Beating the benchmark: IA Clarington’s Andrew Simpson on why ESG investing hasn’t hurt his returns

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Felipe Fittipaldi/The Globe and Mail

Andrew Simpson has to contend with restrictions, but that hasn’t hurt his returns. He oversees a total of $870 million in the IA Clarington Inhance Global Equity and IA Clarington Inhance Canadian Equity SRI funds. The funds only own stocks that meet environmental, social and governance (ESG) criteria. Although that means 550 firms in the MSCI World Index are off limits, Simpson’s global fund has beaten that benchmark over a decade. We asked the growth manager why he likes the FAANG stocks—Facebook, Amazon, Apple, Netflix and Alphabet (formerly Google)—except for Facebook, and why TPI Composites is an attractive clean-energy play.

How do you screen stocks?

We have always excluded companies generating revenues from tobacco, nuclear power, military weapons, adult entertainment and gambling. In 2015, the global fund became fossil-fuel free, and since then it also omits oil and gas companies; the Canadian fund did the same in 2019. We do an ESG analysis to help identify best-in-class names in a sector and do fundamental analysis. We look for firms that can grow earnings per share faster than the benchmark over three to five years.

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How do you try to beat your benchmarks?

Outperforming is never easy. In December, we had 63 names in the global fund versus about 1,600 in the benchmark. We were overweighted in mid-cap and mega-cap companies, but underweighted in large-caps. For instance, we own Evoqua Water Technologies, a U.S. water-purification services company that is a mid-cap but not in the index. Outperformance has also come from mega-caps within FAANG.

You once owned all the FAANG stocks. Why did you ditch Facebook?

The FAANG stocks are profitable, high-growth companies taking a leadership role in digital transformation. We divested Facebook in 2019 after a 73% gain. There are positives to Facebook in connecting people across the world, but it was revealed that it fed data without people’s consent to British political consulting firm Cambridge Analytica. That’s different from targeted advertising. Facebook hasn’t done enough to address this issue and to regulate hate speech.

What else have you divested?

Wells Fargo was a great U.S. retail bank that wasn’t caught up in the 2008 financial crisis, so we were happy with that. But we divested it in 2016 after our ESG monitoring caught signs of customer complaints about unauthorized savings accounts and credit cards that led to a huge scandal. We would not own it again.

Wind-blade manufacturer TPI Composites is a top holding in your global fund. What’s the attraction?

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The big secular theme is decarbonization of the power grid. To reduce dependence on fossil fuels, we need more wind and solar installations. Today’s wind turbines require blades about 75 metres long, roughly the height of the Statue of Liberty. TPI is a composite blade maker with this expertise. It has about 18% of the onshore market worldwide and can grow that. It sells to wind-turbine manufacturers, such as Vesta Wind Systems and Siemens Gamesa Renewable Energy, whose shares we also own.

What other stocks may benefit from U.S. President Joe Biden’s US$2-trillion climate action plan?

We own Hannon Armstrong Sustainable Infrastructure Capital, a U.S. financier focused on green energy projects. In Canada, we own renewable power producers Boralex and Brookfield Renewable Partners, while Xebec Adsorption gives exposure to renewable natural gas and hydrogen. We don’t own electric-vehicle stocks now because we find them to be expensive. We play this sector indirectly through SQM (Sociedad Química y Minera), a Chilean miner of lithium [used in EV batteries], and NFI Group, a Canadian bus maker that is producing environmentally friendly vehicles.

Shareholder advocacy is part of your mandate. What issues have you pursued?

We have engaged with Canadian banks—specifically Toronto Dominion Bank and Bank of Nova Scotia, which we own—for a moratorium on Arctic oil and gas financing, and they agreed. We have also engaged with Gilead Sciences, a leader in HIV drugs, about providing free or low-cost drugs to low-income individuals, and it continues to do so in the U.S. and developing countries.

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