Responsible Investment Solutions For professional investors only Responsible Investment Solutions
Investing responsibly At BMO Global Asset Management, we recognise the important role that environmental, social and governance (ESG) considerations play in the creation of superior long-term investment returns. We also believe that investors have a critical role to play alongside policymakers and business in meeting the many ethical and sustainability challenges facing today s world. Our responsible investment solutions and services seek to be a part of the answer to those challenges and make a positive contribution to society. Established expertise We have a long and distinguished heritage in responsible investing. From the launch of Europe s first ethically screened portfolio in 1984 we have gone on to build a diverse range of responsible products and services that includes pooled bond and equity funds and a comprehensive global engagement and voting service for institutional investors. Market-leading capabilities Our Governance and Sustainable Investment (GSI) team brings award-winning expertise and capabilities to responsible investment. It works closely with many of our fund managers to monitor portfolios for ESG risks, to assess sustainability-related investment opportunities and to provide input to investment analysis. The team also manages our dedicated engagement and voting service reo. Given growing evidence of the impact of environmental, social and governance issues on risk and performance, investing responsibly is an important part of helping our clients meet their long-term investment goals. Richard Wilson, Chief Executive Officer and Chief Investment Officer, BMO Global Asset Management 2
Alignment with values The origin of responsible investment. Screening potential investments against a range of defined criteria allows individuals and organisations to invest in a way that is aligned with their values and beliefs. Risk management The assessment and management of risk is an integral part of any robust investment strategy. Responsible investment means recognising a broader range of material risks, including those posed by environmental, social and governance issues. ALIGNMENT WITH VALUES RISK MANAGEMENT Active ownership OWNERSHIP Consideration of ESG issues does not end when the investment decision is made. Through engagement, and the active use of voting, investors and companies can work together to improve the management of risk, and create the conditions for long-term outperformance. ACTIVE SUSTAINABILITY OPPORTUNITIES Sustainability opportunities Global trends including demographic shifts, climate change, water stress and natural resource constraints are changing our world and creating opportunities for companies able to provide solutions. Thematic funds offer a way for investors to gain access to companies in these high growth areas. 3
Leading expertise in Responsible Investment We bring over three decades of experience in responsible investment with extensive capabilities, a comprehensive range of responsible investment solutions, and ESG considerations integrated into many of our broader investment processes. Responsible investment overview Integration Fund range reo Consideration of ESG factors in the company research process, supporting investment decisions across a number of our capabilities Engagement with companies identified as high ESG risk Funds that apply one or more screens to define the investable universe based on: Ethical criteria ESG standards Sustainability themes Responsible Engagement Overlay Engagement and voting service, addressing global ESG risks Expertise and resource Successfully implementing responsible investment strategies takes specialist knowledge and resource. Three layers of expertise provide the foundations on which our related products are built. Dedicated team our Governance and Sustainable Investment (GSI) team is entirely focused on research, engagement and voting. The team s activities are structured in a way that ensures breadth and depth of coverage, with expertise spanning ESG issues and geographies. Fund management as well as their asset class-specific expertise, our investment teams bring extensive knowledge of the particular considerations involved in the management of responsible investment funds. Responsible Investment Advisory Council an independent body comprised of individuals drawn from a range of relevant backgrounds. They provide advice and guidance particularly with regards to the ethical principles and criteria applied to our screened funds. A history of innovation in Responsible Investment 1984 1987 1997 2000 2006 Launch of Stewardship Growth first ethical strategy in UK Launch of Stewardship Income & Stewardship North American strategies Stewardship North America becomes Stewardship International strategy Launch of Responsible Engagement Overlay (reo ) Founding signatory to Principles for Responsible Investment (PRI) 2007 2010 2011 2014 2016 Launch of Responsible UK Sterling Bond strategy Launch of Emerging Markets ESG Strategy Launch of ESG Risk Tool Rebranded as Responsible Strategy Range Launch of Green Bond Strategy 4
Integration Given the importance of ESG factors from a risk perspective we have worked to integrate ESG considerations across many of our broader investment activities. At BMO Global Asset Management, portfolio investment decisions are always made in the best interests of our clients. Supporting many of these decisions is the belief that companies that successfully manage ESG risks and proactively follow ESG best practices have a greater chance of generating more attractive risk-adjusted returns over the longer term. ESG considerations are integrated into a large proportion of our investment processes. Where appropriate, our research analysts and portfolio managers follow a process that considers, among other factors, the potential impact of ESG issues related to investments in our internally managed portfolios. This analysis informs our decisions on asset allocation, stock selection, portfolio construction, shareholder engagement and voting. Case study: ESG integration in the credit investment process ESG principles have been an integral part of the credit analysis undertaken by our London-based credit research team since 2012. Credit analysts research the ESG profile as an integral part of the analysis process, focusing on those with weak ESG scores as identified by the data, and supported by analysis from our Governance and Sustainable Investment team. Companies with weak ESG scores are also flagged on the Credit Portal. It is this research that identifies whether a company s ESG risks may be important to the credit fundamentals of the company, assessing the potential impact on a company s ability to service or repay its debt. Credit risks could arise if a company faces significant fines, legal costs, or audit or accounting issues, whilst factors such as the potential risks to a company s reputation and brand value are also considered. The credit view may already include these factors on an implicit basis, or the investigation may lead to new insights. Relevant ESG factors are then reflected in our internal credit scores, which are used in portfolio construction. We believe that consideration of ESG issues should be considered as part of the risk management process. Richard Watts, Head of Fundamental Investment and CIO, BMO Global Asset Management (EMEA) 5
Our responsible fund range Our fund range offers a broad range of responsible investment solutions from ethically screened UK and global equity offerings to thematic funds, screened fixed income and sustainability-orientated emerging market equities. Objective Global and International Equity F&C Responsible Global Equity To provide capital growth by investing in an ethically screened and diversified portfolio of global equities of companies with a focus on long-term sustainability. Emerging Market Equity BMO Responsible Global Emerging Market Equity Strategies To provide capital growth by investing in a portfolio of equities of companies that stand to benefit from sustainable development trends in emerging markets while minimising investment risk associated with ESG factors. Benchmark MSCI World Developed MSCI Emerging Markets Launch date and structure Responsible investment approach 13.10.87 (OEIC), 26.10.06 (SICAV) 02.03.10 (Cayman LLC), 08.04.16 (SICAV) At a glance Ethical screening ethical exclusion criteria are used to screen companies before investment can take place. ESG standards companies are assessed for sustainability and/or governance standards. Thematic the strategy targets companies which are set to benefit from long-term sustainability themes. Engagement we conduct an active dialogue with investee companies, encouraging best practice on ESG issues. 6
UK Equity F&C Responsible UK Equity Growth Strategy To provide capital growth by investing in an ethically screened and diversified portfolio of UK equities. F&C Responsible UK Income Strategy To provide income and capital growth by investing in an ethically screened and diversified portfolio of UK equities. UK credit F&C Responsible Sterling Bond Strategy To maximise returns and provide income through investment in an ethically screened and diversified spread of investment grade corporate bonds issued by companies and other non-governmental organisations. FTSE All-Share FTSE All-Share Markit iboxx Sterling Non-Gilts 01.06.84 (OEIC) 13.10.87 (OEIC) 01.10.07 (OEIC) The range is underpinned by a simple philosophy: Invest Avoid Improve Invest in companies that make a positive contribution to society and the environment. Avoid investing in companies with damaging or unsustainable business practices. Use influence as an investor to encourage best practice management of environmental, social and governance issues through engagement and voting. Tailor-made responsible investment solutions Our depth of experience in ESG analysis and screening also allows us to construct investment solutions on an individual basis for clients. Segregated solutions developed to date include a European sovereign bond fund with a benchmark based in part on country-level ESG performance, and a global sovereign bond fund with strict ethically-based exclusions tailored to the client s core values and beliefs. 7
reo : Responsible Engagement Overlay Launched in 2000, reo is an overlay service available to institutional investors. It gives them access to our engagement and voting expertise providing a consistent and transparent approach to active ownership. ESG risk identification Engagement and voting Outcomes Assessment of material ESG risks in client portfolio Monitoring of controversial issues Engagement with companies to address ESG risks Active voting that reinforces engagement Measurable improvements to company ESG policies and practices Supports long-term investor value and risk management How reo works Benefits for reo clients reo is an overlay service and is available on all equity and corporate bond portfolios. We do not have to manage the assets and its application does not impact on the underlying portfolio management activities. Our GSI team identify, manage and report on ESG risks in a client s portfolio. We conduct engagement and voting with companies held in a portfolio with a view to achieving positive change. Alignment between ownership practices and responsible investment policies. Consistent and transparent approach, wherever assets are managed. Comprehensive reporting of engagement progress and outcomes. Supports compliance with responsible investment codes. Companies engaged by country and issue United Kingdom Continental Europe North America Asia (ex Japan) Japan Other 10.5% 30.6% 25.8% 12.2% 9.1% 11.8% Environmental Standards 39.5% Business Ethics 7.5% Human Rights 4.0% Labour Standards 14.9% Public Health 1.5% Corporate Governance 29.1% Social and Environmental Governance 3.7% Milestones achieved by country and issue United Kingdom 16.2% Continental Europe 21.5% North America 13.1% Asia (ex Japan) 16.2% Japan 23.0% Other 9.9% Environmental Standards 27.0% Business Ethics 16.2% Human Rights 5.8% Labour Standards 7.5% Public Health 0.8% Corporate Governance 41.9% Social and Environmental Governance 0.8% Source: BMO Global Asset Management. As at 31 December 2015 8
reo highlights We represent 26 advisory-only reo clients reo covers 97.2 billion in assets under advice* 241 instances of change at companies in 2015 In 2015 we voted at more than 6,300 company meetings Engaged with 1,376 companies across 58 countries in 2015 Source: BMO Global Asset Management, 31 December 2015. *30 September 2016. Institutions recognise our expertise and reo gives them the opportunity to apply this to their existing portfolios. Mandy Mannix, Head of Client Management, BMO Global Asset Management (EMEA) 9
Engagement in practice Environmental: Social: Governance: Policies on environmental issues including climate change, waste and water are growing ever tighter. Our engagement focuses on the quality of companies environmental strategies and management systems, and their ability to comply with existing regulations as well as to adapt to a changing world. Social issues capture risks related to a company s interactions with its workforce, suppliers, customers, local communities, and the public. Our engagement aims to move companies towards best practice in managing labour standards, human rights, public health and business ethics. The way a company governs itself is fundamental to its identity and way of operating. Where companies have boards that fail to provide sufficient challenge and oversight, or governance practices that neglect the interests of investors, this raises questions about their ability to deliver on business strategy. Case study: Stranded assets As the evidence of climate change mounts, the coming decades look set to see a transition towards a low-carbon economy. The question for investors is how quickly this happens. An acceleration in the development of policy could lead to global fossil fuel demand peaking sooner than some companies are projecting, raising a risk of stranded assets high-cost projects left unprofitable by falling demand and prices. We have engaged the world s major global oil, gas and mining companies, joining other investors in asking them to provide greater visibility on how they are stress testing their current investment plans take into account scenarios in which sustainable energy displaces fossil fuel demand. Case study: Bangladesh factory safety For apparel manufacturers and retailers, poor working conditions in the supply chain have the potential to cause severe reputational damage that can ultimately affect brand value. Following the 2013 Rana Plaza factory collapse, we engaged with manufacturers in Europe and the US, encouraging them to support industrywide initiatives to improve safety. We have visited Bangladesh twice to view progress on the ground, visiting factories and holding discussions with workers. We found credible evidence of safety reforms, but also obstacles to progress, including intense price and deadline pressures that can incentivise unsafe production practices. These findings feed back into our engagement dialogue. Case study: Corporate Governance in Japan Despite its position as one of the largest capital markets in the world, Japan s corporate governance practices lag those of its developed world peers. We contacted 80 companies with boards composed entirely of company insiders, highlighting the risks associated with a lack of independent oversight. We travelled to Tokyo to meet with companies in person to press for governance reform, and led an investor initiative with regulators and companies calling for one-third independence on boards by 2017. After years of little change, investor pressure and political change have had an impact, with a new corporate governance code established in 2015. 10
Industry recognition and awards External recognition includes: Money Observer Fund Award F&C Stewardship Income Fund named best SRI UK equity fund 2013 WealthAsia BENCHMARK Magazine House of the Year Award 2012 Outstanding Achiever Award Recognised F&C for innovation in responsible investment FairPensions Award F&C (now part of BMO Global Asset Management) Top-ranked fund manager in the ethical funds survey 2012, which rates screening, engagement and disclosure practices Investment Week Sustainable Investment Awards 2014 Outstanding Contribution Award for F&C (now part of BMO Global Asset Management) 11
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