In this episode of the Wealth Experience podcast, Sylvain Brisebois, Head, Sales Strategies and Programs, BMO Private Wealth is joined by Nalini Feuilloley, Director, Responsible Investments, BMO Global Asset Management to discuss how non-financial factors are a viable way to reduce portfolio risk, generate sustainable long-term returns and help investors feel good about investments reflecting their values, and ESG priorities.
Transcript:
Welcome to The Wealth Experience podcast series, where our subject matter experts provide the latest updates on what’s happening in the world around us…brought to you by BMO Private Wealth.
Sylvain Brisebois: Hello, everyone. My name is Sylvain Brisebois and I am Head National Sales Strategy and Programs and a Senior Vice President with BMO Private Wealth. Today we’re going to have a brief conversation about ESG, which stands for environmental, social and governance. Investors are increasingly applying these non-financial factors as part of their analysis to identify material risks and growth opportunities.
With us to expand on this is Nalini Feuilloley, Director Responsible Investments with our BMO Global Asset Management Group. Nalini, thank you so much for joining us today. Now let’s get started with a few questions. Some refer to responsible investment as a fad in investment management. Are they overlooking something here? And why is this approach here to stay in your opinion?
Nalini Feuilloley: So, responsible investment is definitely not a fad. I think that responsible investment is such a widespread space that there are components of it that general public tends to focus on. So people have mistakenly conflated this with ethical investing or value-based investing, which is one of six approaches to responsible investment where you actually reduce your investable universe by divesting out of certain sector’s or certain companies.
In fact, responsible investment is actually very all-encompassing. So, there are a few different approaches that fall under that umbrella which I'll quickly mention which are ESG integration, positive screening, impact investing, thematic investing, and active ownership. Negative screening is definitely a part of that list but it is not the only approach.
In terms of why it’s here to stay, I think everybody’s realizing that sustainability challenges are all around us. It’s really making its way into the mainstream. And for a resilient portfolio over the long term, you’ll want to know that your advisors or your investment managers are taking into consideration sustainability risk, which we characterize as environmental, social and governance.
Sylvain Brisebois: Wonderful. Can you give us an example of that on this ESG, environmental, social and governance, again? Can you help our listeners perhaps better understand that concept?
Nalini Feuilloley: Absolutely. So, in terms of environmental risks, the main one I'll mention is climate change. It’s by far the number one issue that we hear from our investors on a daily basis. The United Nations has been ringing alarm bells for some time to say that we are running out of time before the effects of climate change become irreversible. That deadline is 2030. So countries and companies around the world are finally making commitments to be net zero from an emissions perspective in the next few decades if not sooner. So I'd definitely use climate change as my main environment example.
On the social side, labour standards are continually a front-and-centre issue for investors. And I think COVID has really exposed some of these more dire practices that need to be accounted for, everything from health and safety considerations in the workplace. the allotment of six days to the labour force, and even the recognition of modern slavery in supply chains.
From a governance perspective, I would say diversity and inclusion is an issue that has started to be raised with boards and management all over the world, obviously starting from a perspective of gender diversity in terms of representation. However, that definition is now being expanded to include representation of all minority groups. So I would say that’s another good example.
Sylvain Brisebois: OK, so we’ve talked a lot about this but do you think there’s a little bit of a catchup still to be made? Is there a lack of interest or a lack of understanding perhaps when it comes to responsible investment solutions?
Nalini Feuilloley: I definitely think there’s a lack of understanding. As mentioned earlier, there are many different approaches and ways to implement a responsible investment strategy for an investor. But for some reason, the negative screening/divestment approach seems to have caught the attention of the mainstream.
What I think is important is educating investors on all the ways they can incorporate a responsible investment strategy into their asset allocation decisions. And personally, I think that investors would be equally interested in solutions that employ a positive screening approach, knowing that their managers are looking for investment opportunities that are solving for sustainability challenges.
Sylvain Brisebois: OK, there’s been a lot of press on this and perhaps it’s an argument that is fading a little bit, but does one sacrifice investment portfolio performance when one achieves or incorporates responsible goals in a portfolio? Can you speak to that? Because we’ve heard about this in the past.
Nalini Feuilloley: Absolutely. This is a question we get all the time. So, we are absolutely not sacrificing portfolio performance. Obviously, it depends on the details of your investment strategy, but there have been numerous academic studies over the years that have shown that companies with sound E, S and G practices often [unintelligible 00:05:35] the same performance results if not better results over the long term. Those are investors who are looking at a runway of 20-plus years, they want to ensure that their manager understands these risks to make sure that they’re taken into consideration in their portfolios. So for example, if you think that the effects of climate change will not impact the resilience of certain sectors that you’re invested in, I think you’ll be sadly mistaken.
Sylvain Brisebois: Very good. And perhaps we can thank the younger generation for pushing us a little bit here. I'm generalizing, but this is a conversation that is spanning multi generations, for our clients today and their children, our clients for tomorrow. Can you elaborate on that thought please?
Nalini Feuilloley: Absolutely. So I would definitely agree that the younger generations, the millennials and below, are looking to make meaningful change with all of the decisions that they face on a daily basis. You know, that includes the brands that they buy and consume, the investment decisions that they make and so forth.
However, I think that the general public, including the older generations, the Baby Boomers and above, are bombarded on a daily basis with examples of sustainability challenges in the daily headlines, so everything from the wildfires in the west coast and in Australia to poor labour standards in factories. And I think that you’ll see that most end investors are very cognizant that these are real threats. And you should as an advisor or as an investor increase your questions around what we’re doing to solve for them in the investment decision-making process, both young and old.
Sylvain Brisebois: Wonderful. So there’s been a ton of information here that you’ve just share with us. In summary, could I ask you to have a couple of comments on what you think are the key reasons for ESG to be forming a part of everyone’s portfolio?
Nalini Feuilloley: Absolutely. So the three things I would mention are that ESG considerations are not going away. We all need to ensure that it is a strategy which is used in the management of our own assets, especially for investing over the long term.
The second point is that they are material to the value-creation process. So there have been several examples of where a company has lost significant market value due to an event related to a E, S or G risk that could have otherwise been mitigated. Like examples include Volkswagen and their emissions scandal, or maybe Facebook and the sharing of user data.
And then the third point is around sustainability challenges. They are everywhere around us and really present an opportunity for investors to play a key role in solving for them.
Sylvain Brisebois: Wonderful. So if I'm an investor and I'm interested in this concept, where can I go to learn a little bit more on the subject?
Nalini Feuilloley: I would definitely advise you to go to your trusted advisor for more information. I think the first step in this process is all about education. There is also a website that I can direct you to, which is www.bmogam.com/rileaders, for some good pieces that can bring you up to speed on the space.
Sylvain Brisebois: Wonderful, thank you so much, Nalini. This has been really helpful. And again, thank you for taking some of your time today and sharing your insights.
With ESG investing being a viable way to reduce portfolio risk, generate strong long-term gains as it sounds today, and to make you feel good about yourself along the way, I would encourage our listeners to contact your wealth professionals to discuss the benefits of ESG and how you can incorporate these products into your portfolio.
Nalini, thank you so much again. And to all, be well, be safe. And until next time, have a wonderful start to spring. Take care.
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Disclosures:
The comments contained in this podcast are general in nature, provided for information purposes only, and do not constitute legal, investment, trust, estate, accounting or tax advice. They are provided for general guidance, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. Unless otherwise qualified, any opinions, estimates and projections in this report are those of the speakers as of the release date, are subject to change without notice, and may not reflect those of BMO Private Wealth. This podcast may not reflect all available information.
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