PPNs: Socially responsible investment potential?

(the following was originally published on social finance.ca)

Principal Protected Notes are a possible way to broaden investor participation in socially responsible investment, writes Shyam Shankar in a recent posting on Social Finance.ca. They do not have the same rewards as riskier investments, but will allow investors across the board to invest ethically/responsibly without the fear of large losses to their capital.

PPNs have gained favour in boomer investment communities precisely for this reason - they allow near-retirement investors to participate in equity markets while minimizing the risk of a large loss to their nest-egg before retirement.

The most obvious limitation of this investment product is that it presently relates to publicly traded companies. In their current form, they are not designed to finance new social enterprises. This is not to say that the same logic cannot be extended to smaller companies – tailoring the PPN concept for smaller scale social enterprises will just require additional thought and innovation.

All investments involve tradeoffs between risk and return. Here, the fact that a PPN will protect against loses means that the investor pays a price in terms of potential upside. A direct equity or option based investment could mean higher returns than a PPN.

Finally, this is a relatively new investment product in Canada, and therefore does not receive the same level of regulatory scrutiny as say, a mutual fund. That means it is up to investors to be that much more diligent, do their homework and seek out advice to make sure PPNs work for them.

The PPN is already an established asset class in the traditional investment arena. Targeting it toward environmental, ethical or other progressive ends will permit the average investor to participate in SRI with limited downside and small amounts of capital.

It will be RRSP season before we know it – wouldn’t it be great to see some new socially responsibly investment options? Perhaps a David Suzuki endorsed portfolio of environmentally sustainable businesses? Maybe a portfolio of firms vetted for fair trade practices? The possibilities are endless in terms of how to use the PPN structure.

Shyam Shankar is a blogger at Social Finance.ca.