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Joe BattyDoes capital have a responsibility to all of society or is return on investment the only consideration?

Opinion is changing rapidly in favour of social responsibility and it’s starting to penetrate to the highest levels of investment management. Consider the recent paper Shaping Society, by Saker Nusseibeh, a member of the prestigious 300 Club and chief executive of Hermes Investment Management of London:

 “I would like to suggest that the reason we ‘invest’ our savings goes beyond the simple quest for the accumulation of wealth. If we accept this assertion then we arrive at two main reasons as to ‘why’ we invest. The first is the straightforward accumulation of wealth, by trying to plug into economic growth. But the second, and I would suggest equally important reason, has to do with the shaping of our social economy.”

In the past few months, Canadian Prime Minister Justin Trudeau and Alberta Premier Rachel Notley have ventured to capital markets in the United States to promote international investment in the Canada.

The questions that naturally arise from such trips are:

  • Why do Canadian politicians go to the U.S. for investment capital?
  • Why would Americans invest in Canada when it’s obvious Canadian fund managers choose not invest in their own country?

To the first question, there’s no shortage of savings and investment in Canada. There’s in excess of $2 trillion in savings in various Canadian pension funds, endowment funds, TFSA/RRSP and other accounts.

As for the second question, one can only assume that Canadian capital has, for reasons unknown, adopted an anywhere-but-Canada bias. Canadian funds chase return on investment (ROI) all over the world but, tellingly, very little of Canadians’ savings are directly invested in Canadian companies.

If Canada is such a good home for outsider investors, why aren’t more Canadian savings invested here, shaping our social economy?

It’s not for lack of trying on the part of Canadian political leaders.

Apparently Notley recognized this problem and attempted to intervene with one of Alberta’s largest funds, Alberta Investment Management Corp. AIMCO, a $90-billion-plus fund, manages Alberta’s Heritage Trust Fund and many of Alberta’s public pension plans.

Was the premier encouraged in this effort to increase investment in Alberta?

No. Financial Post columnist Kevin Libin accused her of attempting to politically influence AIMCO, compromising its vaunted independence by suggesting management invest a small portion – perhaps as much as three percent of its portfolio – in Alberta.

But the issue is not as clearcut as Libin suggests. An elected government should use its position to intervene or influence a Crown corporation (or any public service body) – it’s precisely what leaders are elected to do. The controversy is really one of degree and getting that right never seems to get fully resolved.

One of the great ironies of this situation is related to Notley’s father Grant, who was also a leader of Alberta’s NDP. In opposition a few decades ago, Grant Notley was one of the Progressive Conservative government’s fiercest critics. In those far off days, the opposition played a critical role in forcing the government to stop meddling directly in the economy by funding pet projects. Notley senior would, no doubt, have championed the creation of an arms-length Crown investment corporation, in hopes of limiting these abuses.

However, as dangerous as it is to be too far into the kitchen in these cases, it’s equally hazardous to be too far out of it. Elected officials act as owners of Crown corporations, providing them with boundaries and strategic direction, establishing and monitoring their goals and objectives.

The difference between managing and meddling is a matter of overstepping boundaries.

AIMCO, as a Crown corporation, has the mandate and the professional competency to decide independently on investments. But government is within its rights to get involved in setting the fund’s strategic parameters. And if the government chooses to set targets that involve investing in Alberta, that’s its prerogative.

But it would be wrong for the government to micro-manage AIMCO, to override the professionals and start making individual investment decisions, as happened so often in the past.

Albertans and Canadians need to abandon out-of-date thinking. We need to overcome the bias that Bay Street or Wall Street are better at picking investment opportunities in Alberta than we are.

After 150 years, Canadians have enough firepower and our political leaders have enough experience to better control our destiny.

As Nusseibeh suggests, modern thinking is starting to embrace ethical parameters for investment. Investing locally and shaping our domestic economy is a form of socially responsible investment.

Joe Batty is an accountant with a specialty in new asset management. Joe has more than 40 years of experience in finance and accounting.

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