Responsible Investing: Busting 5 myths to build a better portfolio

Many people still believe what’s good for the soul – or society – isn’t good for the portfolio or the bottom line. It’s one of many myths that’s caused some investors to shy away from learning more about responsible investing (RI) (and potentially miss out on opportunities in the process). While investing with a conscience may have been one of the early motives behind RI, the case for it today goes well beyond anyone’s world view.

At its core, RI is a risk-mitigation strategy that also happens to steer investors toward companies at the forefront of a changing economy, says Matthew Soegtrop, Director of Responsible Investing at BMO Private Wealth.

Here’s a closer look at some of the myths around RI:

Myth 1: You have to sacrifice performance

Rather than hurt your returns, RI can be a way to improve performance and lower your risk, says Soegtrop. Some Environmental, Social and Governance (ESG) indices as well as popular individual ESG strategies have outperformed their traditional benchmarks over the long term, some significantly so. The Mackenzie Greenchip Global Environmental All Cap Strategy[1], (which is also available in a fund format that has won a Lipper award), invests in the energy transition, and has returned 18% over the past five years (see below), far ahead of the 8% returned generated by its benchmark, the MSCI All Country World Index. Here’s a look at some of the standout ESG performers available for purchase on the BMO Private Wealth platform versus their benchmarks, as well as a broader ESG index.

 

Source: Morningstar Direct

 

Regardless of how some feel about climate change and businesses investing in social impact, these issues represent headline risks that could potentially eat away at a company’s bottom line over time.

Firms with solid ESG policies could attract a premium from investors. “Suppliers, buyers, customers, they don’t want to be doing business with entities that are perceived to be a detriment for the environment or for social considerations,” says Soegtrop. As public markets become more transparent, it’s easier for investors to identify the bad actors. Businesses are seeing it in these terms, too. A recent survey of small and mid-sized businesses by the BMO Climate Institute found almost a third of U.S. businesses with climate plans have them because they expect it will improve their profitability and/or share value.

Myth 2: Responsible investing means avoiding certain sectors

This can be true, but it’s much more nuanced, says Soegtrop. “ESG at its core, has nothing to do with exclusion,” he says. “The priority is risk mitigation.” Rather than avoiding companies, it means utilizing the ESG framework to evaluate the risks and opportunities that a certain company faces.

BMO takes the approach that it’s important to work with clients together with industries, like fossil fuels, to help them lower their carbon emissions. Divestiture only changes who owns these assets, not how they operate, Soegtrop explains. “You need to get dirty to get clean,” he says, borrowing a quote from one of BMO Private Wealth’s subadvisors who is a portfolio manager on one of the energy transition funds. In fact, an economist study found that from 2020-2022, Public firms are selling fossil fuel assets to appease ESG considerations, but those assets are still operational – Private Equity firms purchased USD$60 billion worth of fossil fuel assets from 2020-2022.

 “That said, there is no ‘one-size’ fits all approach in the RI space. At the end of the day, if an investor does not want to own a certain sector or company for political, personal, or religious reasons then we are happy to recommend an appropriate solution to align to that client’s values.”

Myth 3: It’s just a passing fad

Apart from being around in its current form for about 40 years, RI is one of the fastest growing areas of investment, says Soegtrop. Asset managers are taking ESG integration very seriously. Many are going beyond looking at board structure and taking social and environmental consideration more seriously. The BMO Climate Institute found almost 70% of small and mid-sized businesses expect the physical impacts of climate will disrupt operations at some point over the next five years, and many say severe weather patterns are already creating challenges.

Another reason it’s not a fad: Younger investors are also more attuned to responsible investing. Soegtrop says he’s experiencing this first-hand, recalling a recent meeting where a mother brought her daughter into a conversation about their portfolio. “All the daughter wanted to know about was what we’re doing from a sustainability standpoint,” he says. “If this is starting now, what is this going to look like in 10 years?”

Myth 4: It’s too political

There are very clear global trends that support a well-defined ESG process, regardless of which party is in power. The climate transition is a historic investment opportunity, which is something everyone can get behind, notes Soegtrop. “There is going to be more money spent on the energy transition tomorrow than there is today,” he says.

He recalls meeting with a wealthy client whose money was all tied up in oil and was apprehensive about RI strategies. In these situations, Soegtrop likes to keep the conversation focused on the benefits of diversification, using RI as a hedge, or as a differentiated return stream. “From an investment standpoint, there is just so much merit to the opportunity,” he notes.

Myth 5: RI/ESG strategies are all the same

Saying all RI or ESG strategies are the same is like saying all U.S. funds are identical. In Canada, 94% of asset managers say they do some form of ESG integration, says Soegtrop. But he contends that if you want to invest responsibly you have to look closely at the strategy. “Knowing the board composition, or how management is compensated, should be a bare minimum when considering an investment opportunity,” notes Soegtrop. “Materiality of use of ESG integration as well as the nuances of what an RI product is actually purchasing needs to be understood, as it is not binary.”

When talking about these myths, the important takeaway for Soegtrop is that there are important subtle distinctions in the RI space. Investors need to get past the buzzwords and the all-encompassing descriptors and look at the value these investments can offer to their portfolios. The scrutiny is healthy and welcomed, he says.

Responsible investing goes far beyond feeling good about where you put your money, it’s also a critical lens you can use to help you manage risk in your portfolio – and that’s no myth.

 

[1] The Mackenzie Greenchip All Cap Strategy is an institutional mandate managed by the Mackenzie Greenchip team with an inception of January 2008. The strategy is available for purchase on the BMO Private Wealth platform in a public mutual fund format (Mackenzie Greenchip Global Environmental All Cap Fund) that has inception since October 2018 and via a pooled fund (Mackenzie Greenchip Global Environmental Fund) which has approx. 90% overlap with the Mackenzie Greenchip All Cap Strategy.

 

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