As the attention around environmental, social and governance (ESG) factors within investments continues to grow, there is likely to be greater emphasis on direct engagement with companies to improve their ESG performance and provide more transparent reporting on those areas, according to a panel discussion at Portfolio Management Association of Canada’s national conference in Toronto on Tuesday.

“People that invest in ESG strategies are expecting a more active approach and [for shareholders to] essentially make a difference in how the company is run,” said Daniel Solomon, senior vice president and chief investment officer of Toronto-based Northwest and Ethical Investments L.P. (a.k.a. NEI Investments), during the panel discussion.

This is an area in which European investors are ahead while North American investors are catching up, Solomon added.

Engaging with companies to improve their ESG performance is an alternative to avoiding sectors altogether. The latter can be problematic because you would have to avoid companies that benefit directly or indirectly from the products produced by that sector, said Solomon, who provided the example of people who don’t invest in oil producers.

Thus, if the investor says oil is bad, then he or she probably doesn’t own any airline companies or car companies, said Solomon: “You end up having nothing in your portfolio.”

NEI Investments does exclude some companies from its funds — such as tobacco producers and certain types of weapons manufacturers — but generally works with companies in various sectors to improve their ESG performance.

NEI Investments has different criteria for each sector it invests in about what could be improved. For example, the asset manager makes corporate governance a priority for its bank holdings and will talk to these firms about issues such as improving their compensation structure.

Another area that is likely to develop with growing efforts to integrate ESG factors into the investment process is increasing pressure on companies to provide more transparent and detailed reporting surrounding those factors.

For example, if that were to occur, a fund would not simply report on its impact on the environment, but list each of the elements that go into making that company’s products; where the products are manufactured; and what the practices are within those facilities, said Olga Emelianova, another panellist and vice president and head of North America MSCI ESG research with MSCI Inc. in New York.

“None of that is reported right now. Those are important factors because they result in the recalls and the lawsuits,” she explained.