Hello there, my name is Mark Costello, Associate Financial Planner with Coast Capital Wealth Management and thank you for tuning in to our Ask the Expert segment. Today I’ll be speaking with Rod Castellanos, Vice President with NEI Investments, one of our primary partners when it comes to sustainable funds and we’ll be discussing some key concepts and trends around responsible investing and ESG.

So first, thank you Rod for being here and answering some of our questions today.

My pleasure, thanks for having me.

Absolutely. So to get started, why don’t you tell us a little bit about NEI?

NEI is a mutual fund provider. We are part of the Aviso Wealth group, which is owned in part by credit unions across Canada, the central credit unions and Desjardins in Quebec.

Okay, very good. Now, I know in my practice and in many of my colleagues practices they’re getting the question, “What is responsible investing?” So I pose that question to you.

Yeah, responsible investing by dictionary definition is the incorporation of ESG factors which stand for environmental, social and governance, criteria into the financial analysis when looking at a company.

Now, if you can explain, maybe in just a little bit more depth, what are the ESG factors, and just tell us a little bit more about that?

Yeah, so, these are criteria that we look at. I would consider them to be off-balance sheet risks or issues that could effect the impact of how a company performs and behaves but the environmental component looks at how a company might impact its surroundings. Whether it comes to pollution, whether it comes to we can take a look at things like its waste, through maybe its plastics / packaging policy. “Social” refers to the fact of how a company behaves in a community or how it treats, maybe, it’s workforce. So we might look at things like supply chain management. “Governance” would refer to how it’s being run and there’s a number of components that would be included there including things like its diversity at the management level. pay equity, or taking a look at executive compensation and how that is factored in when it comes to accountability.

Okay, very good. So, you know, from NEI’s perspective what are some of the strategies that you see around responsible investing?

At NEI, we use a number of different strategies that fall within the responsible investing world. One would include integration of ESG Environmental, Social and Governance criteria with financial analysis we would couple that with something called Corporate Engagement. And Corporate Engagement is the ability as investors in these companies to have a dialogue with senior management or a board of directors where we can address maybe some concerns we might have. Examples of that might include investment in a pharmaceutical company, asking them about whether their policies and where’s the accountability about the distribution of opioids, for example. Another example could be the our investment in a consumer goods company and just dialogue and questioning what are their polices around plastics pollution when it comes to consumer goods and some of that packaging. So that would be one of the strategies, another would be screens.There are two ways of looking at either including or excluding companies. Including companies are called positive screens, and so we might include certain sectors or companies that we want because we feel there’s a positive impact when it comes to those ESG criteria. Right now we’re seeing things like the inclusion of renewable energy companies, maybe solar power, as an inclusionary, or positive, screen. On the negative screen side we would have an exclusion of certain sectors that we feel don’t have a positive impact on society as a whole, and might include things like tobacco companies, nuclear power, weapons manufacturing, gambling or pornography, that’s extending out now to exclude things like oil or gas depending on what the investor wants, or doesn’t want to see, in their portfolio. The third area is impact investing, and this is a this strategy is growing in popularity. Impact investing is investing where there is a measureable benefit to the environment or to a social cause. An example of that could include investing in a bond a social bond, or an impact bond, for example that would be, the proceeds of that bond would go directly to say, building schools or improving water infrastructure in an emerging market. All of those strategies can be used in combination, not necessarily just exclusive of one another.

Okay so, Rod, why should someone invest responsibly?

We see that there are a number of different factors but we’ve boiled it down to maybe four. First one being value association. Value association would be for individuals that they have some core values themselves that they hold and they don’t necessarily want to move away from those values by investing in companies that maybe contrast. So, for example, tobacco. Tobacco seems to be the one that’s most common, people don’t want their dollars to be invested in the tobacco companies. So you can definitely avoid that. The second is risk mitigation. there’s more and more evidence that points to the fact that when companies a very strong ESG rating, that they do well when it comes to their environmental social and governance those companies do well from a performance point of view. They’re also able to mitigate or avoid risk in the volatile times. The third could be opportunities, so, looking at, for example wanting to invest in maybe an emerging sector, an emerging type of industry that they feel is a great investment idea. That could be related to, for example, renewable energies at this time. And then the fourth is impact. Wanting to make a positive change with their investment dollars, changing at the company level, but also having possibly impacts globally on other areas of society that they feel they could have an impact with those dollars.

Given all of that information, how does responsible investing compare to say, traditional investing?

So, responsible investing takes many of the criteria if not all the criteria into account that say traditional investing looks at we would want to make sure that we’re looking at a company, their balance sheet, to make sure that they’re a good investment to start. We just apply a number of different criteria and ultimately what we’re trying to do is look at a company more holistically, from the point of view of making sure that it’s an investment that could avoid certain pitfalls if we look at their ESG criteria. Or, find more opportunities by say looking at areas that are maybe outside of the traditional financial universe, by looking at companies that could create more growth in the future.

 

So Rod, what are some of the trends you’re seeing in regards to responsible investing and RI, and where do you see it going?

Yeah, responsible investing has been growing here in Canada and globally. The RIA is the association of responsible investing, and has been tracking some of this growing trend. Today we have about 2 trillion dollars of assets in Canada which have this responsible investment approach. That’s been a 40% increase over the last two years and more than 90% increase over the last two years prior to that. A lot of this is happening at the institutional level, so organizations like the Canadian Pension Plan, the investment board, have their own strategies around responsible investing, which you can find on their website. So many Canadians may not already realize, but they’re investing with this responsible investing approach. Also, global leaders are seeing the need for responsible investing in order to remain competitive in the future. Larry Fink is the CEO of BlackRock, the world’s largest asset manager, and what he said was, to prosper over time, every company must not only deliver financial performance, but also show it makes a positive contribution to society. That’s being echoed and being influenced on many of the company CEOs around the world.

You know, we talked a little bit about performance, you had talked about risk and providing risk adjusted returns, how is RI performing right now, especially given the current market conditions and COVID-19?

 

Well, maybe not surprising again as I’d mentioned that when a company takes these ESG factors into account many of them tend to be better managed. Many of them would have much more robust financial statements or might have a much stronger with their suppliers, their workforce, their employees. And if we look back at the last 10 weeks, in fact we’ve seen the metrics have shown that. On the S&P 500, those companies with positive ESG ratings have exceeded or outperformed companies with lowest ESG ratings by about 10%. If we take a look at global equities we can see that companies with high ESG ratings have outperformed companies with low ESG ratings by about 7%. So there’s more and more evidence that comes into show that, again, ESG is very much part of this new financial analysis and is providing positive financial returns for investors.

 

Well that’s excellent, thank you very much.

 

So, in closing, I’d like to thank our listeners again for tuning in and I hope you learned more about the growing trend of responsible investing.

 

Thank you to Rod and NEI as well for joining us and being such a valued partner in providing responsible solutions to our members.

 

Thank you, and take care.