Brand Knowledge

Help your clients invest according to their principles

Published on May 19, 2016 12:33

The responsible investing (RI) segment of the investment industry is growing rapidly, with assets under management increasing over 68% between 2012 and 2014, according to the 2015 Canadian Responsible Investment Trends Report by the Responsible Investment Association (RIA). And as the RI segment grows, the types of solutions available to investors expands, providing advisors with more opportunities to find suitable investments for their clients.

Christina Collini, Senior Manager, Product Strategy & Implementation, BMO Asset Management Inc., explains why the RI solutions are growing: "Institutional investors, particularly pension funds, are a key driver of RI growth, largely as a result of new policies mandating the inclusion of RI strategies in their portfolios. Interest is also increasing among retail investors, as investors are becoming more environmentally and socially aware, and they are looking to align their investment portfolios to their principles."



Digging deeper into RI, we find the socially responsible investing (SRI) and impact investing sub-categories. SRI refers to the inclusion or exclusion of certain companies based on specific criteria, such as those that profit from fossil fuels. Impact investing refers to investments made in companies, organizations and solutions with the intention of generating social and environmental impact alongside financial returns.

Perhaps the most interesting aspect of RI is the correlation between corporate responsibility and performance. The RIA reports that 87% of impact investors who sought competitive returns met or outperformed their targets in 2013. RI is both a means to match investments with social consciousness, as well as a way to seek potential outperformance.

Going fossil fuel free
"Fossil fuel free" investing refers to the exclusion of companies that are involved in the development and delivery of fossil fuels. Obviously, the majority of these companies are primarily in the energy sector. The BMO Fossil Fuel Free Fund applies a transparent approach by only excluding companies that are directly involved in fossil fuel operations.

"Fossil fuel free funds help match investors' portfolios with their social beliefs," says Collini. "But there are also significant strategic and financial reasons to adopt a fossil fuel free mindset; namely, protection against stranded assets." Stranded assets occur when the cost of extraction is greater than the value of the asset, meaning it's simply cheaper to leave it in the ground. Perhaps the most common event that leads to stranded assets is a significant change in price. For example, the advent of new or innovative technology that increases supply would put downward pressure on price. Another concern is expanding regulation. Today, global governments are broadening their focus on regulating fossil fuels and being less dependent on fossil fuels, making the likelihood of carbon pricing (i.e., a type of tax on carbon emitters) a distinct possibility. This intensified scrutiny on fossil fuels could put further pressure on the price of extraction.

However, a major challenge facing Canadians who want to avoid exposure to the fossil fuel industry is Canada's significant exposure to energy companies. Currently, the energy sector makes up approximately 20% of the Canadian equity market.1 If a Canadian investor wants to remove fossil fuel companies from their portfolio, they are looking at a relatively small investment universe if they keep their portfolio entirely in Canada. Investors can benefit from a professionally managed solution because a fossil fuel free fund can diversify its holdings across North America and the globe in order to build a strong portfolio of fossil fuel free companies.

Embracing gender diversity
There is more to the RI story than just fossil fuels. "A burgeoning segment of RI is called impact investing," says Collini. "The goal of impact investing is to generate a positive impact or influence on environmental or social challenges … while also generating strong returns. An example of this would be investing in companies that support gender diversity, including those with female Chief Executive Officers and/or meaningful representation of women on their Board of Directors."

Interestingly, there are consistent, repeatable results from studies that show a correlation between diversity and performance. Namely, companies that embrace gender diversity on their Board of Directors show a higher return on equity, a higher price-to-book value and a greater return to shareholders, when compared to companies with no women on their boards. As Newsweek aptly pointed out, "Women are the biggest emerging market in the history of the planet."2


Today, it can be challenging for retail investors to embrace gender diversity in their portfolio. First, they need to define which metrics best represent gender diversity. Once complete, investors must conduct further research to determine which companies meet – and maintain – specific gender diversity metrics. This can be a very time-consuming endeavour. To participate in impact investing in general, and gender diversity in particular, a professionally managed investment solution can be a logical, convenient option for investors.

Next steps for advisors
Looking ahead, it is likely that the RI segment of the investment industry will trend higher. As more research reveals the positive effects of environmental and social considerations on investment performance – as well as the industry's ability to help investors align their investments with their social values – RI will continue to benefit from heightened retail and institutional interest.

Advisors who stay on top of significant trends are typically in the best position to help their clients, and RI is no different. But how can advisors know if clients are good candidates to add RI solutions to their portfolio? Engage them directly. Advisors can start with women and younger clients as they are typically the investors most interested in RI solutions. If they respond positively to the principles of RI, advisors can offer proof points to further explain why RI may be a suitable way to address their concerns, while still making sense from an investment perspective.

1 http://web.tmxmoney.com/index_sector.php?qm_symbol=^TSX
2 Newsweek, "Women will rule the world," July 2010.

BMO Global Asset Management comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp. and BMO's specialized investment management firms. BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and a separate legal entity from Bank of Montreal. BMO Mutual Funds refers to certain mutual funds and/or series of mutual funds offered by BMO Investments Inc., a financial services firm and separate legal entity from Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in mutual funds and exchange traded funds. Please read the prospectus before investing. Mutual Funds and exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.

BMO is a registered trademark of Bank of Montreal, used under license.

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