Responsible Equity Investing – can it pay to play nice?

Nick Henderson explores the growing demand for financial decisions to reflect ESG considerations.
Mars 2020

Nick Henderson

Director, Portfolio Manager, Responsible Global Equities

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Risk Disclaimer 

The value of investments and any income derived from them can go down and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Screening out sectors or companies may result in less diversification and hence more volatility in investment values.

Equity investing may remain in vogue for some time yet – but how the industry invests is changing. There is growing demand for financial decisions to reflect environmental, social and governance (ESG) considerations. Traditionally a trend driven by personal values, there is now increasing momentum from a regulatory perspective. Last year, the EU regulator introduced mandatory disclosure by asset managers and advisers of their sustainability policies[1]. Asset managers are implementing investment policies and products that include appropriately disclosed ESG criteria, often linking these to the UN Sustainable Development Goals (SDGs) – 17 global goals designed as a blueprint for a more sustainable world by 2030.

Another driver of increased demand is the growing consideration that aligning investment decisions with ESG issues doesn’t necessarily mean compromising on performance; in fact, it can mean quite the opposite. Don’t just take our word for it – a review of over 200 academic papers found that 88% showed a link from good ESG practices to good business performance[2].

Risk Disclaimer 

The value of investments and any income derived from them can go down and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Screening out sectors or companies may result in less diversification and hence more volatility in investment values.

Risk management matters

History provides stark examples of what can happen when businesses fail to consider and prioritise ESG issues – consider the 2010 BP Deepwater Horizon disaster, where cost-cutting and poor safety systems contributed to the death of 11 workers and the biggest marine oil spill in history. BP’s share price lost 50% in the immediate aftermath and total costs to the company were around US$62 billion. Avoiding companies that lack ESG credentials can therefore play an important role in protecting investment performance by limiting the risks derived from less responsible businesses.

Opportunities are waiting

The sustainability challenges we face can seem daunting, from limiting global warming to removing plastic from our oceans. However, they provide opportunities for investors as businesses search for solutions. Xylem, held in the BMO Responsible Global Equity Strategy, is a leading global water technology company at the forefront of addressing SDG Goal 6 – ensuring the availability and sustainable management of water and sanitation for all. Billions of people lack access to safe drinking water, while floods and droughts are increasing worldwide. Among its services, Xylem offers dewatering and data metering services. It is a high-quality business with strong margins, an example of the kind of company that can sit well in a responsible portfolio.

Active ownership and engagement

It’s important to remember that responsible investment is so much more than financial performance – its core purpose of ‘doing good’ must prevail. Managers should use their influence as stewards of capital to encourage positive change at companies through constructive dialogue and voting, helping

to ensure that positive ESG momentum is maintained and ultimately driving towards a more responsible world.

Competency means competition – sense-checking credentials

Responsible investment is evolving into the mainstream, creating competition as managers develop their ESG practices and product ranges. The quantity and quality of information varies, with some products being repackaged as responsible – so-called ‘greenwashing’.

At BMO Global Asset Management, we believe responsible investment is a mindset, hardwired into our investment activities. It sits at the centre of everything we do. From the launch of Europe’s first ethically screened fund in 1984 and our position as a founding signatory on the UN Principles of Responsible Investment, today we offer a comprehensive suite of ESG specialist funds and services, supported by our highly experienced 17-strong responsible engagement team. Active ownership is the cornerstone of our responsible investment approach: in 2019 alone, we had over 1,500 engagements with 765 companies.

(1) Regulation (EU) 2019/2088 of the European Parliament and of the Council on sustainability-related disclosures in the financial services sector, 9 December 2019.
(2) From the Stockholder to the Stakeholder – How Sustainability Can Drive Financial Outperformance, (University of Oxford & Arabesque Asset Management, March 2015)

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