Strategies Best-In-Class

Given that investors generally aspire to a portfolio of investments diversified across key sectors, the best-in-class strategy seeks out companies which perform the best based on a set of social, environmental and governance criteria, including in sectors which may not appear socially or environmentally responsible at first glance. To determine which companies lead the way in terms of performance, an investor must research and analyse company operations. Although some investors choose to conduct their own research, the majority purchase ESG research from specialty service providers and then invest only in those companies deemed strong financial performers. To substantiate their investment decisions, some funds and advisers rely on research services such as those offered by Sustainalytics or MSCI ESG Research.

Examples

RBC Jantzi Canadian Equity Fund uses a four-step, best-in-class investment approach:

As at 31 May 2014, the fund’s top 10 holdings included as follows:
Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Suncor Energy Inc., Canadian National Railway Company, Canadian Natural Resources Ltd, Bank of Montréal, Manulife Financial Corporation, CIBC and Cenovus Energy Inc.

Despite involvement in oil sands operations, Cenovus and Suncor qualify as best-in-class in the energy and utilities sectors. These companies perform better than sectoral counterparts with respect to greenhouse gas emissions and other airborne pollutants which contribute to climate change, acid rain and smog. They also score higher than many of their peers on health and safety, bribery and corruption, and community relations issues.

To view a sample Sustainalytics industry report which details best practices on key social and environmental issues in the utilities sector, and lists global leaders in this particular industry, click on the following link.

To view a list of the top 50 Canadian companies for 2014 as ranked by Sustainalytics based on environmental, social and governance performance, click on the following link.

RBC 

 

Strengths and weaknesses

Strengths

  • Based on logic which is both simple and robust: “Invest in the best and avoid the rest”
  • Helps contribute to change as companies are held to account on activities which give rise to social and/or environmental challenges. Pressure can be brought to bear on companies to produce sustainability reports. Companies are motivated to seek inclusion in social indices and avoid one or other of exclusion and being labelled as laggards.
  • Can help engage the natural competitive drive of companies.
  • Supported by numerous independent rating and ranking models.

Weaknesses

  • ‘Best-in-class’ wording can be somewhat misleading. In some industries, ‘least bad’ might be more appropriate albeit unlikely to inspire or motivate the companies involved.
  • Portfolios based on this strategy alone tend not to appear much different from traditional investment portfolios.
  • Responsible investors who fail to understand this strategy fully often feel disappointed or cheated when they see that holdings include companies involved in controversial sectors such as oil sands or shale gas development.
  • Contributes indirectly to change