ETF pioneer Som Seif is making responsible investing factors paramount in his company’s stock selection, a move he predicts will be adopted across Canada’s entire asset management industry in the next five years.
After years of collecting data, Mr. Seif, president and CEO of Purpose Investments Inc., is now incorporating environmental, social and governance (ESG) factors across all the investment funds the company manages.
In a recent interview at the newly renovated offices of Purpose, which now has more than 200 employees, Mr. Seif said he is not trying to build an ethical funds asset management business. Rather, he has given an ESG rating to each of his current funds, which investors can review.
“Traditionally, investors have had to trade performance and returns in order to invest in something they strongly believe in," he said. "Now we choose investments with better ESG rankings ... and tilt our exposures toward providing capital to corporate sustainability leaders.”
ESG funds are typically known for screening out certain companies that do not meet ethical standards for socially conscious investors. For example, some investors avoid gun manufacturers, casino operators, the adult entertainment industry, or alcohol and tobacco producers.
Mr. Seif said he doesn’t believe in excluding a certain industry or company completely.
“We’re still a money manager,” Mr. Seif said. “Our fiduciary responsibility is to make more money for our customers, to always be doing things in a way that improves the outcomes for our customers. At the same time, we believe that using the capital we manage in a way that enables better business practices is positive."
With about $8-billion in asset under management, Purpose Investments is the eighth-largest ETF provider in the country. While Mr. Seif said he may look for new investors for his holding company Purpose Financial LP – a financial technology services platform that holds Purpose Investments and several fintech providers such as Thinking Capital and Ario – he said he is not looking to sell a stake in Purpose Investments directly.
(OMERS Platform Investments, a branch of one of Canada’s largest pension fund providers, bought a minority stake in Purpose Financial in 2017.)
Mr. Seif, who has been a long-time advocate for lowering fees for Canadian investors, is now turning his attention to the ESG movement. He doesn’t believe there should be ESG-only fund categories, and expects most of the asset management industry in Canada to follow his lead.
“My hope is in five years every money manager will be saying, ‘I can do that too,' " he adds.
The idea of setting up an organization with ESG as a “core mindset” was one Mr. Seif has been considering since 2005, when he ran Canada’s first ETF company, Claymore Investments. But at the time there were limited data available from public companies about ESG factors, he said, so he was forced to shelve the idea.
After selling Claymore to Blackrock Inc. in 2012 – and launching his second firm, Purpose Investments – Mr. Seif spent seven years building his own proprietary data set on ESG. As more companies begin to publicly disclose information and more ESG metrics are being reported, investment companies will be able to embed ESG into their stock selection, regardless of the investment objective of the fund, he said.
In the same way investment managers use quality, value or volatility as deciding factors in the stocks they pick, Purpose now incorporates ESG data as a factor in its investment selections for all 50 of its investment funds.
“It doesn’t make sense to ignore this part of the market,” Mr. Seif said.
Currently, only 26 per cent of Canadian investors own investments that embody ESG mandates, according to a recent survey by the Responsible Investment Association (RIA). Yet 72 per cent of investors express an interest in investing their dollars in a more socially conscious manner.
“We’ve reached a point where having knowledge of responsible investing is simply table stakes for investment professionals seeking to earn clients’ business,” RIA’s CEO Dustyn Lanz said in a statement.
Daniel Straus, head of ETF research at National Bank Financial, said there are definitely “rumblings of a system wide sea change” around the ESG approach by Canadian asset managers.
“There’s a lot of hype in terms of ESG-focused funds, but I think the real action is coming in the mechanism in which ESG principles will be integrated in a widespread way, across many firms and asset managers in Canada,” Mr. Straus said.