Responsible Investment

ESG in 2019

An audience with the Archbishop of Canterbury
February 2019

Risk Disclaimer

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.

We recently hosted a gathering of UK institutional asset owners, including senior representatives from pension funds and charities, for an agenda that spanned the moral and financial cases for responsible investment, as well as an exploration of some of the practical implications around implementation.

Institutional
Asset Owners

External
speakers

Hosted in
London

Networking
opportunities

Risk Disclaimer

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 transition to ‘doing good’

The Most Reverend Justin Welby, Archbishop of Canterbury discussed his 10+ year association with BMO Global Asset Management through his membership of the Responsible Investment Advisory Council (RIAC), before making observations on ESG-orientated investment and the implications for those adopting a responsible approach.

Responsible investment is complex, with issues and outcomes rarely clearly defined. In illustrating this, the Archbishop recalled how in 2007, the advisory council wrestled over the case for allowing banks into BMO Global Asset Management’s ethically-screened portfolios. Following the decision to selectively accept banking names, 2008’s banking crisis highlighted the challenge and risks associated with responsible investment judgements. He emphasised that understanding the detail is key, and that taking decisions on a company-by-company basis – informed, where needed, by engagement – is vital.

 

Related Capability

Responsible Investment

“Investment without engagement is irresponsible investment”

Justin Welby, Archbishop of Canterbury

The Archbishop emphasised that even in the context of an ethically-screened fund, there is no such thing as absolute purity, and every business can be challenged around ESG factors to varying degrees. For the investor, publicly stating the intention to take a responsible approach also raises expectations and creates reputational risk. Where concerns are material, disinvestment is of course an option, but for an investor adopting a responsible stance, vigorous engagement can prove effective in improving practices. He argued that “investment without engagement is irresponsible investment”.

Looking to the future, the Archbishop suggested that a marked shift in the responsible investment landscape is taking place – one that will accelerate and mature as the millennial generation makes itself increasingly felt in terms of its investment decisions. That transition is from responsible investment’s origins as an approach typically orientated around ‘avoiding harm’ through negative screens to one with greater emphasis on ‘doing good’. The drivers of this move are clear and none more so than climate change – a global issue that raises many questions including those around our social contract with future generations.

Over time, it’s likely that the theme of ‘doing good’ will pervade all investment activities – a trend exemplified by initiatives like the Transition Pathway Initiative, which aims to assess and encourage companies’ preparedness for the transition towards the low carbon economy.

“Active but ‘non-confrontational’ engagement strategies proved effective.”

Professor Elroy Dimson

Active ownership

Professor Elroy Dimson, Cambridge Judge Business School, London Business School provided insights into some of the key findings from his work with Oğuzhan Karakaş and Xi Li on the impact of shareholder engagement on company behaviour and performance. The study* was largely based on an extensive dataset provided by BMO Global Asset Management covering engagement activity and resulting milestones with 613 US firms over a decade.

Initially prompted by ethical considerations but with growth increasingly driven by a recognition of the risk and reward benefits from an investment perspective. Professor Dimson’s paper was the first published study in a top-ranked, peer-reviewed finance journal on the impact of engagement on ESG issues.

Whilst the performance implications for unsuccessful engagement were broadly neutral, those companies where engagement drove change demonstrated an upturn in their stock market performance. A number of factors post engagement may be at play here:

  1. Attracting new customers and increasing loyalty driving sales and profitability.
  2. Increased employee loyalty resulting in more efficient operations.
  3. Improved practices attract socially conscious investors – higher demand for shares and lower volatility in returns.

Large, cash rich and low capital expenditure firms are better able financially to respond, whereas reputational risk provides impetus to those operating in areas of high advertising intensity. Active but ‘non-confrontational’ engagement strategies proved effective. 

Perspectives on ESG 

Vicki Bakhshi, a Director in our Responsible Investment team spoke with David Russell, Head of Responsible Investment, University Superannuation Scheme (USS) and Dawn Turner, CEO, Brunel Pension Partnership on some of the more practical aspects of ESG-orientated investing.

 

Key takeaways

The significance of ESG is increasingly recognised but the availability of information can be sparse – consultants should play a key role here, particularly in using their resource and expertise to fill the knowledge gap. It’s important, however, that trustees ultimately take responsibility, and spend the time to consider what elements of responsible investment matter to their own pension scheme most.

With ESG’s increasing profile, it’s unsurprising that many managers are claiming credentials here. Sense-checking the strength of that commitment is essential. As part of the due diligence process, it would be reasonable to expect ESG factors to appear throughout an RFP document if they’re truly integrated across a firm’s activities – not just in the ESG section. It is also important to consider ESG as an integral part of manager monitoring, not just selection.

Equities are just one element of a broader portfolio, so it does make sense to consider ESG more broadly, whether that be in private equity, sovereign debt, property or credit. Within credit, for instance, it seems sensible to emphasise engagement on an asset class that requires businesses to operate sustainably if they are to maintain coupon payments and repay bondholders upon maturity.

We face serious global challenges to sustainability. As well as the risks, it is important to recognise and harness the opportunities that are created through innovation here. New technologies, renewable energy and initiatives like social housing all provide scope for sustainable
long-term returns.

Responsible about investment 

BMO Global Asset Management’s heritage and commitment to ESG investing runs deep. We take our responsibility seriously and that includes considering the impact of our investments on society and the environment.

Over 30+ years we’ve developed a range that includes specialist ESG products, investment strategies with ESG integration and engagement incorporated, and our Responsible Engagement Overlay service, reo®.

Our approach is an active one. We contribute to public policy development and engage with companies on ESG matters. And we express our views and perspectives through voting and thought leadership as well as working to ensure that ESG analysis is integrated across our broader investment processes.

*Active Ownership, Elroy Dimson, Oğuzhan Karakaş, Xi LI, The Review of Financial Studies, Volume 28, Issue 12, 1 December 2015.