Liz Simmie, of Honeytree Investment Management, says ESG consumers expect the same from advisors as they do the firms they invest in
The surge in ESG demand and assets was among last year’s biggest stories in the investment world, and it’s a theme that continues to grip the industry today. For some asset managers, it represents a new opportunity to attract assets — but it means so much more to Liz Simmie.
“I've always believed down to my core, even before I knew what ESG was, that you don't need to invest in firms that are causing big negative externalities in the world,” said the co-founder of Honeytree Investment Management. Simmie is one of the many industry authorities and thought leaders who will be at Wealth Professional’s Invest ESG summit happening next month.
“I'm a millennial. We're a very special group of people,” She said. “We're not anti-capitalist; we just believe you can do well financially by doing good.”
With more millennials and women set to benefit from a gigantic wave of wealth in the coming years, the clamour for ESG among retail investors is set to grow louder. Demand for ESG is also on the rise among institutions: aside from estimating at least 20 global universities have adopted a fossil-free mandate in the last year, Simmie noted that more requests for proposal (RFPs) now contain more questions on ESG than fundamental questions.
Other stakeholders are taking notice. More companies are declaring their commitment to the UN Principles of Responsible Investing. At the same time, more asset managers are now figuring out how to explain ESG, or how they’ve integrated ESG into their investment process.
“Most ESG products today use passive indexes, or pursue traditional active strategies with ESG factors just incorporated as secondary or tertiary criteria,” Simmie said. “But I think asset managers are moving away from negative screens, values-based exclusions, or best-in-class ESG products. Now, they’re trying to cater to clients who invest in impact through purpose-driven companies.”
Perhaps the strongest evidence of just how important the ESG market is comes from BlackRock, the world’s largest investment manager. With the firm’s recent moves signalling its dedication to curbing climate change, the responsible-investing space has a powerful ally in its corner.
But while sustainable investing is on the move, there are still plenty of challenges. One notorious problem has to do with the standardization of data. As Simmie noted, fundamental data wasn’t properly standardized until the last decade or two; on that front, ESG data is 10 years behind, if not more.
“Ratings providers are all trying to come up with scores that incorporate ESG, but there are plenty of problems with trying to rate a firm or fund across all non-financial parameters,” she said. “It’s just impossible.”
At HoneyTree, they get around the problem by building their own sets of raw non-traditional data, including information from the Carbon Disclosure Project and GlassDoor. But even with the best ESG research and the most comprehensive non-financial information, they run into walls.
“We can’t use many non-traditional systems because they only cover the U.S. or Europe,” Simmie said. “Others are limited in terms of the types of companies they report data on.”
There are also shortfalls in terms of the type of data reported. While there’s been a much-needed uptick in the number of companies declaring net-zero emissions targets, raw energy usage reporting isn’t perfect. Disclosures on female board and executive-level representation have gotten better, and some firms have broken their workforce data down to distinguish between tech and non-tech employees, but other areas of diversity such as disability or LGBTQ reporting still need work.
“We hold a concentrated portfolio of 20 or so companies that we’ve found to be strong across ESG and fundamental measures,” Simmie said. “In 2018, just maybe half of those had year-on-year data on workforce diversity or water use; now they all have it, and it’s much more in-depth.”
Discordant definitions of impact are also proving to be a challenge. The sheer variety of causes and convictions among investors has given rise to a confusing space, where greenwashed and mislabelled investment products can worm their way into people’s portfolios.
"In some cases, I think engagement seems to be used as an excuse to hold oil and gas companies, with the companies being selected based on their commitment and ability to do better,” she said. “That could work for some consumers, but it’s certainly not good enough for those who want to be fossil fuel-free.”
The most overlooked gap, from Simmie’s perspective, is the lack of consistency when it comes to upholding values. Just as corporate purpose should take into account all stakeholders involved, she stressed, the focus on ethical and moral principles should be present among all participants in the ESG investing process.
“What folks don’t understand about sustainable-investing consumers is that whatever they expect from the firms they invest in, they expect the same from the companies they buy investments from, their consultants, and whoever else is involved in building their portfolios,” she said.
“As Canada’s fourth female-founded firm and the world’s fourth woman-led long-only responsible investment firm, we realize it’s important to not only talk the talk, but also to walk the walk.”