May 1, 2020

With the breadth of approaches to responsible investing available, it’s hard to simply classify investments as ‘responsible’ in a way that truly helps you to understand what you’re getting out of an RI fund. So think about responsible investment like buying a car. Look under the hood. See how much horsepower the investment manager is using.

The incredible rise in interest in Responsible Investing (RI) among investors brings with it the need to understand just what a “responsible fund” is. And while everyone agrees that responsible investing bases investment decisions on Environmental, Social and Governance (ESG) considerations, those considerations can be applied in different ways.

Often investors interpret RI to mean that certain types of companies – like those involved with tobacco or weapons – will be excluded from their investments. More recently, that approach has expanded to sometimes include oil and gas companies, as RI is becoming equated with “fossil fuel free.” It’s an expectation that’s gained traction in the minds of investors lately. So why do some RI funds continue to include oil and gas companies?

To understand, you have to look beyond what a fund holds, and consider both how its holdings decisions are made as well as how the fund manager interacts with those companies after they’re included. Seeing that relationship may require extra work for investors (and their advisors) but answering those ‘how’ and ‘what happens next’ questions around fund holdings is essential to fully understand the influence your investment exerts. Because RI does more than reward good behaviour. It is a catalyst for change.

The key to understanding the difference starts with finding investment companies that are transparent about how their RI investments are managed. It’s easier to understand the influence an investment can have when you can look under the hood and see what it’s doing. Conversely, if you can’t get a clear explanation of how your RI fund is being managed, then there’s a good chance that it is not actively working towards changing the world for the better.

A company truly committed to responsible investing should offer you:

  • A clearly articulated responsible investment philosophy that drives all their RI-related activities
  • A comprehensive RI Policy that explains exactly how that philosophy is put into practice
  • Regular reporting on RI-related activities, including activities like corporate engagement, proxy voting and policy work that extend the impact of your investments well beyond investment returns

That’s how we operate at NEI. In some of our funds you will find oil and gas companies. Our funds are tied to a philosophy that the best way to positively influence companies is to own them and engage management in dialogue. And we use the rights that come with ownership to enable us to influence management to improve their company’s performance against ESG risks. We think that’s a more responsible approach than simply divesting and hoping change happens.

That’s the kind of difference you can only spot by looking under the hood to determine if a responsible investment has the “horsepower” to affect the kind of change you’d like to see.