Investors can be forgiven for being confused about responsible investing (RI).
As more fund companies have launched clean energy and RI funds, there has been a lot said about the theme, but no clear definition of what’s involved.
ESG is one acronym that describes the way companies behave when it comes to the environment, their social responsibility to employees and customers, and how they are governed. Another is impact investing, which describes how a company behaves (ESG) as well as its actions, which includes what it makes. Impact investing can also be used to describe funds that focus only on climate change solutions.
That means a lot of different interpretations and conflicting investment advice. Some investments that sound good might not do much good for the environment or returns.
Two veterans of the responsible investing space offered their perspective: John Cook is senior vice president, portfolio manager and team co-lead with the Mackenzie Greenchip Team at Mackenzie Investments and Adelaide Chiu is vice president of responsible investing and ESG services at Northwest & Ethical Investments LP (NEI Investments) in Toronto. They offer some rules of thumb to help advisors and investors. The rules aren’t a substitute for research, but offer a quick way to see beyond product marketing to what a fund is trying to do.
1. ESG is how a company behaves, not what it makes
Mr. Cook chooses companies that make products offering solutions to climate change for Mackenzie Greenchip Global Environmental All Cap Fund. The companies are also likely to score higher on ESG measures.
He believes the distinction between behaviour and what a company makes to meet climate challenges is the most important criterion for investors. Mr. Cook and Greg Payne co-founded Toronto-based asset manager Greenchip Financial Corp. in 2008. It was acquired by Mackenzie Financial Corp. in 2020. They manage the successor Mackenzie Greenchip Global Environmental All Cap Fund, which has $1.9-billion in assets under management (AUM).
The companies that the Greenchip team invests in generate renewable power using solar, wind and hydro and make products that help build, manage and control these facilities. Other companies in the fund make components for electric cars and more energy efficient devices for homes and factories. They are technologies that help do more with less, Mr. Cook says.
“ESG and thematic investing are two very different approaches. They’re both necessary, but the challenge for investors is to realize the difference between them,” he says. “If you see Microsoft Corp., Apple Inc., Bank of America Corp., you know, you’re looking at an ESG portfolio. If you see Canadian Solar Inc., Siemens AG and utilities like Brookfield Renewable Partners LP, you’re looking at a thematic portfolio.”
2. Does the asset manager have a dedicated ESG team?
A dedicated ESG team is Ms. Chiu’s top criterion because it tells investors how serious the asset manager is about RI.
Along with that, investors should look at whether the asset manager does its own voting at annual meetings, or outsources that to a proxy advisory firm. A third criterion is whether the asset manager engages with companies on ESG issues and tracks progress on those that have been discussed.
Ms. Chiu’s NEI Investments has a 30-year history of involvement with these themes and markets all its funds under an RI umbrella.
She says there are two branches to RI, but they go together.
“You might make good environmental products, but you could still be weak on the ‘S’ or the ‘G.’ ESG integration takes all that into consideration,” she says.
“There’s no such thing as a single ESG fund,” says Ms. Chiu. “I prefer to think of it as a broad spectrum of ESG offerings.”
3. Names may be misleading, but holdings are a good guide
Mr. Cook says words like “climate,” “low carbon” or “sustainable” are commonly found in fund names.
He compares the practice to food packaging that’s worded vaguely claiming to be, for example, “lite mayonnaise,” or “low fat.” The only way to be sure is to read the label – or fund prospectus.
Ms. Chiu says NEI Investments’ approach to building a fund starts with a conventional analysis, which lays out the objectives and target rate of return. The ESG team provides an extra layer of analysis, which is incorporated into the final decision.
NEI Investment’s largest equity fund is NEI Environmental Leaders Fund with $1.3-billion in AUM. The holdings are different than those in Mackenzie Greenchip Global Environmental All Cap Fund.
The Mackenzie Greenchip fund holds companies whose main business is making products that offer climate-related solutions. That narrows the pool to a universe of about 1,000 global choices, Mr. Cook says. The NEI Investments fund’s mandate is companies with a minimum 20 per cent of their business in environmental markets, which is a much bigger group.
NEI Investments’ top holding is Waste Management Inc. WM-N , followed by Linde PLC LIN-N , the multinational industrial gases company. Two-thirds of the holdings are industrials or information technology versus 45 per cent in the Mackenzie Greenchip fund. That includes names such as Kubota Corp. KUBTY , the Japan-based manufacturer of farm equipment, Autodesk Inc. ADSK-Q , which makes industrial design software, and Microsoft MSFT-Q.
The top two holdings in the Mackenzie Greenchip fund are Veolia Environmental SA VEOEY, a France-based multinational waste manager, and Guelph, Ont.-based Canadian Solar CSIQ-Q. Its criteria exclude companies like Microsoft, Autodesk and Kubota.
4. Investors need patience
As more fund managers launch RI funds with differing definitions of ESG and impact investing, regulators are struggling to catch up with agreed upon frameworks, Ms. Chiu says.
“That’s going to take a very long time because it’s really a global initiative,” she says.
Ms. Chiu also thinks it will take time for investors, advisors and fund managers to understand what RI is. The concept is relatively new and investor education takes time.
“That’s why you have to be very aware of who is managing [your] money and how they’re doing it because there is no standard.”