Partner Insight: Does sustainable multi-asset need a clearer story?
Sustainable investing across asset types demands clarity and consistency, says BMO's Simon Holmes
The alphabet soup of sustainable approaches, ranging from excluding harmful industry sectors to ‘impact investing' in industries such as renewable energy, can confuse investors. BMO's new sustainable range is therefore built using a using a clear three-stage investment approach, says Simon Holmes, who co-manages the range with Paul Niven, BMO's Managing Director of Multi-Asset Solutions.
The first stage echoes the famous medical dictum: Do no harm. The global social burdens caused by climate change, war and health issues have led the team to avoid fossil fuels, weapons production and tobacco firms. "So in terms of tobacco and weapons production, we're saying no more than 1% of an investment's revenue should be derived from that," he says. It's a stringent threshold that's easy to apply and to communicate to investors.
Fossil fuel companies are also out, including many energy giants, though this creates a dilemma. Are sustainable funds right to exclude firms trying to make the transition to a lower-carbon portfolio?
Holmes points out that a fossil fuel-intensive firm might invest heavily in renewables but also lobby for the deregulation of traditional energy. "It risks conflicts of interest," he says, "and I don't want to build a portfolio where an investor thinks ‘I don't want owners of fossil fuels' and then suddenly finds one in the portfolio."
Sustainable screening
The chosen exclusions leave a large universe of potential investments, some of which may behave poorly in terms of Environmental Social and Governance (ESG) factors. So the investment team also screen out firms with the lowest ESG scores in each industry sector, based on both external scoring from third parties and BMO's internally generated scoring.
"Here our analysis isn't just about data - it is about policies and investment, conversations with company management and business strategy," says Holmes, and he can make exceptions. "If for example we think that the ESG data is not quite right or we think that that company is engaged with wanting to improve, we may be supportive," he says.
In the same way, a company with a product that benefits the world can remain attractive even with a below-average ESG score, if the rationale survives a monthly meeting with the BMO's Responsible Investment team. "We don't want to miss out on positive stories but anomalies must be there for a good reason," Holmes says.
Positive process
Holmes says the negative screening process "leaves plenty of scope for investing in companies that help the world on its journey to be sustainable." The second stage of the investment approach is therefore to make positive sustainable investments in areas such as renewable energy, and global healthcare and nutrition. Holmes cites as an example a large-scale food company that addresses nutritional needs by focusing on socially and environmentally friendly products.
Thinking positively also means working with firms after investing, which constitutes the third stage of the sustainable process. "We have a heritage at BMO of engaging with companies so the third part of our process is to look for companies where we can work with them to improve outcomes," says Holmes.
Click here to read how BMO created a more consistent sustainable approach across asset types.
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