Looking past environmental labels in equity investing
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Once niche, sustainable themes now span industries, helping advisors find real opportunities for clients
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Diversification has always been a moving target. What counted as a well-diversified equity portfolio 20 years ago bears little resemblance to what investors hold today. Yet, even as portfolios have expanded in complexity, many of the assumptions behind diversification have remained largely unchanged.
For Tim Prescott, senior vice president and head of asset management at NEI Investments, the bigger shift is that diversification itself is being redefined. Many advisors once assumed that if their clients’ assets were spread across sectors and regions, they were diversified enough. Prescott has spent years observing how portfolio construction adjusts when markets change shape, and he argues that the definition of diversification keeps evolving. “There was a time when sector and geographic diversification felt sufficient,” he says. “Now different-looking holdings can still be exposed to the same underlying risks.”
NEI Investments is a Canadian asset manager committed to helping investors achieve their financial goals by forging new paths to performance, powered by foresight and supported by action. For almost 40 years, we’ve been delivering innovative investment solutions that capitalize on unseen investment opportunities to help power growth and reduce risk. Our unique approach incorporates a broader set of inputs and considerations to inform intelligent investment decisions for long-term results. We’ve built an extensive global network of sub-advisors, each with distinct areas of specialization across asset classes, geographies, and themes, giving us greater access to expertise and innovative strategies.
“Portfolios that appear well spread can still be shaped by the same economic pressures, whether through shared supply chains, similar capital spending cycles, or exposure to the same policy uncertainty”
Tim Prescott,
NEI Investments
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Published Feb 23, 2026
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Regulators
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Wealth technology
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Life and health insurance
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“What’s changed is that you’re not just investing in potential. You’re investing in companies that are putting solutions to work and getting paid for it”
Tim Prescott,
NEI Investments
Equity allocations are still often defined by geography, sectors, and market capitalization. US exposure, in particular, has become increasingly concentrated, with a small group of mega-cap companies accounting for a growing share of index performance. At the same time, global trade relationships are being re-examined, supply chains are adjusting, and physical risks related to climate and resource constraints are becoming more visible in corporate operations.
For advisors, these shifts have complicated the idea of diversification. Owning different securities does not necessarily mean owning different sources of risk or return. Portfolios that appear well spread can still be shaped by the same economic pressures, whether through shared supply chains, similar capital spending cycles, or exposure to the same policy uncertainty.
In that context, investors have been looking for exposures that are defined more by underlying activity than by traditional sector labels. Sustainable finance as a category faced a more contested year in 2025. However, investor attention continued to concentrate around areas where the investment case could be grounded in measurable activity, including climate transition, infrastructure renewal, and industries tied to adaptation. Rather than chasing a broad ESG narrative, they are focusing on solutions that show up in revenues and capital spending.
Prescott sees that as a portfolio conversation rather than an ideological one. “People still think environmental investing is a niche play that sits off to the side,” he says. “But companies have built these considerations into how they operate. If you want diversified exposure, you have to look through the labels and into what’s driving the business.”
“In the early days, thematic investing was based on future-based hypotheses,” he says. “Today, the opportunities are much broader.” He also notes that “thematic” does not necessarily mean small-cap or speculative. In the NEI Environmental Leaders Fund, the opportunity set includes large, well-known companies that many investors would not instinctively classify as environmental exposures.
“You wouldn’t think of them as environmental companies,” Prescott says. “But when you look at what they enable, how they operate, and how they drive revenues, it becomes clearer.”
This is one reason environmental investing has become relevant to advisors who want to diversify within US and global equities without simply swapping one sector bet for another. Environmental solutions show up across the economy, not in one corner of it. They are tied to how water is managed, how power is used, how goods are transported, how buildings perform, and how systems are monitored.
It is also where the mitigation versus adaptation shift becomes important. Mitigation still matters. But adaptation reflects the growing spend on resilience and operational adjustment, from hardening physical infrastructure to reducing vulnerability in supply chains. That spend can support durable revenue streams, especially where it is tied to regulation, insurance requirements, or long-term capital plans.
Prescott emphasizes how mainstream these considerations have become, even among companies that are not typically grouped under sustainability headlines. “Large companies have operationalized this,” he says. “It’s built into their models. It’s not an educational exercise anymore.”
The challenge for advisors is that broadening the definition of “environmental” also broadens the need for discipline. When every company has a sustainability report, it becomes harder to know what is meaningful and what is simply disclosure.
That is where taxonomy comes in.
Why taxonomy has become a due diligence tool Environmental investing has become harder to evaluate using simple labels. Many companies now describe themselves as aligned with sustainability goals, but that does not necessarily tell an advisor how exposure appears in revenue, margin structure, or competitive positioning.
A taxonomy provides structure in that environment. Rather than categorizing companies based on broad sector classifications, it assesses them by the products and services they sell and whether those revenues are tied to environmental solutions. It becomes a way to separate narrative from economic exposure.
For Prescott, taxonomies matter because they introduce repeatability. “A taxonomy gives you a framework to invest with discipline,” he says. “It helps you focus on what’s real in the business model.”
NEI applies this structure through its partnership with Impax Asset Management, which has built an environmental taxonomy that maps the environmental economy across clusters of activity. The idea is not just to label companies as sustainable but to identify how they participate in the economy of resource efficiency, resilience, and infrastructure modernization.
NEI Environmental Leaders Fund serves as a concrete example. The fund is built using the Impax environmental taxonomy and includes a security-level requirement that companies derive a minimum of 20 percent of revenue from environmental solutions. That threshold is important because it forces exposure to be measurable, not implied.
The fund uses a growth-at-a-reasonable-price approach and focuses on mid- to large-cap companies, aiming for quality businesses tied to long-term environmental themes. It is also designed to diversify across clusters, which helps reduce the risk of becoming a single-trend portfolio.
Prescott sees the value of that partnership through an advisor’s lens. “What it does is expand the investable universe,” he says. “It gives advisors access to managers who specialize in this space and have been investing in it through different market conditions.”
Building differentiated exposure without reinventing the portfolio Manager selection, as Prescott emphasized, is not just about performance history. It is about alignment and process. “These partnerships represent both brands in the marketplace,” Prescott says. “There has to be confidence that the philosophies match.”
That focus on process shows up clearly in how NEI positions itself. The firm operates with a manager-of-managers model, selecting sub-advisors globally based on specialization across asset classes and themes. For advisors, the argument is that open architecture can support differentiated exposures without requiring them to build everything in-house.
“It’s not just the products,” Prescott says. “It’s the portfolio construction support and the ability to think across multiple assets with these exposures in mind.”
A strategy like NEI Environmental Leaders Fund can function to diversify away from pure market-cap-weighted exposure, particularly when those indices are dominated by a small set of companies. It can also offer exposure to infrastructure-linked and resilience-linked demand, which may behave differently through a cycle than more sentiment-driven growth segments.
Disclaimer This material is for informational and educational purposes, and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters. The views expressed herein are subject to change without notice as markets change over time. Information herein is believed to be reliable, but NEI does not warrant its completeness or accuracy. Views expressed regarding a particular security, industry or market sector should not be considered an indication of trading intent of any funds managed by NEI Investments. Forward-looking statements are not guaranteed of future performance and risks and uncertainties often cause actual results to differ materially from forward-looking information or expectations. Do not place undue reliance on forward-looking information. Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus and/or Fund Facts before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. NEI Investments is a registered trademark of Northwest & Ethical Investments L.P. (“NEI LP”). Northwest & Ethical Investments Inc. is the general partner of NEI LP and a wholly-owned subsidiary of Aviso Wealth Inc. (“Aviso”). Aviso is the sole limited partner of the Manager. Aviso is a wholly-owned subsidiary of Aviso Wealth LP (“Aviso Wealth LP”), which in turn is owned 50% by Desjardins Financial Holding Inc. (“Desjardins”) and 50% by a limited partnership owned by the five Provincial Credit Union Centrals (the “Centrals”) and The CUMIS Group Limited.
Air pollution
Electric and hydrogen engines are typically less polluting than traditional gasoline-powered cars
Clean and
efficient transport
1Goldman Sachs, 2024; 2WaterFacts_water_and_wastewater_sep2018.pdf; 3Waste and recycling – European Commission;
4World Resources Institute: How much food does the world waste?
Water contamination
Approximately 80% of global wastewater goes untreated, containing everything from human waste to highly toxic industrial discharges2
Water
Materials – electronic, hazardous
In many US states >60% of waste goes to landfills, while in some European countries <10%3
Circular economy
Food waste and inefficiencies
30-40% of food goes to waste globally4
Sustainable food
Carbon footprint
Inner cities are very polluted due to buildings emissions
Energy
Data centre demand
Data processing and cloud storage are expected to consume up to 25% of electricity globally1
Smart environment
resource scarcity
digitalization
infrastructure needs
regulatory shifts
efficiency pressures
What drives structural demand
Six Environmental Clusters
“What’s changed is that you’re not just investing in potential,” Prescott says. “You’re investing in companies that are putting solutions to work and getting paid for it.”
That shift is also why thematic funds are starting to play a different role in portfolios. The stereotype of thematic investing is that it belongs in a small satellite sleeve, held for optionality or “future growth” and accepted as potentially volatile. That framing, Prescott argues, misses what thematic strategies can do when they are built around established business models.
At the same time, Prescott is careful not to position the strategy as separate from traditional investing. His point is that the market itself has changed, and portfolios need to reflect that.
“My hope is that advisors stop thinking about this as something that sits over on the side,” he says. “It’s not responsible investing versus normal investing. It’s just investing.”
That line captures a broader shift within sustainable finance over the past decade. Early responsible investing often centred on what investors avoided owning. Today, the focus has broadened to what investors actively want exposure to, particularly companies solving constraints that the economy is already pricing.
“You no longer have to think only in terms of what you don’t want to buy,” Prescott says. “We still do that, but we get more excited about what we do want to buy.”
What this means for advisors building portfolios today The case for broadening equity exposure is not rooted in a single market call. It comes from a set of structural changes that are becoming harder to diversify away from using traditional frameworks alone: concentration within US equities, shifting trade relationships, supply chain redesign, and the growing visibility of physical risks.
Prescott views the advisor takeaway as straightforward: focus less on the label and more on the underlying exposure. “Most companies now have some awareness of these risks and opportunities,” he says. “The question for investors is whether they understand where the real investment case lies.”
For advisors looking to diversify within US and global equities, the implication is not that environmental investing replaces a core equity allocation. It is that environmental themes, when applied with structure and revenue discipline, can broaden the opportunity set and provide exposure to profitable problem solvers across the economy.
resource scarcity
digitalization
infrastructure needs
regulatory shifts
efficiency pressures
What drives structural demand
resource scarcity
digitalization
infrastructure needs
regulatory shifts
efficiency pressures
What drives structural demand
How environmental investing became a broader opportunity set A decade ago, many environmental strategies were built around mitigation and early-stage transition technologies. The investable set was narrower, and some of the investment case rested on what might become commercially viable.
Today, the picture is broader and more grounded in current demand. Environmental markets include efficiency, water, transport, infrastructure, circularity, and digital systems that reduce waste or improve resource use. The common thread is not a “green” label but revenue tied to solving constraints that are already shaping corporate decisions.
Air pollution
Electric and hydrogen engines are typically less polluting than traditional gasoline-powered cars
Clean and
efficient transport
Water contamination
Approximately 80% of global wastewater goes untreated, containing everything from human waste to highly toxic industrial discharges2
Water
Materials – electronic, hazardous
In many US states >60% of waste goes to landfills, while in some European countries <10%3
Circular economy
Food waste and inefficiencies
30-40% of food goes to waste globally4
Sustainable food
Carbon footprint
Inner cities are very polluted due to buildings emissions
Energy
Data centre demand
Data processing and cloud storage are expected to consume up to 25% of electricity globally1
Smart environment
Six Environmental Clusters
1Goldman Sachs, 2024; 2WaterFacts_water_and_wastewater_sep2018.pdf; 3Waste and recycling – European Commission;
4World Resources Institute: How much food does the world waste?