Why excluding imperfect companies is antiquated approach

ESG approach can help nurture better long-term returns for clients

Why excluding imperfect companies is antiquated approach

Sifting through asset classes searching for the perfect company is an antiquated approach to ESG investing and won’t lead to better returns.

A more modern approach involves disregarding a few irredeemable “rotten apples” and engaging with firms to unlock their potential, manage risk and gain better returns.

Daniel Solomon, SVP and CIO at NEI Investments, said this approach and overall decision to integrate responsible investing factors should be an easy one for advisors when picking stocks.

He said that as well as assessing management, supplier, clients and strategy, money managers should also get a full understanding of a firm’s ESG approach. Failure to do so could hit returns in a major way, especially if it leads to environmental disasters like an oil spill.

“As we’ve seen, data breaches can literally bring a company down and cost millions,” Solomon said. “Bad corporate governance is one of the things that can plague a company and impact returns as well. If you have a strike or a problem with the local community, you will have a real impact on the profitability and viability of the company.”

Solomon said that where NEI differs from other groups is its willingness to engage with companies that have work to do around their ESG policy.

He added: “The vast majority of time, what we prefer to do is work with companies to get them to improve on their ESG practices, helping them to understand best industry practice in order for them to earn better returns on their capital and essentially be more profitable for shareholders.”

Solomon said his company’s approach is not based primarily on screening but based on including better information in the investment analysis. He said that getting impartial third-party data on smaller companies can be a challenge but that the myth of responsible investing hitting returns has now been debunked.

He said the proof of that is the number of four-star funds NEI has, spanning different asset classes. These include: NEI Ethical Canadian Equity Fund (Canadian large cap); NEI Ethical Special Equity Fund (Canadian small cap); NEI Ethical Global Equity Fund; NEI Ethical Select Income Portfolio and NEI Ethical Select Conservative Portfolio.

He said: “It’s challenging for everyone to beat the benchmark peer group but it’s no more challenging for us to do it within the context of ESG or responsible investing. I would say it makes it easier because you get better information that you can use to make better decisions by looking at all the assets.”

As an example, Solomon highlighted his firm’s Environment Leader Fund, which has grown to $300 million in assets. It involves looking for companies that have strong ESG profiles in relation to solving problems relating to the environment. He characterizes this as aspects like: energy transition and energy efficiency; water and water scarcity; recycling and waste disposal; and agriculture and food.

He said: “We look to harness positive change, companies who are improving their ESG as an indicator to select stock and companies who are improving on this score. The basic premise is if you’re a company that is gradually improving their profile on these factors, you are likely to be in a business that is continually improving, not just short-term gain.”