So your RRSP is stuffed with investments in tobacco companies, gambling casinos, weapons makers, purveyors of pornography, and assorted major polluters that support oppressive regimes and don't hire minorities for any job except janitor. The returns haven't been bad, but you're feeling just a tad uncomfortable.

"Cleanse my RRSP!" you cry. "Just don't compromise the returns," you quietly add.

You have just entered the world of socially responsible investing — or SRI as it's known. These days, it's getting more attention than ever. With daily headlines about global warming, investors are increasingly searching out "green" or socially responsible alternatives for their RRSP investments.

So where to begin? Well, the most popular investment Canadians pick for their RRSPs are mutual funds. While many fund companies still have no funds that invest along social or environmental guidelines, the SRI-club is steadily growing. There are now dozens of funds that factor in a company's approach to various social and environmental issues when making their stock selections. They operate in all the fund categories — foreign and domestic equities, bond funds, balanced funds, even money market funds.

Ask advisors

Canada's biggest SRI mutual funds ($M):

Investors Summa $1,920

Ethical Growth $447

Ethical Balanced $389

Ethical Special Equity $286

Ethical Canadian Dividend $258

Source: SIO

The easiest way to find SRI funds is to ask your financial adviser, planner, or stock broker. You can also ask about socially responsible investments at your bank or credit union. Tell them what issues are important to you — the environment, human rights, tobacco — and the adviser can find funds that match your particular values.

You can also do some of the research yourself online. The Morningstar Canada site, for instance, lists the Top 10 holdings for most mutual funds available in this country.

Many SRI mutual funds have launched in the last few years, along with other new SRI products. For instance, Citizens Bank launched a Shared World Term Deposit for the 2007 RRSP season — a GIC that provides affordable credit to people in developing countries.

It's all about the screens

All SRI mutual funds employ screens to weed out companies or investments that fail to meet their criteria. What's "ethical" for one fund is not for another, and perhaps not for you either. The screens are often different. Meritas Mutual Funds, for instance, screens out companies involved in alcohol; Ethical Funds does not. Other funds concentrate their screens on issues like the environment or community values.

One more thing about that screening process. SRI funds don't exclude all oil or mining companies, for instance. Most funds adopt a "best of sector" approach — investing in companies that make the best effort to be socially responsible. The SRI industry says if it automatically excluded all resource companies, there wouldn't be enough left in the Canadian marketplace to invest in.

Companies with extensive SRI offerings:

Ethical Funds - 15 funds

Meritas - 7 funds

Acuity Funds - 5 funds

Inhance Investment - 5 funds

Phillips, Hager & North - 4 funds

Source: SIO

So you'll see Suncor Energy in some SRI portfolios, even though it's heavily involved in the Alberta oilsands — an industry noted for its high emissions of greenhouse gases. But Suncor also runs wind farms and makes a big effort to limit its carbon footprint.

"It's much better to figure out which companies are pressing the envelope and setting new standards on sustainability by rewarding those companies," says Eugene Ellmen, executive director of the Social Investment Organization — the association for Canada's SRI industry.

Does SRI investing work?

That brings up the question of whether ethical investing really works, beyond making the investor feel better. Do companies care if they're included on the various SRI indices? Do they change their bad habits?

"It's not at the point that it [SRI investing] has an impact on their share price," Ellmen acknowledges. But he says companies do care. "Being on these indexes is a source of pride for their employees, their contractors, their suppliers," he says.

Michael Jantzi sees this firsthand. His company - Jantzi Research Inc. - provides social investment research for a variety of funds, pension plans, endowments, and other institutional investors. In 2000, he started the 60-company Jantzi Social Index as an SRI-screened version of the S&P/TSX 60 index.

"If companies didn't care if they're seen as being socially responsible, why do they put up such a fuss if they're excluded from the [Jantzi Social] Index?" he asks.

Does SRI investing always mean poorer performance?

Jantzi disputes the widely held view that investors inevitably give up better returns when they choose to invest in SRI funds. His own Jantzi Social Index has equalled the performance of the S&P/TSX composite index and the S&P/TSX 60 index over the past five years. In fact, it beat the S&P/TSX composite by almost two percentage points in 2006.

This is not to say that SRI funds are all market beaters. Figures from the Social Investment Organization show that many do lag the market. Among the 63 SRI funds with track records of at least one year, 34 managed to beat the average fund performance in that category. The rest fell short. Among the 44 SRI funds with track records of at least three years, 13 managed to beat the average fund in that category. So, as with all investments, it's important to shop around and diversify.

Top 10 SRI companies by sector

Sector	Company
Materials	Alcan
Telecom	BCE
Industrials	CNR
Energy	EnCana
Health Care	MDS
IT	Research in Motion
Cons. Discretionary	Rogers Communications
Financials	Royal Bank
Cons. Staples	Shoppers Drug Mart
Utilities	Transalta
Source: Jantzi Research

There remain many investment professionals who dismiss SRI investing as something that has no place in a portfolio. Jim Cramer, whose sometimes frantic "Mad Money" stock picks attract a lot of attention on CNBC, says there's only one commandment investors should follow: "Thou shalt make money."

"So many people try to invest morally," he said in 2006. "They let their politics and emotions and ethics bleed into money management," he complained.

The future of SRI investing

The SRI world hopes for a day when all big money managers — whether at mutual funds or pension plans — will focus on how a company behaves, not just on the bottom line.

We're still a long way from that. But the gap is closing. Many pension funds now have responsible investing policies. More companies have policies on sustainable development.

Canada's investment community is certainly paying more attention. As of 2004, more than $65 billion was being managed under various SRI guidelines in Canada. The trend since then has been up, the industry says. Way up.

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