For example, we expect health care companies to have policies in place for the humane treatment of animals used in testing and expect them to commit to using alternatives when feasible. We also have specific animal welfare expectations for companies in the food, cosmetics and household products industries.

As noted, these expectations apply to the evaluation of companies for inclusion in the Ethical Funds portfolio. Once companies are added to the portfolio, we monitor their ongoing performance through various means. If we identify situations that we deem to be breaches of ethical management practice —inhumane or illegal treatment of animals would fall into this category — we investigate and take appropriate action.

NEI also supports shareholder proposals asking companies to adopt the highest possible animal welfare standards and to report publicly on implementation.

Recently, we have identified an opportunity to engage companies on this important issue. We are collaborating with the Business Benchmark on Farm Animal Welfare (BBFAW) and other investors to engage companies on farm animal welfare issues. BBFAW ranks global food companies, including restaurants, retailers, food manufacturers, agricultural companies, on disclosure of animal welfare practices. The goal of the benchmark is to improve farm animal welfare management and reporting and drive improvements in their practices and performance.

What is Ethical Funds’ approach to aboriginal rights and resource extraction projects?

There can be tension between respecting Aboriginal rights and the development of resource extraction projects. Canadian companies often seem to find themselves at this nexus of rights and development. This conflict brings unwanted risks to everyone: communities, companies and investors. That is why we’ve been engaging on this issue for over a decade, arguing that there is a better way to do business. We have worked hard to convince the companies we invest in, fellow investors, governments and standard-setting agencies that it is in everyone’s best interest to properly and respectfully address Aboriginal rights as part of any extractives project.

We believe it is possible to develop extractives projects in a way that affirms Aboriginal rights. Through our research, engagement and policy work we promote:

  • Aboriginal engagement policies that explicitly recognize and commit to respecting Aboriginal rights.
  • Consultation frameworks that respect local Aboriginal leadership and decision making structures, developed in concert with the communities.
  • Free, prior and informed consent (FPIC) of Aboriginal communities that could be impacted by extractives projects.
  • Impact and benefit agreements, procurement commitments, and equity ownership offers for communities.
  • The use of due diligence tools such as human rights impact assessment (HRIA) to determine the impact of project activities on indigenous rights.

For more details, see our Aboriginal Issues Update.

What is Ethical Funds’ approach to executive compensation and income inequality?

We have been working on the issue of executive compensation for almost ten years, but we have recently begun to shine the spotlight on our work in order to encouraging a wider conversation.

This began in 2012 with the publication of our white paper Crisis What Crisis?: Executive Compensation in the 21st Century, in which we challenged the dogma of shareholder primacy and examined its contribution to excessive risk taking at the level of the firm, the financial markets and the global economy. The paper focused on the related issues of the disconnect between pay and performance and the persistent and growing problem of income inequality.

We followed this up with engagements with Canada’s big banks on internal pay equity, framing excessive executive pay as both a fairness issue and a business risk and promoting a different approach to pay — equitable compensation that rewards executives who create long-term sustainable value for all company stakeholders, including shareholders. Since late 2012, we have been engaging Canada’s six biggest banks on quantum: how much the top executives are paid. In 2013, the banks agreed to explore the risks of setting quantum by horizontal comparison with executive pay at peer companies, and the potential to add vertical comparisons: comparing the compensation of top executives to the pay of other employees in the company or income levels in society as a whole. As of 2015, all the banks that we engaged have begun to consider vertical comparison metrics as part of the decision-making process on executive pay.

We will continue to ask the banks to disclose more detail on their vertical metrics, the trends they reveal and how this information influences pay. This is important for shareholders like us, who take equitable compensation into account in proxy voting. It would also support development of good practices in this new area of pay governance.

We don’t value vertical pay comparisons for their own sake. Our purpose in promoting vertical comparisons is to moderate executive pay and address the risks associated with income inequality. That is why we’ve been promoting different equitable compensation approaches and metrics that deliver the outcomes we are looking for — equitable compensation and moderation of executive pay.

For more details, see our executive compensation issue brief.

What is Ethical Funds’ approach to water?

Water is essential for industrial and extractive operations and also a focus for pollution concerns and conflict with other users. Ethical Funds has long been concerned about the way in which companies manage water risks — in terms of both water use and impacts on water bodies — and we have a long history of incorporating consideration of these risks across our program areas.

Our evaluation process begins with the identification of material ESG risks and the establishment of baseline expectations for each sector: measures that companies in this sector must fulfill in order to satisfy us that they are managing these risks appropriately. Companies must meet baseline expectations in order to be included in the Ethical Funds branded portfolio.

We have identified water as a significant issue and material risk for companies within a number of sectors; including Consumer Staples, Energy, Industrials, Information Technology, Materials and Utilities. Companies in these sectors must demonstrate credible commitments to reducing water consumption and mitigating impacts on water quality.

Our corporate engagement program is committed to focusing on corporate responsibility for water across all sectors – addressing both the direct impacts of company operations and the supply chain. We encourage companies to adopt good practices in water risk analysis and water management, as well as improving their disclosure so that we can follow their progress.

Our Proxy Voting Guidelines contain guidance on a number of issues relevant to water; specifically water consumption and conservation and risks to water posed by hydraulic fracturing (also known as fracking). For example:

  • NEI supports proposals to report on water use and efforts to reduce consumption to sustainable levels.
  • NEI supports proposals to review and disclose risks associated with water consumption and access as well as proposals asking companies to reduce ground and surface water extraction.
  • NEI supports proposals asking companies to refrain from locating facilities with high demand for water in water-scarce areas.
  • NEI supports proposals requesting companies to respond to the CDP Water Disclosure questionnaire.
  • NEI supports the Investor Environmental Health Network’s report Extracting the Facts: An Investor Guide to Disclosing Risks from Hydraulic Fracturing Operations, which promotes best practices in risk management and oversight, footprint reduction, well integrity, reduction and disclosure of use of toxic chemicals, water quality and quantity management, pollution prevention, stakeholder engagement and compliance disclosure.