It’s been about 30 years since the first Desjardins responsible investing (RI) fund was created. At first, responsible investment focused on excluding controversial industries such as tobacco and firearms from people’s portfolios. Portfolio managers selected stocks by taking a negative screen to their investing universe to filter out whole sectors before performing their fundamental analysis on the rest. Investors could sleep a little easier knowing their money wasn’t being put into activities they abhorred.

However, over the last few years, responsible investment products have become a lot more sophisticated, says Deborah Debas, Responsible Investment Specialist at Desjardins. “We don’t only take out the bad players anymore, we also go after the good players,” she says. With more people, especially millennials, wanting their investment to be a lever for change investors now want to own funds that hold, for instance, technology companies that are helping to accelerate the transition to a more sustainable economy or businesses that have gender-diverse boards.

Creating RI portfolios also involves adding environmental, social and governance (ESG)-related metrics to the fundamental analysis. Integrating ESG criteria contributes to portfolio manager’s fiduciary obligations regarding risk and return. “We’re not taking anything away from traditional fundamental analysis – it is part of our job,” says Debas. In RI, this analysis is influenced by how the company is exposed to ESG risks and opportunities.”

Digging into ESG data

When it comes to managing responsible investments, the portfolio manager and their approach to constructing a portfolio can really make a difference. The process usually starts with layering on ESG criteria over standard fundamental analysis, Debas explains. Many companies, encouraged by regulators, now publish reports on environmental impact and corporate social responsibility, and these enable an easier stock selection by the portfolio managers.

But Desjardins’ portfolio managers and ESG analysts don’t stop there. They attempt to verify the companies’ claims using third-party data from universities, associations, government agencies, non-governmental organizations (NGOs) and media reports. Still, there are no common standards for ESG reporting as of yet, which can make accessing quality data a challenge, says Debas. “Accessing data is easy. Accessing quality data is harder,” she explains.

As with fundamental analysis, meaningful comparisons are usually made between companies in the same sector. Portfolio managers aim to select companies with robust ESG practices, provided the valuation makes sense. But even then, “you have to look under the hood,” she adds. For instance, you might have two grocery chains, one with a higher carbon intensity than the other. But upon closer inspection, you might find that the “greener” company outsources its shipping and deliveries to contractors, therefore providing no net benefit to the environment.

Once Desjardins becomes a shareholder, it prompts the portfolio managers to engage with companies and press them to enhance their ESG focus further, including improving areas where their practices may be weakest. Whether a business is considered a responsible investment “is rarely ever black or white,” Debas says. “We’re not so much looking for perfect companies but for those with positive ESG momentum.”

In one case, a large fast-food operator wanted to know why it was excluded from Desjardins’ ESG investing universe. The portfolio managers met with the company and explained what it had to do to change. The chain ended up committing to improving its practices in single-use plastic and in labor relations and, soon after, became part of the portfolio.

Finding stocks that help society

In the case of Desjardins’ thematic impact funds, such as its Desjardins Societerra Cleantech Fund, the stock selection process begins with identifying companies that specialize in sustainable solutions such as wastewater treatment. They then home in on operations that have the greatest potential for public and shareholder benefit. Here again, the search can’t be superficial. Some solar panel manufacturing, for example, takes place in locations where forced labor is known to exist. The environmental benefit may be nullified by a social transgression.

One company Desjardins Funds invest in is a building material company that developed an innovative way of taking wood and plastic waste, reprocessing it, and extruding it as a waterproof decking material. Despite sustainability being a core part of their business model, the company didn’t report on the environmental impact of its own manufacturing process. With guidance from portfolio managers, the company improved its disclosure and now benefits from an internal benchmarking mechanism and a way to make investors more aware of their compelling ESG culture.

In Debas’ view, creating positive societal impacts instead of just avoiding negative ones is where responsible investing’s future lies. She would like to see thematic funds broaden their mandates to include factors such as fostering biodiversity and promoting workplace diversity beyond gender balance alone. She also thinks we could see new asset classes popping up in the ESG space such as alternative strategies (of the sort employed by hedge funds).

Fortunately, the universe of funds that focus on positive societal outcomes is expanding as fast as demand. For instance, in 1999, there were just 250 public companies in the cleantech space – there are now more than 1,200. “The market,” says Debas, “has grown and will continue to expand for a better and more sustainable future because there are solid business opportunities in the space.”