BMO Global Asset Management has been leading the charge2 in this maturing ESG landscape, drawing on 35 years of RI experience,3 and a comprehensive suite of specialized strategies focused on sustainable, long-term performance. Our latest foray in the field is the launch of new ESG ETFs. This ESG suite is designed to meet the needs of institutional investors globally, driven not only by increasing RI demand, but also by the sheer growth in ETF usage by asset managers as a core allocation.
The rise of ESG investing and ETFs have gone hand in hand: in fact, Canadian institutions have made aggressive use of ETFs in the last two years as they navigate unpredictable geopolitical events, with a recent study from Greenwich Associates showing that the share of those using ETFs to displace other investment vehicles climbed to 45% in 2018 from 30% in 2017.4 Aside from their flexibility, ease of use, cost-effectiveness and transparency, the research highlights that ESG enthusiasm is also expected to emerge as an important source of demand for ETFs in Canada over a longer time horizon.5 ETF simplicity is no doubt a factor here, with the ability to quickly hone in on an asset class or geography. From 2015 to June 2019, AUM of ESG ETFs quadrupled, growing from US$6 billion to US$25 billion, mainly explained by large positive net inflows, particularly in Europe.6
In response, we’ve teamed up with MSCI Inc. (MSCI), the world’s largest provider of established ESG indexes and research, to bring out ESG ETFs that helps institutions mitigate risk and bolster returns, through a rigorous ranking process and exhaustive coverage of more than 7,500 companies. The partnership with MSCI builds on our reputation for ETF innovation – and ESG legacy.
BMO MSCI Global ESG Leaders Index ETF, for example, uses MSCI ESG ratings, which are based on a comprehensive approach involving the evaluation of relevant ESG factors by industry; scoring models that focus on risk exposure, not just disclosure; and a final score that identifies leaders and laggards from AAA to CCC. Though some exclusionary screens are used to avoid controversial companies, the focus is on the selection of companies with the best ESG footprint in each sector. The index provider’s rankings also include monitoring of ESG risks, and regular updates of public documents and third-party data sets – such as from governments and NGOs – to minimize reliance on voluntary disclosure. Importantly for institutions, companies are compared on a like-for-like sector basis (i.e. oil and gas firms are not compared to banks), which allows us to have full market exposure, and maintain a lower tracking error because the ETF is deliberately built around the market.
MSCI uses 156 industry model variants to focus on the key issues that pose the most significant risks to a company relative to its own peers, with each “Key Issue” typically comprising between 5%-30% of the overall ESG rating. In other words, an oil company could have a high ESG ranking based on its sustainability leadership in its industry. The benefit is that BMO MSCI Global ESG Leaders Index ETF does not vastly deviate from the broad benchmark through outright sector exclusion, while also providing some highly sought-after ESG differentiation at the same time. Indeed, positive performance impact, including mitigating risk and enhancing returns, is now the top-cited reason for incorporating an ESG-based approach for institutional investors in Canada, the U.S. and the UK.1