Stephanie McCullough (00:06):

Welcome to Take Back Retirement, the show for women 50 and better, facing a financial future on their own. I’m Stephanie McCullough, and along with my fellow financial planner, Kevin Gaines, we’re going to tackle the myths and mysteries of “Retirement,” so you can make wise decisions toward a sustainable financial future. Through conversations and interviews, you’ll get the information and motivation you need, to move forward with confidence. And we’ll be sure to have some fun along the way. We’re so glad you’re here. Let’s dive in.

Stephanie McCullough (00:40):

Coming to you semi-live from the beautiful Westlakes Office Park in suburban Philadelphia, this is Stephanie McCullough and Kevin Gaines of Sofia Financial and American Financial Management Group. Say hello, Kevin.

Kevin Gaines (00:50):

Hello, Kevin.

Stephanie McCullough (00:51):

Today, we have an interview with Liz Simmie. Liz is co-founder of Honeytree Investment Management, an asset management firm based out of Toronto. What I love about Liz and her background is that she is part of one of the very few women-led responsible asset management firms around the world. And they really believe that ESG data— we‘ll talk about what that is, values-aligned investing, purpose-driven investing, all that stuff – environmental, social, governance data is just as important to assessing a company’s long-term growth and risk as traditional data, and they integrate in both equally. So because this is kind of a topic of conversation that we’re having this year in 2022, values-aligned investing, we thought Liz would be an awesome guest to have on board to give us a background. So without much further ado, let’s jump into our conversation with Liz. Liz Simmie, welcome to Take Back Retirement.

Liz Simmie (01:52):

Thank you for having me.

Stephanie McCullough (01:53):

Let’s start with the super obvious question because it is kind of a weird acronym. Can you please define for us what you feel ESG really means?

Liz Simmie (02:03):

It’s a loaded question. It seems simple, but it’s actually very complex. So the simple answer is ESG refers to environmental, social and governance data. Data that is not financial in regards to a company. That’s what the acronym means. What it actually means is a totally different story. I’m going to go back in history a little bit. In the beginning of ESG, there was no ESG acronym, purpose-driven, mission-driven investors used their tools in their investment box to be activist investors, not hold weapons, companies hold weapons. Companies do a whole bunch of different things, especially around the apartheid and especially with religious groups, Quakers and the Mennonites, even nuns, for example, and those groups have always invested like that and continue to always invest like that. ESG came as a result of a bunch of different things, but really trying to come up with a separate label for data that wasn’t considered financial.

Liz Simmie (03:10):

And I say data that wasn’t considered financial because a lot of people in finance think that things like diversity or environmental data don’t matter to security selection or investment decisions, which is completely incorrect. But the ESG acronym really came out of the investment industry kind of saying, “Here’s the non-financial data over here. This is the ESG data, this is what the ESG teams are going to look at when they do their research. Isn’t this great? And here’s our financial data over here.” And my belief is it’s not clear cut and all useful data is fundamental data. So even though I talk about ESG all the time and I use the acronym all the time, I don’t actually believe in ESG. I believe workforce data, (and this is for our team) workforce data, environmental data, all that stuff is fundamental company data.

Liz Simmie (04:01):

It’s all directly tied to the bottom line and separating it, kind of ‘others’ it, separates it from the decision making. And in order for ESG to be useful, you have to believe that the data and you have to find a way to use it that really gets to the fundamental issues of your investment. So that’s why it’s a complicated answer, because it means ESG and everybody is very happy to have these buckets to dump this data, but it’s the pillars, the buckets of ESG do it a disservice and they’ve separated it.

Liz Simmie (04:35):

And that’s why you’ll have a lot of investment folks, portfolio managers, who want to use this data, but it doesn’t fit into their financial model. And so I like to kind of help folks with understanding how it can and I find non-investment professionals get ESG a lot easier. It’s easy to speak to any business owner, teacher, you name it and say, “Reducing your water use is good for the bottom line.” Of course, it is. It’s intuitive, right? Hiring more women executives is good for the bottom line. Of course, it is intuitive to everybody, but the investment industry. So anyways, that’s a long-winded answer, but that’s kind of my deep belief of ESG and why I’m so passionate about it, because it’s much more complicated than three little buckets where we dump all our non-financial data.

Kevin Gaines (05:25):

It’s also kind of funny that there’s this resistance among the investment community because part of the brilliance of active management was being able to drill down and talk to the companies and learn about the quality of management and do they protect shareholder rights? So at least the G portion of ESG has kind of always been around. But I guess now that it’s put in this different label, all of a sudden us investment geeks are scared to touch it, or we think it’s going down a different rabbit hole that we like to go down. Do you see that kind of pushback?

Liz Simmie (06:05):

Oh yeah. I think the best portfolio managers in the world have always looked at ESG, never called it ESG, but whether it’s turnover, the quality of the management team, governance. And on the data side, governance and leadership data and science is in its early stages. And I think that’s where we get kind of tripped up. Historically, how do you systematize qualitative and quantitative data about the quality of governance? And financials cover some of that, in-depth interviews cover some of that, but non-financial data also covers that, right? If you have a high level of turnover, low level of retention, huge pay equity imbalances, that actually suggests that the governance quality is low or the management quality is low.

Liz Simmie (06:55):

But the future of investing in ESG is digging into this governance and leadership science and using additional data beyond financials and beyond qualitative interviews to assess the quality of governance and leadership and how do you project a company’s ability to survive well during COVID? Right? During a pandemic. Goes far beyond that capacity, goes far beyond sustainable cashflow growth.

Liz Simmie (07:24):

There’s some qualitative aspects there that can begin to be quantified in ESG data and that’s what I find the most fascinating about it. And that’s kind of my background, why I’m so passionate about this is I’ve done a lot of nonprofit governance training. I was lucky to be on a bunch of boards and go through board management style board to governance style board transitions. And I realized it’s just really messy and very technical. And the same thing that happens on a community board happens on the board of the world’s largest companies and managing the governance, the roles, all that kind of stuff is actually very difficult and has nothing to do with the qualification for the most part of the folks on the board.

Liz Simmie (08:07):

It actually has to do with the governance culture of the organization. Anyways, one of the things I like to say about ESG is it’s not here’s ESG and here’s financials, it’s environmental data, workforce data, and financial data tell you how well governed an organization is. So it’s actually mixing up the pillars and ultimately, if you’re a long-term investor, you’re not speculating on short term other things, you’re really putting your investments in a company because you believe they’re well managed and are better able to handle all problems in the future through quality governance and workforce and environmental and financial data all together is what can help get you there.

Stephanie McCullough (08:55):

I love that. You mentioned a little bit of your background. Liz, can you tell us what you’re doing today and then kind of the brief story of how you go there?

Liz Simmie (09:03):

Whew, I’m going to go back a little bit further. I had a father in the investment industry and I did a degree in economics with a lot of statistics and I never wanted to be part of the investment industry.

Stephanie McCullough (09:14):

Me too. I had a father in the industry and never wanted to be here.

Liz Simmie (09:18):

I thought everybody was really old and wore suits and sat behind mahogany desks. Not that my father was old, I mean, he did wear a suit and stuff, but I didn’t see a role for me in the industry, both personally as a young woman, but purpose. I saw a lot of the news and I think this is still the case and why we have a problem recruiting diverse folks to the industry. It seems very extractive from the outside. The industry seems like it doesn’t care about humanity very much until you start to learn about all the different roles, whether it’s advisors or allocators, or even financial planning, all these kind of human-driven, servant leadership roles, all these amazing things that you can do to change people’s lives. They don’t get advertised and the part of it comes from the only cool jobs are being a Goldman Sachs MD, right?

Liz Simmie (10:10):

Anyways, so I avoided it. I ended up in market research doing consumer insights, which is actually a really good background, despite all perceptions that you need to traditional financial path to be a portfolio manager, doing custom quantitative and qualitative research on consumer brands and financial service products with the world’s biggest brands. I don’t know. It’s pretty useful set of skills if you’re going to become a portfolio manager.

Liz Simmie (10:35):

But ultimately I ended up at… My father started an emerging manager in Toronto and his third person quit. He had to quit because he had to go back to the US because he got divorced and he needed a third person and I decided I was done with marketing. This was 2011. And I was pregnant with my first kid and he actually was fine with me working from home with a laptop after I had my baby. So I joined an emerging manager at $50 million having no idea, I’ve never taken a finance course, knew nothing about investing, certainly nothing about ESG. And I lucked out because my father had built a strategy that was actually pretty ESG without being ESG. He was very much focused on high dividend growth and the ability of the management team and the board to consistently and sustainably deliver that growth.

Liz Simmie (11:29):

And fast forward a couple years, I went to be an advisor at one of Canada’s largest wirehouses and I live in downtown Toronto. I had many gay and lesbian clients coming to me asking me for real ESG. And I looked at every single product available in Canada and I thought I was going to find stuff and there was nothing. It was either big oil companies, big pharma, whatever, in large positions in the portfolio and it was that no real ESG work whatever that was had been done. Anyways, a couple years later, we launched ETFs as a firm. I discovered the US market. We had been in the Canadian market and we discovered, we ended up on an SMA platform at one of the large wirehouses and my co-founder and I realized it’s very risky, but we could start an emerging manager that was similar investment strategy, but real ESG integration. The model allowed for us to bring in non-financial data on equal footing with financials and tie things like company performance to change in diversity and leadership year over year, environmental inputs and outputs.

Liz Simmie (12:32):

And we could make that argument and have true ESG integration and be one of the few woman founded firms in the world. Apparently there’s not that many of us who do ESG, but because I’d been through that experience from 50 million to about two and a half billion, I knew that if you work hard enough and get lucky enough as an emerging manager based in Toronto and that this whole ESG wave was going to come, right? So that’s kind of where we are. So I’m the co-founder of Honeytree. We’re an asset manager, very small asset manager based in Toronto. And our goal as we grow is to basically provide advisors and family offices and institutions with ESG strategies, but we don’t call them ESG strategies. They’re just equity strategies because ESG is integrated into our process and we run very concentrated portfolios that are very long term.

Liz Simmie (13:22):

And one of my favorite things about ESG is companies are like people, even the best people have giant flaws and how they deal with those flaws, how they grow, how they learn, how they improve, it’s my job to go around and find some companies that are working on their flaws and are aware of them and not just financial, it’s how does parental leave impact their workforce? So we’re starting to see a lot more parental leave by gender reporting because companies have realized they’ll retain women on maternity leave if they can convince a whole bunch of guys to go on parental leave better, and that reduces their costs and it makes it easier to hire folks. So it’s just fun watching companies try and put their stakeholders first. That’s kind of what I think ESG can be summed up as is stakeholder governance.

Liz Simmie (14:14):

So stakeholder focused, purpose-driven companies. That’s what ESG is. It has nothing to do with the box checking exercises or winning awards or donations or ERGs, employee resource groups. That’s all just bandaid solution and marketing check boxing. Real ESG is companies that make money because of the impact they make on their stakeholders, because they pay better, they have higher retention, more employee engagement, because their products are more safe, they sell more of their products, all these kind of things matter to the bottom line. They do not matter to the short term bottom line. They are not cool. They’ve been very uncool for the past two years since we launched but that’s kind of how I see it all tied together.

Kevin Gaines (15:02):

I want to switch gears and you made comments about checking the box. I’m a cynic by nature and my one knock on ESG, and Stephanie’s heard me complain about this before, is a lot of it, I don’t want to say seems fake, but there seems to be a lot of posturing and positioning and not a lot of real commitment, just trying to make things look good on the surface. This is a loaded question because I’ve actually heard you talk about this before, Liz, and your Twitter feed is great for hearing your opinions on this. Talk about greenwashing, pinkwashing, box checking, the fake ESG if you will, please?

Liz Simmie (15:52):

Do we have 45 hours because it’s at least… I mean, there’s so many examples. Greenwashing is more prevalent because nobody really cares about diversity that much. That’s what’s really funny about ESG is a lot of the ESG managers globally don’t release the diversity data of their teams, which I find fascinating, even the European real ESG folks and that’s just the asset management industry. At its most basic, there’s this kind of arbitrage between what’s required to report and do we care about any of this? So you see a lot of companies with robust diversity and inclusion reports. The big tech on the West Coast is a great example for this. They have lovely pages with colors and you can toggle back and forth between years. But most of them, when you dig down to it have not improved their women in leadership or racial diversity and leadership or tech roles.

Liz Simmie (16:46):

And that’s kind of where we concentrate our data because that’s getting reported most robustly now. Another example would be large Canadian bank, very high ESG score, wins all of the diversity awards, no women on their portfolio manager teams. Right? And this is just common. And then you have companies who don’t report because they don’t have a giant marketing team. They have no CSR department. They kind of focus on their employees and their customers and they have 70% women in leadership roles. Right? And so there’s this kind of balance between getting data to the right place to get the box checked and actually making a change in difference. And so as workforce data gets more standardized, folks aren’t going to be able to escape it. And what I talk about specifically is the Department of Labor EEO-1 report.

Liz Simmie (17:40):

So every company in the US with more than 50 employees has to submit their workforce diversity data by level. Most are not very good at collecting it but the folks who are good at collecting it are pretty good at collecting it. And they won’t have a choice in a couple years because the SEC is going to require it be disclosed publicly as opposed to kind of hidden. So then we’ll be able to see much like financial as you can’t hide for the most part what’s in required disclosures. We’re going to be on a little more level playing field. So the companies that were not good at reporting because their marketing department’s tiny, will all of a sudden look amazing. And the companies that were really good at promoting how great they are, whatever in their 600-page sustainability report with lots of pictures, which will not look as good because we’ll be able to run the data quite easily by sector and region and all that kind of stuff.

Liz Simmie (18:35):

And the same thing with environmental data like net zero is both great and totally ridiculous because net zero, without science-based targets allows anybody to just say that they’re buying their energy from a wind farm and not change any of the other stuff that they’re doing. Right? And we do look at net zero in our research at the same time we look at whether it’s science-based targets, which don’t allow for offsets. At the same time, companies who make paper or wood products or have any gas involvement are going to have much higher emissions. And we can’t just go, boom, let’s ban all the fossil fuel and all the transportation globally, because I don’t know if you guys remember the light bulbs. It’s one of my favorite. Remember when 10, 15 years ago we had to switch to the high efficiency light bulbs and everybody was like, “Get rid of all your working light bulbs and switch to the high efficiency.”

Liz Simmie (19:32):

Then we realized they couldn’t be disposed of because they have toxic chemicals in them. Right? And I’m super pro renewables. Don’t get me wrong here. But just putting up a million wind farms in oceans, it needs to be balanced with a reduction in use of energy. Right? We need to do a lot more work in how much energy we use as opposed to just offsetting it with renewables because building a whole renewable infrastructure at our current rate, anyways. So the box ticking occurs because of the ratings, right? So each rating system will collect a set of data. And if you don’t have that data somewhere, if you haven’t checked that box somewhere, you get a zero, right? Or you don’t get rated on that. That’s why I’m not a fan of ratings. I understand why they’re ratings.

Liz Simmie (20:17):

I understand lots of teams have to buy them and use them. But we’ve gotten to the point where most companies, let’s call it 50%, are disclosing useful data. And useful data is what is often found in the GRI summary report, which is usually the five pages at the end of the 200-page sustainability report, which is three or five year history in water use, three or five year history in waste, hazardous waste changes, emissions per unit of production, that kind of stuff, change in scope one, scope two, scope three over history, board diversity, exec diversity, change in diversity year over year, right? So three or four year history of women in the workforce, especially if it’s a tech company, work in tech. So all this data soon we’re going to have turnover, soon we’ll have pay equity. In fact, there’s pretty good sort of reasonable pay equity data out of the UK for most US companies now because the UK government’s been requiring it.

Liz Simmie (21:16):

So that data is not check boxing. It’s really about the early kind of standardizations of non-financial data and you’ll be able to see that this company who’s got all these net zero awards and all these environmental awards actually isn’t doing anything about the reduction in their energy inputs, or you’ll be able to see this company that hasn’t won any awards has actually taken this stuff very seriously because it matters to their bottom line. So for me, ESG is finding those companies where it’s not a separate ESG report. There isn’t a separate head of ESG. ESG is a core function of the board and the management team and part of day-to-day operations in all aspects of the business. And that’s the good news is that’s where the standardization of this data is heading and throwing out all the other useless information that is just marketing dribble.

Stephanie McCullough (22:08):

So there will be less opportunity for companies to hide behind the awards for those investors who are paying attention and looking at least one level below the name brand on the fund or whatever.

Liz Simmie (22:20):

Yeah. I didn’t realize awards were part of some ESG rating systems until I was digging into them. And the thing is one of the biggest limitations of non-financial data is the number of companies that were reporting. It’s much better now but if you go to… Accenture was the first tech company to report their data in 2016 for their workforce diversity. So you can imagine how and think it’s something like two thirds of US listed companies now report any diversity data, but that could be as simple as one single data point on woman in the workforce. Where it’s headed is everybody being required to essentially report much more detailed year over year and broken out by a bunch of different things. And the companies… It’s funny if anybody pays attention to ESG, the shareholder proposals. A lot of shareholder proposals out there are for the companies to just disclose the information that the investors know has already been collected.

Liz Simmie (23:22):

And so you see, Tesla’s a great example. They refuse to release their diversity data. And then I think this was the first year that they have, there’s women in the workforce. But even in Europe, they don’t report racial diversity data. And it’s really funny because I think everybody thinks the US is behind in some stuff and Canada is some haven of ESG and progressiveness, and Europe’s some haven. But both Canada and Europe are way, way, way behind the US on workforce racial diversity disclosure. And it’s funny because it’s because the US has always asked racial diversity questions. And I say that from back in the time of my market research career in Canada, if you had a survey or a focus group, you’d never collect racial diversity data. I don’t know, you just never would. Whereas in the US, it’s just been standard demographic profile and in the UK, they used to collect your class level, which is super weird, but they never collected racial diversity data.

Liz Simmie (24:20):

And people will say, “Well, Europe’s not diverse. It doesn’t matter.” You can look at the census metropolitan areas at most European cities and realize they’re just like Toronto or New York. And it’s funny because one thing that’s hilarious about ESG and impact is almost every framework only looks at gender diversity and it’s because it’s only been in the past couple years where you could get some good data sets. And so any impact rating or ESG rating will reward a board. Let’s say a board is four women and six men and let’s say there’s no racial diversity on that board. A rating system will give them a much higher score than a board with three women and three racially diverse men, even though it’s much more diverse because racial diversity, even at the board level, isn’t counted. And there’s a couple reasons for it, which are total BS like race is in the eye of the beholder, which is not true.

Liz Simmie (25:17):

As long as you have a self-disclosure policy, it’s pretty easy to collect. But what isn’t measured, doesn’t get managed. Right? And so if we don’t measure diversity, whether it’s portfolio managers who are women, board diversity, whatever, we can’t improve it because there’s no baseline. So the US is ahead and leading and it’s so fun to watch and I’m so glad I’m in the front row looking at companies because since 2018, I’d say in 2018 half of the companies in our consideration set, reported useful racial diversity data.

Liz Simmie (25:56):

And now it’s closer to 90 and the exception is a couple European companies, but you can see the racial diversity showing up on boards finally in Europe. Whereas when we started, there was no racial diversity on any of the boards. So you can see the work that the US is doing is rubbing off and it’s really the Department of Labor. Let’s be honest, it’s not the investment industry. The investment industry is being dragged, kicking and screaming into the diversity disclosure. But it’s the SEC gets it, the SEC and the Department of Labor understand for business purposes why this matter. And it’s funny that a lot of portfolio managers don’t.

Stephanie McCullough (26:35):

Do you think it’s almost because it’s how they were trained? Sometimes I look at a traditional medical doctor dissing on my chiropractor because it was not in their training to understand that maybe something that looks at your whole body as one system might actually have something to offer. Do you think maybe the investment people came up in a certain training and anything outside of that is suspect?

Liz Simmie (26:57):

Absolutely. So I think even portfolio managers who outside of investing completely believe that diversity’s good for team management, risk reduction, that environmental stuff is useful. I think our perspective in the investment industry and our general approach to finance theory suggests that ESG is constraints.

Stephanie McCullough (27:21):

Yeah.

Liz Simmie (27:22):

So by adding in diversity data or environmental data, we are constraining whatever model that we previously thought was going to be successful. And if you use ESG data the wrong way, absolutely. And that’s why I think it’s about shifting perspectives. It’s this stakeholder shareholder primacy and who the bottom line is about. And again, I think I tweeted this, I shouldn’t say I tweeted everything all the time, but capitalism was always stakeholder capitalism, not shareholder capitalism. You always needed employees. I mean, serfdom’s a little separate story, but you still needed the serfs to do all the farming and the field you needed to feed them sort of, or mostly except when they were starving.

Liz Simmie (28:08):

So the idea that all business purposes is to drive shareholder return is flawed. And so at the beginning of my ESG work, I thought it was more of a new paradigm, stakeholder governance, stakeholder focus is a new paradigm. I think well run businesses throughout all of humanity organizations, any group are stakeholder governed, are stakeholder focused, are organized, the leadership is organized to serve their stakeholders. And so I think it’s funny that in the investing world, and again, I grew up outside of the investing world. I took economics at a very progressive school, apparently. I realized that every day when we learned that raising minimum wage was not bad for employment levels. So apparently not everybody gets taught that in their economics program.

Liz Simmie (29:00):

It’s very messy, at the same time, it’s just so kind of exciting to see and Larry Fink is the best and the worst of this whole ESG thing, because he truly does, he believes in stakeholder governance,

Stephanie McCullough (29:15):

Larry Fink is the CEO of BlackRock, just to put that in there.

Liz Simmie (29:18):

And if you Google Larry Fink and stakeholder, he’s done a lot of work in to talking about it and talking about stakeholder governance and he’s going in the right direction. Then he gets on his private jet or hires team members who aren’t able to integrate and to reinterpret how this data… And so to use ESG data properly, you need to change the framework and perspective. And so it’s been nice trying to prove to all the portfolio managers that I know whose initial reaction to ESG was, “But it’s going to perform, right?”

Liz Simmie (29:55):

There was this idea that ESG was going to detract. It never occurred to me by the way that ESG would ever detract from performance. The science is there, more diverse organization… And it’s not even about whether a more diverse board is more successful. Change in workforce data, lowering turnover, lowering theft, all this stuff shows that the organization is competent, right? And so it’s really about just changing our perspective in how we look at this data in security selection and in making it truly a part of security selection, not some secondary or tertiary afterthought so we can say we signed the PRI and we care about this stuff because… By the way, every asset manager and advisor, not every advisor, has ESG on their website now. It’s great. I hope that everybody figures out how to use it.

Liz Simmie (30:50):

I also hope it’s reflected in their teams as well, but buying some ratings and using it to exclude a couple companies is ESG light maybe, but it’s not what that end real ESG client wants. The end true ESG client believes companies doing good outperform. They see risk in holding companies with weak governance, high turnover, lack of diversity, short-term thinking. And it doesn’t matter if they’re a foundation or an individual, they believe and I’ve always believed this, companies that just are better managed and take care of their stakeholders outperform in the long run. However, a bunch of investment theory doesn’t agree with that. So that’s where the kind of debate is and it’s a fascinating one.

Kevin Gaines (31:43):

And I think part of the problem among us advisors, at least those of us that have been around for a while, we remember when ESG was SRI, socially responsible investing, and at least on the retail side, the only SRI you got was exclusionary, we wouldn’t have defense, we wouldn’t have tobacco, we wouldn’t have alcohol. I mean, that’s it. And depending on the market cycles, sometimes those were good places to invest.

Kevin Gaines (32:11):

So, I mean, I think that’s kind of how that stereotype of ESG being detrimental, but that leads to this question. Is it possible for a company that is really good environmentally? And I’m not targeting any particular company, but say they make electronic EVs, electric vehicles, but to be bad on the SG side so that you actually don’t want to invest in them and conversely that maybe it’s not the most environmentally friendly company in the world, they make chemicals or something like that, but they’re still a good ESG company because they don’t pollute, but they have good governance and all that stuff. Is that what you’re looking at is the whole picture of the company?

Liz Simmie (32:54):

That’s kind of why we started. There seemed to be, obviously we just kind of talked about it best of sector SRI products are pretty common. You can get good ones kind of everywhere if that’s what you’re going for, but then everything else was thematic. So it was just diversity or just emissions and personally, just kind of market opportunity. What about if you care about everything? Are you going to allocate 10% of your portfolio to water, 10% to renewables, 10% to women, but not racially diverse folks? Then people aren’t going to change their allocation. So we wanted to build a core product that was a core investment strategy, but that took all of those things into account. And there are a good handful of firms like ours that there who look at all of this stuff and how it’s tied together.

Liz Simmie (33:46):

I like to summarize it in negative externalities, right? So every company in the world, even a pharmaceutical company that makes the most life saving product in the world, if they have high turnover, lack diversity, have a poor culture, aren’t doing anything to reduce their emissions, it’s not a good investment, right? And so that’s where our framework was developed to ensure, doesn’t matter if it’s your debt rating, your debt capacity, your Glassdoor rating, your board diversity. It all matters because it all goes into telling us how well governed, how long-term focused you are. One of my big, big qualms with ESG and impact ratings is they’re good at looking at products and services. So all pharmaceutical companies, all product, all companies that make a renewable energy related product, like an EV or windmills, get rated as a hundred percent impact.

Liz Simmie (34:46):

And I understand why that happens because it’s pretty easy to say, “Okay, we’ve got a hundred windmills. They’re producing X amount of renewable energy.” That’s the impact. The problem is we have not taken into account the operational negative externalities of that firm, whether it’s workforce related, building the windmills, the supply chain, how all that’s managed and a lot of ESG frameworks will say things like, “Well, emissions don’t matter for Apple.” Right? It’s a tech company. It’s just computers and stuff. And I’m like, “But I’m pretty sure they’re shipping iPads and phones across the ocean all day, every day and they’re making them all in a country that uses mostly coal.” But they’ve lucked out because that’s a different company, right? So it’s Foxconn’s ESG rating. So, this idea that only the product or service is making an impact positive or negative on society, and I’ll pull out a tobacco company just because, we don’t look at tobacco companies.

Liz Simmie (35:42):

We exclude tobacco companies, but there’s not really that many of them so it doesn’t make that much of a difference. Whereas 20, 30 years ago, it would’ve made more of a difference, but there are tobacco companies that are improving their women and gender and racial diversity and leadership year over year way better than big tech. There are industrial companies in the Midwest who make most large mega account financial and tech companies look completely incompetent at changing diversity and there’s no reason why those industrial companies should have any ability to do it other than part of their purpose and their bottom line.

Liz Simmie (36:15):

Whether it’s a windmill, whether it’s a battery in electric vehicle, but then there’s all these companies in the world who don’t fit into any of those nice boxes who are making an impact, whether they’re getting to a hundred percent of their products being made out of recycled material, whether they’re reducing their working from home and shutting down buildings because it saves emission, whether they’re encouraging employees, there’s so many things that you can do that don’t fit into nice boxes in terms of ESG and impact that are actually where the innovation and change is going to come from.

Liz Simmie (36:51):

And there’s not enough products out there that can kind of dig into that. And again, that’s kind of why we launched because if you just invest in climate innovation or if you just invest in carbon capture innovation and carbon innovation, what about water? What about companies… What about commuting? And we never talk about public transportation ever in ESG and impact. Why? Because electric vehicles, everybody should have their own car, which is funny because a third of most cities on the East Coast with any transportation systems, a third of households don’t have any cars.

Stephanie McCullough (37:22):

Awesome. I love your comment that companies are like people, they all have flaws, right? So how do we find the ones that are improving and do you also put a focus on trying to encourage improvement among the companies that you’re buying?

Liz Simmie (37:35):

Yeah, we’re whatever the opposite of activist investors are. There’s a lot of ESG firms where it’s about going in and getting a bunch of seats and Exxon shifting Exxon to renewable energy. We prefer to buy companies we don’t need to micromanage. That comes out of the strategy I was trained in. We did not meet management on purpose because it created bias in the security selection process. That being said, everybody can improve. And so we focus our engagement mainly on reporting and very specific issues. As we grow and get bigger, we believe engagement is best done in a collaborative sense. And so how we can leverage partnerships and collaborations with other organizations, other asset managers, even individuals. Right? There’s been some really cool stuff. I think it’s BlackRock and Vanguard are going to try and get their direct investors to be able to participate in proxy voting, right?

Liz Simmie (38:36):

And proxy voting is for the most part pretty boring, but sometimes there’s some really interesting stuff that comes up and there’s also a lot of weird ESG votes that come up that don’t make any sense, which is kind of a fascinating side discussion for those of interested in voting. And a lot of good ESG firms who may take a different approach to security selection than we do spend a lot of resources in the engagement side in their voting… Canadian pensions are great. And on the side of ESG, we hold very concentrated portfolios. We don’t care about tracking or what the index sectors look like. Whereas a lot of folks either have mandates or they have to, or they’re a giant pension with quadrillions of dollars. And so, can the CPPIB, Canada’s largest pension, one of the largest pensions in the world, can they convince one of their very non ESG holdings to change? What’s their role?

Liz Simmie (39:30):

And they’ve done some good work. CPPIB and, I can’t remember the other pension, went around to every company in Canada and basically said put a woman on your board or you’re going to have problems at voting. Now that’s a little check boxy at the same time now there’s a woman on every board in Canada. So we went from zero to 10%. So at least we’re making some improvements. And now at least there’s a fear, which is okay, that these pensions are going to come around and say, “Okay, now you got to do this.” And you even see the NASDAQ folks will remember, I think it was last year, to be a NASDAQ-listed company, you’re going to have to have two diverse folks on your board and the SEC approved it too. That was the interesting thing. So, there’s these requirements coming from everywhere, at the same time, we don’t want to hold companies that haven’t figured out how to put diversity on their board yet.

Liz Simmie (40:22):

Because it suggests they’re a little behind the times and that’s our perspective. Other investors would disagree, but I think it takes a concerted effort, right? Passive investors can’t be as selective as we are, but there’s still a role for engagement and all that stuff. And I’m a big fan of passive, even though we’re an active shop, mostly because the investment industry’s not very good at outperforming, but there’s a role for everybody. And also it doesn’t matter how big the company is or how small the company is. Every company globally makes an impact. Doesn’t matter if you’re a one person RIA or you’re BlackRock, you are creating an impact on your ecosystems and stakeholders and improving percentage of women in leadership positively impacts the economy, right? More women who are better paid, all these kind of things are…

Liz Simmie (41:18):

And that’s why I think it’s funny that you can’t make impact by buying stocks, that’s totally ridiculous. There’s many ways to make an impact by buying publicly-listed securities.

Kevin Gaines (41:28):

And to circle back what you were saying about that it’s good business, Apple reducing the size of their packaging reduces their cost, increases their profit margins, allows for more dividends to shareholders or expansion. It’s not one or the other is the important thing on ESG.

Liz Simmie (41:50):

Absolutely.

Stephanie McCullough (41:51):

Awesome. Well, Liz, we so appreciate your spending time with us today. How can people follow you if they want to get more Liz Simmie wisdom?

Liz Simmie (41:59):

If you like sarcasm, I do that most days, some days more than others on Twitter. To plug Twitter, if doesn’t matter what industry you’re in, but there’s little communities on Twitter. You just have to find them. They’re like Facebook groups, but they’re informal. And so there’s ESG, there’s impact, there’s investing, there’s biopharma, and you kind of meet friends on Twitter. And I know it sounds really weird, but it’s the opposite of Facebook, right? Facebook, you’re friends with all your friends, Twitter, you just meet strangers all the time that turn out to be interested in the same stuff as you. You can go to honeytreeinvest.com. That’s our website where you can see some other podcasts I have recorded and some of our blogs and articles where we basically rant about all the same things we’ve talked about today. Those are the best places to find me.

Stephanie McCullough (42:50):

Awesome. Thanks again.

Kevin Gaines (42:52):

And I got to say, I’ve been following Liz for a while on Twitter and she is not a boring follow. It’s definitely one of the more entertaining people that I enjoy and you learn a lot so thank you.

Liz Simmie (43:05):

ESG jokes is a very niche topic and I’m glad there’s a lot of people who apparently understand them because it’s the intersection of ESG and investing world is actually pretty small. Right? And to be able to understand them… Anyways, Twitter’s so much fun and I highly recommend folks spend some time on there.

Stephanie McCullough (43:29):

Awesome. Thanks, Liz. We hope to talk to you again soon.

Liz Simmie (43:33):

Thank you.

Kevin Gaines (43:40):

Thank you. All right. I got to say that was illuminating because truthfully yes, I’m a self-admitted ESG skeptic because a lot of other advisors and this was a key point that she made, which is I hear those three little letters, ESG. It’s like, “Oh, that’s something different.” That’s not real investing but it actually is. As we were talking earlier, active managers have been looking at all this stuff or a decent amount of this stuff for quite a while, they just never labeled it. I actually think that labeling is what turns some people off, but more importantly, other people now have learned the importance of it.

Stephanie McCullough (44:24):

What I really wrote down was her kind of reordering of the letters, ESG, what she said was that environmental data plus workforce data plus financial data tells you about the governance of a company. And really it’s that governance that is giving us information on whether it’s going to be a good long-term investment or a risky investment. And her point that she wasn’t necessarily brought up “in the investment industry” but more in the kind of management science and organizational and leadership development information that really informs how she looks at investments.

Kevin Gaines (45:07):

And that makes a difference because let’s be honest here, there’s a long history of companies that have blown up because of bad governance. I mean, do we need to talk? Enron, HealthSouth. The more recent one, what was the medical company that recently-

Stephanie McCullough (45:29):

Theranos?

Kevin Gaines (45:29):

Theranos. Thank you. If you look at these issues, you may learn other things about the company and say, “Hey, maybe they got a good product or not, but there’s some stuff here that scares me that could come back to bite us.” Let’s be honest. How many times have we seen a particular stock that we own just get obliterated because they got rated by the SEC or the EPA is filing a huge action against them.

Stephanie McCullough (46:00):

Heck, the IRS.

Kevin Gaines (46:01):

Or the IRS. They’re bunking around with the books. Again, a lot of this stuff may not be shown directly through this, but if you’re going to be skeevy towards other people, why would you just assume, “Oh, well they’re going to treat me right.”? You can’t make that assumption.

Stephanie McCullough (46:15):

The other thing that I really took away was that the data’s getting better. The mandates are out there. And when she made the point that what isn’t measured, doesn’t get managed. When we’ve got more information, when companies are forced to report on things, then we have a higher chance of seeing improvement. But also there’s more for portfolio managers like Liz to really dig into and look at so that we can get better portfolios of sustainable companies.

Kevin Gaines (46:48):

Yeah. And I would just say my final point anyway is it’s key to understand there is no perfect company. I think a lot of people out there say, “Oh, well, they do this so they must be good or they do that they must be bad.” And it’s not that, it’s how are they working through the issues to minimize their impact on the environment, on their stakeholders, on their shareholders? Again, going back to Apple reducing the size of their packaging, that benefits shareholders. So don’t get turned off if you hear certain things may end up putting money in your pocket.

Stephanie McCullough (47:27):

And I do believe that when she made the point, some companies are good in one area, not so good in the other, what that lets us investors do is set our priorities, right? Maybe our first priority really is how they treat their workforce or maybe it’s carbon emissions. And at the moment with the proliferation of investment products that are out there, you can get more granular about what you want to support and what you don’t.

Kevin Gaines (47:54):

Yeah. I think that’s a good way to end.

Stephanie McCullough (47:59):

All right. So we’ve got some stuff going on. If you want to check out on the website, sofiafinancial.com, we’ve got some interesting workshops coming up on these topics about sustainable investing where our next podcast guest who will be here in a month is also kind of on a similar topic. So this is an area that is interesting us a lot this year. We’d love to hear from you, what is interesting you? Are you already a values-aligned investor? Is this something that you didn’t know existed? Is this something that you’re trying to move more towards? Please let us know. We’d love to hear from you. We look forward to continuing the conversation. Thanks for being with us. We’ll talk to you next time. It’s goodbye from me.

Kevin Gaines (48:35):

And it’s goodbye from her.

Stephanie McCullough (48:40):

Be sure to subscribe to the show and please share it with your friends. Show notes and more information available at takebackretirement.com. Huge thanks for the original music by the one and only, Raymond Loewy through New Math in New York. See you next time.

Disclaimer (48:54):

Investment advice offered through private advisor group, LLC, a registered investment advisor. Private advisor group, American Financial Management Group, and Sofia Financial are separate entities. The opinions voiced in this material, are for general information only and are not intended to provide specific advice, or recommendations for any individual security. To determine which investments may be appropriate for you, consult your financial advisor, prior to investing. This information is not intended to be substitute for individualized tax advice. Please consult your tax advisor regarding your specific situation.