As responsible investing (RI) quickly becomes best practice for institutions globally, it’s more important than ever to select credible, experienced investment partners that support your values. Rosa van den Beemt, Vice President, Responsible Investment Analyst, BMO Global Asset Management, shares tips to avoid greenwashing, including questions to have on your radar when conducting your due diligence.
A rampant phenomenon in a fast-growing space
It’s no secret that the responsible investment (RI) offering in Canada – and globally – has grown exponentially in a short amount of time as more institutional investors recognize the opportunity, both in terms of societal improvement and long-term performance. Case in point: in a recent survey, two thirds of institutional investors said they believe environmental, societal and governance (ESG) analysis has a valid place alongside fundamental analysis, while 54% said it is a method for discovering alpha.1 What this also means, however, is that it is still early days when it comes to a standard practice across the board, making it challenging for asset owners to navigate the current landscape.
Specifically, greenwashing – a form of marketing spin coined in 1986 that uses green values to deceptively persuade the public – has become a relevant and rampant phenomenon recently as the demand for RI grows, and concerns have been raised across the globe, from the NGO community to investors (both institutional and retail). As a result, significant regulatory development is in the works, starting in Europe, which aims to clearly identify what an RI fund represents and how it all relates back to ESG standards. For example, in December 2019, new ESG disclosure requirements came into force for EU asset managers and ESG-labelled or sustainable investment funds – part of the European Commission’s Action Plan for Sustainable Finance. And further top-down intervention can be expected to trickle into North America, as institutional investors themselves demand greater transparency in their efforts to align their values with their investment expectations.
Still, even with directive, it’s important for institutions to delve under the hood, and ask tough questions. The ESG integration approach is particularly relevant here, since how exactly it’s accomplished has yet to be defined, and it can often transcend “RI/ESG” branded products, meaning regulation would not necessarily apply. Simply put: how ESG factors are taken into consideration is unique and proprietary to every manager since there is no standard benchmark. As providers of capital at the top of the investment chain, asset owners globally should hold investment managers accountable, beginning with a disciplined process to discern ESG techniques, and drive RI throughout the entire cycle.
How to select managers that align with your values
When conducting due diligence, as a starting point, it makes sense to ask for examples on what managers did or did not allow into their portfolios, and why, and this should facilitate a basic understanding of their process, how it works, and how well-versed and comfortable they are speaking about the issues.
Importantly, transparency is key, because if there is significant embellishing language around ESG or RI, but there are no concrete examples, or no reporting the manager can disclose, that would be a red flag for greenwashing. In recent years, there has been more focus than ever on the environmental piece of the equation, particularly climate change. There are many ways managers can incorporate climate change risks into their investment processes, ranging from investing in companies making a positive contribution to a low carbon future to excluding laggard companies or high-risk sectors and pushing for meaningful change through engagement and proxy voting. Therefore, consider digging deeper, and asking a manager: how are you actually voting on climate-related shareholder proposals of the companies that you hold? If the voting is consistently against propositions to enhance climate change reporting, then that is a warning sign. The right to vote is a key part of equity ownership, and an opportunity to influence change.
Similarly, if there is no ESG expertise or responsibility at the manager level, either within the portfolio management team, or the research analyst side, that is another point of concern. Can they provide any thought leadership pieces on the topic? Finally, are there any standards to which they’re adhering to provide external accountability? For example, one would expect that any manager claiming to be a responsible investor would be a signatory to the internationally-recognized UN Principles for Responsible Investment (PRI), or other corporate governance and stewardship codes.
To make the process more effective – and efficient – for institutional investors, I’ve included some sample questions that can be used to assess the quality and depth of managers’ ESG integration approach, which can also be found here:
Investment policy and firm structure:
- Which person/team/committee is responsible for implementing an RI program, and who is responsible for ESG analysis within the investment process?
- Does your organization have a dedicated ESG team or one responsible for ESG integration?
- What are some specific examples of how ESG factors are incorporated into your investment analysis and decision-making process?
- What ESG data, research, resources, tools and practices do you use to integrate ESG factors?
- How do your active ownership practices impact investment decisions?
- What are some specific examples of your voting and engagement activities?
- How often and how will you report on ESG and active ownership activities?
- How do you communicate your ESG performance to stakeholders?
BMO Global Asset Management: A differentiated RI ethic
Responsible Investing 36 years in the making:
We have 36 years of expertise under our belt – equipped with an award-winning team of 19 in-house ESG specialists experienced in high-risk sectors.
Forward and upfront thought leaders:
Active ownership is the cornerstone of our RI investment approach: BMO Global Asset Management voted at 11,131 meetings in 2019, and 22% of the votes were against management, as we strive to actively make pragmatic suggestions to help foster success, rather than automatically voting with leadership.5 Through our engagement, we’re able to expand our RI investment universe by collaboratively working with companies to address ESG risks, better positioning them for long-term growth and improving their RI ranking in the process. As part of our efforts, we also offer a pooled engagement service called reo©, which allows asset owners to pool their funds into one powerful voice, benefitting from greater leverage, access to an expert analytics team and internal data systems that enable institutional investors to track their progress in their own equity and bond portfolios and report back to shareholders.
With external accountability as one of the core tenets of our RI philosophy, we are one of the founding signatories of the UN Principles for Responsible Investment (UNPRI), and our work is governed by our Responsible Investment Advisory Council, which consists of five external sustainability experts and one internal specialist who meet on a quarterly basis and oversee the integrity of our comprehensive solutions suite. Our engagement activities are also tied to the UN’s Sustainable Development Goals (SDG), which provide an ideal framework to assess the wider impact of our efforts, particularly on environmental and social issues. In 2019, 72% of our engagements were linked with a specific SDG.6
Making a difference industry-wide:
Another underexplored area which we believe sets us apart is our public policy work in the RI space, working collaboratively with investors, NGOs, and regulators to further ESG best practices across the industry through a constructive voice. For example, in 2019, we supported the recommendations of Canada’s Expert Panel on Sustainable Finance, which set out how to effectively transition to a low-carbon economy. We also work together with other global groups of investors to impact change on ESG topics at a greater scale: as a part of Climate Action 100+, we help target the world’s largest greenhouse gas emitters, asking them to develop low-carbon business strategies and strengthen climate-related governance and financial disclosures. It’s how we raise the bar not just for a specific company, but for an entire sector.
ESG integration at every step:
Lastly, we apply our ESG integration approach across the entire investment cycle for ALL of our active strategies, and offer a broad, specialized range of funds defined by ESG criteria. Across a range of asset classes, our suite of RI solutions is oriented around one or more of our three overarching pillars – avoid, invest, improve – to achieve our dual mandate of outperformance, and improving the world. When constructing a portfolio, these solutions avoid companies with damaging or unsustainable business practices; proactively look to invest in businesses that are making a positive contribution to social causes; and engage with company executives to push for progressive change – all as part of one, cohesive investment strategy. From ideation to active ownership, ESG analysis is interwoven in every part of our process, reinforcing our high-quality investment mindset from the start. To us, it is about more than doing the right thing; ESG integration enriches the quality of our analysis, and ensures that we earn robust returns over time – regardless of whether markets are moving up, down or sideways.
A golden opportunity to reset
More than ever before, the coronavirus crisis has proven that the financial sector cannot be a passive bystander to the sustainability challenges of today. Many companies are now being forced to rethink inherent risks in their business models that they weren’t properly prioritizing previously, including employee health and safety. The pandemic has identified clear gaps, and it’s giving all of us a chance to reset; now is not the time to be discouraged.
While the vast majority of the investment world has moved forward to understand ESG integration as essential to sound financial analysis, every member of the chain is responsible for ensuring proper techniques are being utilized, and relevant, serious issues are being addressed. Selecting a manager is an opportunity for institutional investors to align themselves with an experienced partner that’s an ideal fit – both in terms of values and process.
To learn more about our comprehensive RI strategy and solutions suite, or other ideas to enhance your portfolio, please contact your Regional BMO Asset Management Institutional Sales & Service Representative.
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