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Sustainable Investing

Digging for Responsible Growth

Liz Simmie says shortcomings in ESG research and data create opportunities.

Editor's note: This article first appeared in the Q1 2021 issue of Morningstar magazine. Click here to subscribe.

In the evolving world of ESG investing, Liz Simmie sees a big opportunity. Simmie, the co-founder of Honeytree Investment Management in Toronto, says, “We believe integrating ESG data into the investment analysis adds significantly to our financial research and helps identify companies with the highest potential for long-term, responsible growth.”

That sounds like the standard ESG philosophy, but Simmie contends that ESG investing as practiced too often emphasizes the environmental portion of ESG without sufficient attention to the social and governance components. Companies in some ESG-branded portfolios may be able to tout climate emissions reductions, but they fall short on important goals such as gender and racial diversity.

When Simmie was introduced to industry veteran Paula Glick in early 2018, she found a like-minded ally. Glick is well connected in the ESG space, having worked at MSCI’s ESG research department and at Sustainalytics, a sustainability ratings provider now owned by Morningstar. She agreed that ESG product launches in Canada were missing the mark. The two decided the market needed a better solution and founded Honeytree later that year.

Climate metrics matter, of course, but Honeytree’s strategy also prioritizes the other aspects of ESG. They concentrate in about 20 global companies that serve not just shareholders but also stakeholders such as employees, customers, supply chains, and communities. Over the long run, Simmie says, that should provide alpha.

“If you have a whole bunch of employees who know what they’re doing, who have shared goals and work together, that’s how a company succeeds,” Simmie says.

It’s still early days for Honeytree, which is building a track record as it markets its portfolio strategy to institutional investors and financial advisors. Yet Honeytree’s strategy of hand-picking ESG leaders is off to a good start, returning 24.1% from its inception on May 6, 2019, through Dec. 31. That compares with 15.5% for the MSCI World Index. (Honeytree’s performance was net of management and administration costs of 1% with dividends reinvested.)

Lack of Standardization Yields Opportunity Honeytree wants to capitalize on what Simmie sees as a market inefficiency: There's no single ESG reporting framework. Instead, there are several competing formats, such as the Global Reporting Initiative, the Sustainability Accounting Standards Board, and the Climate Disclosure Standards Board. Further, companies still aren't bound to report data. The result is a hodgepodge of available information.

“It’s a mishmash globally,” Simmie says. That is where she sees opportunity. “We’re comfortable looking at very unstructured data. If you can find the data for your consideration set, you can use it.”

To whittle down a list of more than 9,000 companies worldwide, Simmie and Glick start with 25 qualification criteria. They screen out companies with less than $5 billion in revenue, for example, and they look for consistently growing financials and stakeholder-focused governance and innovation. Companies dealing in fossil fuels, weapons, and tobacco are excluded, as are those that rank poorly on LGBTQ+ leadership and those based in countries with dictatorships.

They also use workforce metrics, such as Glassdoor ratings. “If your company is running around without focus, direction, and purpose, it’s going be reflected in the rating,” Simmie says. “A low number says there’s too much risk in that company, and we’re not going to even look at them.”

Another requirement is 30% board diversity beyond gender. Companies that haven’t reached that level probably haven’t had any serious discussions about equity and inclusion, Simmie says.

The screens lead to a manageable list of about 45 names. From there, Honeytree does a deep dive using a scorecard of 53 measures organized into 12 pillars: risk management, innovation, risk exposure, environmental impact, accounting integrity, productivity, financial stability, leadership, strategic focus, board effectiveness, competitiveness, and efficiency. All have equal weight and combine quantitative and qualitative metrics. For example, for the innovation pillar, the rate of change of women in leadership is as important as cash flow growth. “Both data sets tell us about a company’s ability to innovate, improve, and gain market share,” Simmie says.

The best 20 companies make it into the portfolio. This number doesn’t change during the year unless a company falls below a key threshold on a given metric and turnover has been low. Cash is kept to a minimum, and the strategy uses no currency hedging or derivatives.

Holdings include CRM and Texas Instruments TXN. Taiwan Semiconductor Manufacturing TSM is the only Asia-based holding; it is a leader in ESG reporting and board diversity. Clorox CLX has been in the portfolio since inception. While it’s known for its cleaning products, it’s also committed to responsible growth and driven by stakeholder governance, Simmie says. The stock was one of the best performers in 2020, spurred by demand for its products in the pandemic.

Institutional Learning Simmie grew up in Toronto and went to a high school that specializes in math and science. She thought she would be an engineer, but her dispassion for physics ended her interest in that career path. After college, she worked as an analyst at Ipsos, a market research firm, then shifted to Bristol Gate Capital Partners, an investment manager co-run at the time by her father, Peter Simmie. In 2015, she tried her hand as an investment advisor but found she preferred the investing side of the business. She returned to Bristol Gate in 2017 as a director of business development, working in institutional sales.

Back at Bristol Gate, Simmie gained experience in client onboarding, compliance, marketing, and quantitative work. But her most important lesson was the investment discipline developed by her father and his business partner, Richard Hamm. That strategy focuses on dividend growers, uses a concentrated portfolio with equal weights, and considers portfolio fit for each position.

The Honeytree model is inspired by Bristol Gate’s method of portfolio construction.

“We don’t do a traditional financial process any differently than Bristol Gate,” Simmie says. “But it’s bringing in ESG on equal footing through all parts of the process and treating it like fundamental data—that is the differentiator.”

Honeytree has some Canadian investors on board, but assets under management are below $25 million. The firm will register in the U.S. with the SEC and aims to develop an exchange-traded fund. “Ultimately, we built the strategy for the people, whether they are foundations, endowments, advisors, or retail clients,” Simmie says.

Simmie likes her chances of success: “In one sense, it feels risky. Two women go start a firm without $1 billion in seed money. But our costs are low, and I know what the bootstrapping process is like. We can do it.”

Liz Simmie, co-founder, Honeytree Investment Management.

How she caught our eye: Builds her own ESG data sets to uncover companies with responsible growth.

Career: Graduated from McGill University with a bachelor’s degree in history and economics. After college, she worked first as a research analyst at Ipsos, then went to Bristol Gate Capital Partners as a senior portfolio analyst. After a stint as an investment advisor, she returned to Bristol Gate in institutional sales, then struck out with Paula Glick in 2018 to form Honeytree Investment Management.

Personal: Married, with three kids, ages 9, 7, and 6. Likes cooking and baking. Before launching Honeytree, her calling outside of professional work was synchronized swimming, where she coached elite 9- to 11-year-olds at the provincial and national level in Canada.

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