Transcript

Speaker 1:
Speaking Logically is brought to you by ETFlogic, the leading provider of analytics and portfolio analysis tools for financial advisors. No information within this should be considered trading or investment advice.

Scott McKenna:
Hey guys, and welcome back to another episode of Speaking Logicly. Today, I’m joined by Liz Simmie, who’s one of the co-founders and chief legal investment officer at Honeytree Investment Management. Liz, how are you today?

Liz Simmie:
Good. How are you?

Scott McKenna:
Excellent. So for our listeners, can you tell us a little bit about your role in Honeytree?

Liz Simmie:
Sure. I co-founded the firm with my co-founder, Paula Glick, in 2018, and we launched it as an asset management firm. We are the fourth female founded asset manager in Canada, but we founded it because there wasn’t that many active managers doing ESG integration properly. And we believed we had a new way to approach it, and so that’s where Honeytree came from. Our flagship is a global equity strategy, we’re mainly focused on institutional business, but we have some private clients up here in Canada. And we’re new, we’re very much an emerging manager, our track records at about 18 months. And our core focus is responsible growth, so we look for the most responsibly growing companies in the world.

Scott McKenna:
Awesome. So how do you guys think, I know a lot of people define ESG a little bit, have different definitions, right? How do you guys define investing responsibly?

Liz Simmie:
We think some of the ESG data, so we think of ESG as data. Not necessarily as an approach, we think some of the ESG data is fundamental data, fundamental company data, whether it’s quant or qual, that helps understand the long-term performance potential of the company. We also believe that purpose-driven companies outperform in the long run because they take care of their stakeholders, their employees, and their customers, their supply chains, even their shareholders. And instead of focusing only on stock price and shareholders, they focus on a long-term vision. And so that’s why they outperform over the long term, and assessing companies purely on financial information doesn’t allow you to dig as deep on some of that stuff. Now, everyone, some folks have shorter term investment styles or things, but in the large cap equity space, the data’s evolving quickly.

Liz Simmie:
We call it workforce data, and environmental data, that’s really fundamental company data in as regulation pushes that reporting forward, because that’s what’s happening. And as companies realize they have the data and report it, it’ll become more standardized and we’ll see it in financial statements in the future. So we use the data like traditional financial fundamental research equally alongside that, which is, the ESG comes from social responsible investing in SRI history, which began as values-based or exclusionary only. And there’s been this belief for a very long time that that activity alone leads to under-performance. So it’s created the sense that, and it wasn’t based on fact. That it was just based on the perception in the investment industry.

Liz Simmie:
If you don’t have exposure, index exposure to energy, if you don’t have a sector exposure, you’re going to underperform, and we run a very concentrated, active portfolio. So we’re very agnostic to the industry, the sector weights, and so that’s one of the barriers for the investment industry to embrace this type of, this data and this research, it’s because it goes against a lot of the traditional beliefs.

Scott McKenna:
Okay. And I love to hear that you guys are female founded female CIO. It’s great to have that diversity. So I’m curious, how do you put a number on something like diversity, right? It’s something more qualitative, is it like X percent of women in the company, X number of women on the board? How do you guys think about specifically diversity? And maybe some other things that might be harder to put a solid number on?

Liz Simmie:
Yeah, that’s a great question. So when we look at diversity, we look for year over year progress, and some minimum standards. And so we believe that a company demonstrating gender or racial diversity improvement is demonstrating that they’re agile, and innovative, and well-governed. So that’s why we use the data, and I think that’s an important, if you don’t have a reason to use a set of data, you’re going to have problems trying to integrate it into your portfolio construction process. So we use actually a lot of quant data in diversity, and when we started, and still now, they don’t publish data sets, none of the large providers. And they kind of just started last year, publishing diversity data sets beyond gender. So even now, board diversity, management diversity datasets that you can find from the large providers are gender only.

Liz Simmie:
And it was important for us to look at real diversity, which is beyond just gender and includes racial diversity, LGBTQ, and disability. Now the data on the LGBTQ and disability proportion at workforces is pretty hard to find your boards. But the companies that we look at are providing relatively robust reporting at the board level, the executive team level, and we create our own data sets, to be clear. Because they aren’t available on racial and gender diversity at the board and executive level. But most of the companies that we look at are now reporting women in leadership year over year for the past five years. Women in the workforce year over year for the past five years, technical roles, women in technical roles, and racial diversity in leadership, racial diversity in the workforce. So we’re only a few years away from that data being completely standardized.

Liz Simmie:
And it’s because California has requirements for reporting this information. And so all these companies that are based there have the data. And so now they’re publishing it, whether it’s in their sustainability report or in their combined annual report. So it seems, if you had to standardize it across 5,000 companies, it would be impossible. But when you’re looking at kind of core leading responsible growers, which is in the larger cap space, the data is getting, it’s gone from 2016, Excentra was the first tech company to report any diversity data, to they’re all doing it. And they’re all trying to do more and more. There’s still a lot of useless stuff that’s being reported around equity and inclusion that you see in big reports and ERGs and donations, which are great, but they’re not demonstrating progress in a company. They’re not demonstrating growth or movement.

Liz Simmie:
So we’re really looking at the data that’s showing year over year changes and progress. And it’s really a good proxy for organizational innovation, and direction. And it seems so simple, but the way to go from 10% women in leadership to 20% women in leadership is to make a goal, and change your processes and hire more women, and retain more women. And we see a lot of companies not doing that, some of the big tech, some of the investment sides, and engineering firms, in any industry. And then you see companies who are industrial, or factories, or whatever, making huge progress on that. And so the idea that it’s pipeline issue or anything like that, it’s a board commitment issue. It’s, “Do we understand that diverse teams that perform over the long-term? Yes or no?”

Liz Simmie:
And it’s a signal of their ability to set goals and execute. So the data itself would be hard for traditional PM to use, because you have to explain why racial diversity in leadership adds to the bottom line. But I think for a lot of investors and for a lot of folks out there, outside of the industry, it’s pretty intuitive. Right? And it just goes against a lot of traditional theory in investing such as nothing matters, other than shareholders.

Scott McKenna:
Yeah. That’s interesting. It’s interesting you mentioned big tech too, right? Because here at ETFlogic, big focus of ours, and we came out of working with ETF issuers, right? And when you look at some of the ESG labeled ETFs, right? When you dive into the constituents, some of them, there’s a couple in particular that I’ve looked at, and we have some ESG scoring that we use from our bask. And the scores aren’t good, and then when you look at the holdings, the top four holdings are like Apple, Facebook, the big tech companies. So it’s funny that you mentioned that because I’ve noticed that too. And I feel like there’s been, along with the advancements that we’ve actually been making when we’re talking about investing responsibly, I feel like there’s also some people that are kind of hopping on the bandwagon and just kind of labeling it as ESG, right? When it’s really not. Curious your thoughts on that as well.

Liz Simmie:
The typical large institutional approach to ESG, with the exception of some institutions who’ve been doing it, we’ll call it properly for a decade or two is, so we have our portfolio managers, right? There are experts in the financial stuff. They’re making decisions on portfolio construction, we need an ESG research team, right? That researches the ESG data, but it’s separate. They’re separate, they’re not registered portfolio. We have registered portfolio managers up here in Canada, by the way. So when I say that, that’s probably confusing, but the ESG team’s not making security selection decisions in a lot of these cases, because it’s a secondary set of data. And that’s a mix, there’s a whole bunch of reasons behind that, that they don’t know what to do with it, they don’t know where it fits in security selection, it goes against their traditional process, right?

Liz Simmie:
Valuation factor, whatever methodology they’re using. And so reconciling that is difficult. But if you, as long as you have a team that’s ESG, and you can write reports that’s ESG, and you sign the PRI, your strategy is ESG, right? And the bigger picture issue is in all the same problems that are in the traditional investment industry, index hugging, sector hugging, fear of being different. And so that’s the main reason you see all those names in the top, whether they’re systematic or active strategies, is because it’s really about the fundamental process, right? And ESG is a best in sector, we can’t take these names, we can invest in the rest of the universe. And the problem with that, and I get this question all the time from asset allocators, reporters, you name it, like, “Why are these companies in an ESG strategy?” And that’s the disconnect between the end client.

Liz Simmie:
So the end client could be you or me, or a foundation, or pension, and their work, or our work, or our beliefs are that companies not destroying the world are good investments. Now there’s a lot of people in the investment industry who might not agree with that, but the end client and responsible who wants to buy the stuff doesn’t want to buy it because it makes them feel good. They don’t want to invest in these companies that are making a huge negative impact on the world, because long-term, they don’t understand the growth potential. And so there’s that communication disconnect. And it comes out, I think, I don’t know if you saw the survey I did this weekend, right? The investment industry sees ESG or anything impact as values-based investing. And I’m not saying it’s not, I’m just saying the idea that that handicaps the concept and says that it’s less than from a performance perspective, but the end client doesn’t believe that, right?

Liz Simmie:
They don’t want guns, they don’t believe guns are going to be a huge part of world manufacturing 20 years from now, right? They want to invest in renewable energy. They want to invest in companies using recycled inputs, because it’s cheaper and better for the world longterm. And they understand that a company doesn’t end at their little sphere, they understand negative externalities. Somebody has to pay for the hazardous waste, or the low pay, or the lack of health care, or job safety. Somebody pays for that. It’s not usually the company. And regulation will change that, and companies have to pay for it, whether it’s plastic or emissions limitations or whatever. But the idea that companies are just this little microcosm that only impacts themselves in their share price and shareholders goes against basic economics. And so I think it’s easier for people outside of the industry to kind of piece things together because they’re not biased by our traditional theory.

Scott McKenna:
That’s interesting. And so you mentioned before that you’re based in Canada, right? So you work both in the U.S. and Canada. That’s correct, right?

Liz Simmie:
Yeah. We’re going to do our SEC registration shortly.

Scott McKenna:
Okay, excellent. So I’m curious, we’re starting to ramp up in Canada as well, and we’re starting to work with some Canadian advisors and might have a partnership that we announce later, early next year. But I’m curious to hear from your view, what’s some of the biggest differences between the focus on ESG or the industry in general, wealth management, investment management in Canada versus the U.S.?

Liz Simmie:
In Canada, we’re a little bit ahead on the environmental stuff, and that’s probably because that’s all we’ve talked about for the last 10 years. So we’re closer in line to kind of Europe in our responsible investment approach now, we have just as many large banks up here with some doing ESG okay, and some doing the more marketing style of ESG. And we’re very bank dominated from a wealth management perspective, in to a certain extent from an asset management perspective. And one of the things that comes with that is the conflict of interest. So we, Canada is a very special place, we have a lot of banks and energy, and not much else. And so what happens in ESG is banks do really well on ESG scores. Even if they have less than 10% of women in senior investment roles, right?

Liz Simmie:
They get scores through the roof because they have pretty good processes, they’ve adopted most of the ESG stuff, and they have folks to fill out the forms. The oil sands companies also do really well on ESG because they fill out the forms, they’ve done a bunch of work on supplier diversity, and some emissions reductions. Now there’s not that many responsible investment clients who won a lot of oil sands in their portfolios. So the Canadian industry has that conflict in that it’s a major industry, it’s a major client of the banks who are the capital markets groups, who are the same asset managers. So we spend a lot of time up here working fossil fuel into our investment, our socially responsible investment world. What we don’t talk ever about up here is gender diversity, and racial diversity has literally just shown up for the first time. And not in the context of portfolio construction, more in the context of, “Let’s figure out why we have no racial diversity on our boards up here.”

Liz Simmie:
In our research, the U.S. is on average, the companies, we have a small Canadian equity portfolio, and the average board diversity Canada of that portfolio is about 35%. And in the U.S., It’s about 45%. So that’s gender plus race, and that entire difference is racial diversity. And Canada is just as racially diverse as the U.S. So we are really behind, and this would be true in all parts of the business, whether it’s corporate boards, asset management teams, advisors, you name it. So we’re, the investment industry in Canada and in Europe too, although they arguably have a different racial mix, we’re very behind in that. And the U.S. is really ahead. There are no diverse manager programs in Canada. The words never come up in Canada at an institutional responsible investment ESG level. Whereas obviously anybody in the institutional world in the U.S. knows it’s … it’s not that it’s made a whole bunch of impact.

Liz Simmie:
It’s just that folks have been working on it for a while. Right? So large state pensions have mandates. New York state’s one of the leaders, Texas teachers, University of Chicago is one of the … they’ve started doing the work. They’ve done the work. So now they, instead of having 1% of their assets managed by women or minorities, now they have 10, or 15, or 20%. So it’s the same okay, here’s a goal. We’re going to work towards it as the companies in our portfolio. And so the idea that it’s impossible or hard to do, the data says otherwise. The data says the U.S. has done a good job in the companies that we look at on both gender and racial diversity, whereas Canada’s really only done an okay job on gender diversity. And so there’s, when I started, I was not in ESG when I started.

Liz Simmie:
I came from the traditional asset management world. And the perception that I had was that Canada was the leader in all of this globally, right? Europe was obviously a big leader, but that Canada was, everybody was flying down to New York to give talks from our pensions and all this stuff. And then you just look at the data, right? So one of our most successful pensions at improving their equity and inclusion, the one leading the conversation has made it finally to 20% senior leaders are women in the organization. They’re still not measuring racial diversity. Actually, they might’ve just started that in a recent report, but they hadn’t been, right? And so now it’s like, oh, okay. And so that’s our best in class. Financial services firms, it’s kind of like the blind leading the blind, right?

Liz Simmie:
How are investment firms, which are notoriously awful at equity and inclusion, even the best, most highly rated ESG ones globally? How are they going to lead the conversation about workforce diversity data in portfolio construction? So that’s going to be the last thing to come. It’s the mandates and the requirements, and every board manager walking in with a team of guys being told by an allocator, “Your team’s not very diverse.” I’ve heard a lot of stories. We don’t run into that problem very much yet, and we have to be very conscious of building a diverse team. And that’s racial diversity, experience diversity, location, income, disability, LGBTQ, it’s a hard thing to do, but we know companies can do it.

Liz Simmie:
The question is, can investment firms do it? And there is absolutely some investment firms out there, many run by women, that are doing the work. But this industry is, the fact that we’re selling gender equity strategies from teams that don’t have gender equity is kind of funny to watch. It’s my role in being a diverse leader in this industry to say, “Wait a second, you guys say you’re committed, let’s see the evidence, right?” And that’s going to become a bigger issue as the data gets standardized and reported because it gets standardized or reported on a corporate level. Then the end client is going to say, “Well, what’s your data, right?” And so an ESG firm can’t just report their voting track record for 20 pages in a PDF anymore.

Liz Simmie:
The end client in three or four years is going to want the full workforce diversity, pay equity data, turnover data, by diversity and training and that kind of stuff. And it’s going to be available because they’re going to have to provide it. So that’s why this industry is so exciting because it’s hopefully going to, the customer demand at all levels will drive some of the change along with, I think some of the guys are getting it. I was on a regulatory call, the equivalent of the SEC call a couple of weeks ago, and it was all the former chairs of the Ontario Securities Commission and almost all men, and they spent an hour, and they were talking about the future, but they spend an hour talking about the absolute need for change in this industry around gender and racial diversity and lack of it.

Liz Simmie:
And so if it’s made it to past the more woke CEOs last year who were thinking about it, it’s really kind of been hammered in to folks who love the industry and want to change it and realize that it needs to evolve for the end client, right? They’re going to lose out on opportunities. And it’s not about everything being ESG, right? It’s about supplier diversity. If anybody reads lots of annual reports or sustainability reports, supplier diversity is huge. Even in companies that aren’t that great, and because it’s been driven by the industries, right? And so eventually supplier diversity will come and hit ETFs and institutional managers and advisors, right? And so if a firm, and it’s not woman want a female advisor. It’s, I open a branch or I look at a set of advisors, is there any that I like in the more broad, the more different clients you can serve, the bigger your business will be. So it’s a fascinating kind of slow motion disaster to watch, that I think we’ll end up better for all of us.

Scott McKenna:
Yeah. It’s interesting. I was trying to find a status now. I think I might’ve saw it on Twitter, but basically, more and more, the mention of the terms ESG or responsibility diversity, they’ve skyrocketed in earnings calls over the past couple of years or so. So it’s definitely going to be interesting to see as it’s becoming more and more prevalent and we get more data, how we’re going to be able to turn that around. So I’m curious how you think, because there’s so many different metrics, right? We talked about diversity, we talked about, there’s a lot of different stats that go into environmental, right? And the governance and social. How do you put that together in a kind of a holistic way. Right? And how do you rank, are certain things ranked above others? Is it dependent on the client? I’m curious, how you think about that when you’re constructing these portfolios.

Liz Simmie:
Yeah. If we go back to responsible growth, which is our goal, so the most responsibly growing companies, that’s on everything. Financials, diversity, environmental inputs and outputs, positive or negative growth. We’re looking for that consistency. So because that’s our thesis, then we work backwards from there. And we run a, I know everybody says this, but we run a very differentiated portfolio construction process that I was trained in. And it’s an evidence-based process, so it removes a lot of traditional theory and really works backwards from, how do we isolate a subset of outperformers. So our outperformers that we’re isolating are responsible growers, which is really high consistent longterm growth. And we look at all of our inputs, we run up a quant process up front, and then a deep dive process later on.

Liz Simmie:
But we think of, we treat them all equally, right? So when we’re doing our qualification process, got some financial stuff, got some functional stuff, but we have some ESG stuff too. We use Glassdoor ratings, for example, as a cutoff in board diversity. And so we think having a diverse board is just as important as having consistent revenue growth in that qualification process. When we do our deep dive, again, we’ve purposely included financial and non-financial inputs on equal footing because we think women in leadership change year over year is that … I just covered up the mic. We think women in leadership change year over year is just as important to its free cashflow growth. So we put those together under, we organize our research into 12 pillars, and all the pillars are treated equally, and all the pillars have both financial and non-financial information in them.

Liz Simmie:
So we treat them equally, which is kind of different. And it works in our process. It would not work in a different type of portfolio construction process, which is one of the benefits we have is that working backwards, we know that diverse teams out-perform the long run. We know companies reducing their hazardous waste disposal costs are going to make more money in the long run. And so we’re just using that as additional data, along with the financials to understand the consistency of the long-term growth of a company. And so instead of saying it happens, our companies, is it their ESG scores that lead to their outperformance? Or do they have good ESG scores because they’re good companies? Scores are a mess. Let’s be honest. If somebody asked you to rate, give all the companies a financial score, we’d have a thousand different versions of everything from every manager.

Liz Simmie:
So nobody should be surprised that the ESG ratings are a mess. They take into account a whole bunch of assumptions. That’s why we use mostly raw data. And a lot of shops are shifting to that now, which is great, because there is no detailed diversity data in those data sets. They do look at the diversity in kind of a qualitative, but they haven’t standardized that data set. So you really, I think, to do ESG properly, to use the data properly, right? Because that’s what we believe. It’s about, you need to have a portfolio construction process that is focused on stakeholder governance, not shareholder governance. So there’s this idea that the board governs on behalf of the shareholders. That’s not true.

Liz Simmie:
The board governs on behalf of the stakeholders, employees, community, customers, supply chain and shareholders. And so you have to make that jump in your governance beliefs and your governance research, that companies that do that can make money over the long-term and outperform, which they can. And so it’s not that just because somebody has a high ESG score that it’s going to do well, because everybody’s going to buy it. That’s ridiculous. It’s changing the perspective and the approach to portfolio construction that makes the data useful. Otherwise, it’s just ESG research sitting on the side.

Scott McKenna:
Okay, excellent. So we’re coming up on 30 minutes. Was there anything else that you wanted to talk about?

Liz Simmie:
I think my favorite learning over the past couple of years has been how smart everybody who’s not an ESG manager is at looking into these products. And it’s, again, probably the 50th time I’ve got this question, and it’s not whether Apple’s or Facebook or any of those companies are good or bad. It’s that the consumer or the end client, can see that there’s a problem with the portfolio construction in a lot of these strategies. And it’s hard to find the one that works, whether you’re a systematic investor, or closer to passive or active. If you want to avoid investing in a company like Facebook because of their data breaches and privacy issues and a whole bunch of stuff, and it’s in the top 10 of a fund, and it’s not in all of them and same, Amazon. And the best companies in the world have tons of problems, but they’re generally trying to fix them, as opposed to shove them under a rug.

Liz Simmie:
And so that’s, I think, what the end client is seeing in these products and that’s where the disconnect is. And so I think just keep on being skeptical. That’s our job as consumers, right? Not to just trust everything that’s thrown at us, and to demand what we want. And sometimes we don’t know what we want until it’s been created, and I think we’re still a few years away from having kind of a really good reflection of products that meet the end client needs, whether that’s the team’s diversity, the team’s beliefs, the product itself, the companies in it, how the research is used. So I think that’s my favorite thing about this industry, is that even some insiders, right? Are figuring that we have a lot of work to do, and we can’t just create these products and do them from a marketing perspective. There’s a much deeper purpose behind this, and it’s fascinating to watch it kind of change in real time.

Scott McKenna:
Yeah. Definitely. I’m super excited for you guys in your firm, Honeytree. I think, good luck on your SEC filing. Can’t wait to have you doing some more business in the U.S. and hopefully, we can meet in person at some point, once things go back to normal. So for those who are interested in learning more about Honeytree, you guys can reach out to Liz, liz@honeytreeinvest.com. Liz, any other places you’d want some people to look?

Liz Simmie:
Yeah. You can find me on Twitter, and the website’s thehoneytreeinvest.com as well.

Scott McKenna:
And your Twitter handle again?

Liz Simmie:
Liz Simmie, L I Z S I M M I E.

Scott McKenna:
Excellent. So thank you guys for listening in to another episode of Speaking Logically, and hope to catch you guys next week. Thanks again, Liz.

Liz Simmie:
Thank you.