In 2020, we saw a continued uptick in interest in how to use our money to invest in sustainable companies. In Europe alone, over €230 billion flowed into sustainable funds according to research firm Morningstar.
We know from our own mailbag that many people are starting to question how our money is put to use by the investment and pensions firms we entrust with our savings. It’s not always a simple story and trying to sort the non-genetically modified wheat from the chaff can be horribly confusing.
We talked to Keith Balmer, expert of the BMO Sustainable Universal MAP fund range, to understand a little more about what goes on behind the scenes.
First up, this range of 5 funds is made up of ‘multi-asset’ funds.
As the name suggests, these funds have lots of different types of investments in them – you’re asking Keith and his team to do all the selection, monitoring and management on your behalf. Think of it like an investment playlist you can just follow – without having to be a music guru.
It’s for them to worry about whether to back the US, Asia or Europe right now; how much should you have in shares, bonds or cash; and which companies make the grade, ticking both financial and sustainable boxes. All you have to do is decide the level of volatility, or risk, you are happy with.
The Cautious flavour, for example, will have larger amounts of cash and cash-like investments in it, making for a smoother ride. It won’t ever be top of the pops in terms of % returns, but you won’t have such pronounced ups and downs to contend with either.
The most recent adventurous fund might sound a bit alarming, but this just means they can have about 95% of your money in shares, so expect your money to have good years and bad years – the hope is this volatility will also accompany better returns over a longer-term period such as 7+ years.
As always, this decision largely comes down to timeframes. The longer you can invest for, the more adventurous you can be.
The team review the % weighting of shares, bonds and cash on a monthly basis and have the option to tweak in response to global events and news.
Part of the team’s guiding principles include avoiding backing harmful products or services. So there is a blanket ban on weapons, tobacco and fossil fuels. Full-stop.
Eliminating fossil fuels might seem obvious but under the bonnet, many sustainable funds actually own companies whose main income source is fossil fuel reserves. Huh?
This is a big debate. Some argue that the big seemingly-bad-boys of fossil fuels are also those investing the most in clean energy research, so to starve them of cash is counter-productive. It is only by supporting their R&D that they will develop, change, and progress. Another view is that if we punish them by selling our shares in a moral sulk, the shares will get cheaper and cheaper, creating interest from unscrupulous quarter such as private equity firms. They buy the oil firm, take it private and suddenly any notion of transparency, accountability, or pressure to change goes out of the window. So goes the argument.
Expect to hear more about this – it will become a huge battleground in future as fund managers seek to ‘out green’ each other.
There will be a diverse range of opinions but if you’re one of the many who prefers not to back fossil fuels with your savings, there are options out there for you. Just don’t assume that a sustainable fund will automatically ban these.
As well as no core nasties, the BMO fund actively aims to back those companies which have either clearly sustainable products or services, evidencing some benefit to society, or those which act in a sustainable manner.
So it’s not just taking out ‘bad’ stuff, but actively backing more progressive businesses. Hoya Corporation is an example currently held in the funds – a Japanese optical products specialist which supports people around the world through production of eyeglass lenses, contact lenses and intraocular lenses used for cataract operations, combatting the leading cause of blindness worldwide.
It's worth reminding people that although you can find Low Carbon funds or Fossil Fuel Free funds, the broader church that is sustainable investing of course has a much broader remit.
The 17 UN Sustainable Goals are held as a guiding framework. Does the company which could form part of the portfolio contribute to any of these goals, such as Good Health and Wellbeing, or Climate Action?
Any analyst can now filter companies through an ESG (environmental, social and governance) lens. Many global indices (baskets of investments such as the FTSE100) will have ESG-screened equivalents, where those firms with poor records on the environment, staff management and corporate governance will be automatically knocked out.
Many investment teams use this as a data-led way of narrowing their investment universe down. BMO choose to eliminate any company falling in the bottom quarter when screened by ESG criteria. However, there’s an overlay of subjective interpretation here so to be precise, currently 98% of the investments held are in the top three-quarters. If the team think any firm is on an upward trajectory (getting steadily better) they have discretion to include.
Individual analysts will identify companies or investments they like, using sustainability criteria alongside more traditional financial analysis methodologies. These stocks or bonds are then vetted by the Responsible Investment team. Do they make the grade? Do they contribute to the UN’s 17 Sustainable Goals?
Decisions are seldom an obvious yes or no. Despite living in a world of algorithms, many of the inputs to these calculations and assessments are subjective in their own right. And what if a company ticks some boxes, but not others?
Keith cites Tesla as an example. He says that the product is ground-breaking and a market leader. Most revenues come from the core activity which clearly has a beneficial impact on the climate. However, the stock is not held in the portfolios for reasons both traditional (the valuation looks high) and ESG-led (some concerns around governance).
2020 was a very good year in general for sustainable funds as the pandemic, quite literally, brought some sectors to a standstill.
Close to home, our FTSE100 is not jam-packed with sustainable firms. It’s heavily influenced by commodity prices including oil. There are other components which were negatively impacted by the pandemic – airlines, for example. Because the traditional core UK index had a bad year, by comparison, sustainable alternatives were arguably handed ‘free outperformance’. They had a much better year.
That said, there are early signs in 2021 that the pendulum could swing the other way as 2020’s punished stocks swing back to favour. Every dog has its day and we expect there to be short-term swings and roundabouts when it comes to performance.
Over the long-term however, the case for sustainable investments is growing. It doesn’t take a genius to conclude that better run companies which are more efficient and have happier staff should survive, thrive and generally do better.
Sustainable investing will continue to hit the headlines in 2021, fuelled in part by Rishi Sunak’s Green Bonds to be launched by NS&I in the summer. Think War Bonds for the woke.
What is sadly predictable is that - as the industry sees the growth in customer interest - more turf wars will emerge on who is the greenest and the cleanest. Most will claim they have been doing this for decades. Look out for the ‘DNA’ claim! It comes up everywhere :0)
Somewhat depressingly a former Chief Investment Officer of global investment giant BlackRock recently wrote “This multi-trillion-dollar arena of socially conscious investing is being presented as something it’s not. In essence, Wall Street is greenwashing the economic system and, in the process, creating a deadly distraction. I should know; I was at the heart of it”. Ouch.
We will all have to dig a little deeper than a fund name to see what really lies under the bonnet. And who is pulling the strings. Like you guys reading this, I have limited time and capacity to spend hours and hours investigating. So how to navigate this space?
Whether we are backing sustainable investments for purely financial, or purely altruistic motives (and frankly I’m in the middle), we need to get clearer on what matters to us, on what are absolute No-Nos – and then check out relative performance over at least a 3-year period.
A quick dig into a factsheet (check the top 10 holdings) could indicate early alarm bells. We had a mail recently from someone who had chosen the Socially Responsible Portfolio on a large robo adviser. And was then horrified to learn that they held oil stocks.
And understand the lingo. Ethical funds are all about taking out the nasties. Low carbon funds are kinda obvious. Sustainable funds tend to focus more on positive support of companies which map to the UN’s 17 SDGs. And impact funds have much higher proof points so tend to have few investments in and can be less liquid. You can’t sell a windfarm quickly. (Not that I’ve ever tried…)
That’s like a question to a PhD student, not something for a finance article! But it does redefine the ‘active’ versus ‘passive’ debate in asset management. Low-cost buying of an entire index with some computer-generated screeners doesn’t lend itself very well to sustainable investing in my book. But do we trust active managers to morph into our moral guardians!?
BMO has a final string to its sustainable bow – the Responsible Investment Advisory Council. Populated with folk such as the Archbishop of Canterbury no less, this group includes those from religious, environmental and labour standards backgrounds, who are there to make sure that any investment in the portfolios is defensible. I’d love to be a fly on the wall in these conversations which really start to challenge received wisdom about what a fund manager’s role should be. And what the role of these stewards of our money should be moving forward.
As Keith puts it, sometimes things get very grey, and if we think back to these funds’ overwhelming objective – to deliver some benefit to society in a sustainable way – the inputs get far too complex for anyone to put into an algorithm. In theory, human-led active managers should excel here compared to the passive computers, but proof points and evidence can still feel hard to find and understand.
Our options for sustainable investing get broader every day and it remains on us to do some groundwork to look beyond the label. The good news is that there are simple, ready-made options out there for those of us who lack the time or experience to assemble a portfolio ourselves.
BMO is sponsoring our Sustainable Savers pages. As part of this we were commissioned to interview the fund manager of the Sustainable MAP range and to write up a description of what the fund is and how it works. The views in this piece are the views of the author.
Those interested in proof points and further reading may like to download the BMO Impact report which goes into more detail on what lies under the bonnet.