Partner Insight: Can deeper engagement lead to more forward-looking ESG analysis?

clock • 3 min read

Claudia Wearmouth, Co-Head, and Vicki Bakhshi, Director, of BMO’s Responsible Investment team on how different ESG-related activities can strengthen each other

Close engagement with companies on Environmental, Social and Governance (ESG) issues is now seen as a critical way for asset managers to help address global challenges such as climate change, biodiversity and human rights. That engagement can also help asset managers track how a company's ESG risks are evolving, says BMO's Claudia Wearmouth.

"At BMO, we have toolkits and dashboards so our portfolio managers can see very clearly where different ESG risks are," she says, "based on materiality and controversies, and where we have engaged with companies within their portfolio and whether the company has taken on board those recommendations."

Vicki Bakhshi says the ever-increasing ESG data available from third parties also helps them to flag up issues and increases coverage across BMO's extensive portfolios. "But as soon as you dig into that data," she says, "you realise it may be based on a fairly simple methodology and quite limited company disclosures."

"On climate change, for example, the key top-down numbers - such as the portfolio carbon footprint - are telling you what your companies were emitting roughly a year ago in terms of their direct fossil fuel emissions and electricity use."  

So, on this and other key ESG issues, says Bakhshi: "We're trying to move away from simple metrics towards a deeper, more forward-looking analysis. What we really want to know is whether companies are on an upward or downward ESG trajectory."

However, deeper, forward-looking analyses demand more qualitative judgements, "and they bring in a whole other layer of data because then you've got to look at the company level and potentially bring in data from engagements," says Bakhshi, "such as considering whether a given target is properly linked to executive pay."

That takes expert resources and experience. "It seems that everyone in the investment industry is now saying that they are building a large responsible investing team," says Wearmouth, "but we've had a large team for 20 years. Engagement is the cornerstone of our efforts and our long heritage in this makes a massive difference in terms of our experience and our access to companies, even if we don't have a large holding within a company."

Click here to learn more about the team's approach to the world's most urgent challenges - and their work with BMO's investment teams

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