Skip to Main Content

How to Proactively Integrate RI into Your Practice

As the Responsible Investing (RI) market burgeons, Nalini Feuilloley tells Advisors everything they need to know to practically – and successfully – incorporate RI into their practice.

February 2020

Photo of Nalini Feuilloley

Nalini Feuilloley

Director, Responsible Investment Team

Read bio

As the Responsible Investing (RI) market burgeons, Nalini Feuilloley, Director, Responsible Investment Team at BMO Global Asset Management, tells Advisors everything they need to know to practically – and successfully – incorporate RI into their practice, including how to avoid greenwashing, and important issues to have on your radar now.

Get Ahead of the Curve on Future Regulation

It’s no secret that the RI movement has grown exponentially in a short amount of time. Increasingly more mainstream investors have come to accept that RI is no longer a “niche-style” of investing – or a stylistic trend – but rather, a fundamental best practice.

Several factors have contributed to this evolution, including the $30 trillion intergenerational wealth transfer taking place currently1: ageing investors are thinking about the next generation, while millennials – a large and important demographic for Advisors – are making more thoughtful decisions on how they want to contribute to their investment portfolios, as they look to solve the world’s sustainability challenges through the allocation of capital. And here’s the proof: according to a 2019 Morgan Stanley Institute survey of high-net-worth investors, 95% of millennials are interested in sustainable investing.2

Increasingly more mainstream investors have come to accept that RI is no longer a “niche-style” of investing – or a stylistic trend – but rather, a fundamental best practice.

In the institutional market, growth has also progressed enormously on the RI front, spurred by significant regulatory developments. Numerous environmental, social and governance (ESG) integration policies have been legislated globally, including the 2015 Pension Benefits regulations in Ontario. . And further top-down intervention can be expected, especially as regulators and central banks take heed of the potential financial implications of climate change, and encourage greater transparency from investors on how these are being managed..

Case in point: the Federal Government created the Expert Panel on Sustainable Finance to investigate ways the financial sector can help encourage and direct capital flows to support low-carbon Canadian initiatives, which included formal recommendations to promote sustainable investment as “business as usual” within the asset management community, and to provide investors with the opportunity and incentive to connect their savings to climate objectives.

Simply put, sooner rather than later, there will no longer be a choice as to whether we should be responsible investors – or Advisors. It’s a reality we ALL need to embrace within the investment management industry.

*Millennials are born between 1983-2000, GenX 1978-1982, Baby boomers 1949-1967

Sources: (1) PRI 2018 Reporting Framework responses, (2) “Global perspectives on sustainable investing – Global Investment study” Schroders, 2017 (3) Wealth X and NFP Wealth Transfer Report, 2016.

Expanding Your Understanding of Responsible Investing

Nevertheless, there’s still a misconception among Advisors (and their clients) that RI limits their universe, and equates to exclusionary, ethical investing – and therefore divestment. Yet that is only one approach of six under the RI umbrella. Alternatives include ESG integration, where investment managers are saying they analyse these factors from a risk perspective, and weighing them as legitimate business concerns as part of the due diligence process.

Six Different RI Approaches – and Client Talking Points:

While it’s certainly valid to say “I don’t want to focus on thematic funds that address one issue in the RI sphere, such as climate change,” it would be detrimental for your business to disregard how ESG factors play a role in the management of client portfolios – especially for those invested over the longer-term. For example, Facebook showed many warning signs (from an ESG lens) prior to the massive data breach it experienced in 2018 that led to the biggest one-day drop in market value of any company in history. In retrospect, many could have avoided Facebook’s negative impact on their portfolio performance if they had incorporated governance factors into their decision-making processes.

79% of retail investors want to be proactively informed about RI options from their financial services provider, yet only 23% have ever been asked if these products interest them.

Perhaps the biggest hurdle facing Advisors is the fear that RI approaches could conflict with fiduciary duty, or that these strategies can detract from performance. In fact, numerous studies have found evidence to support that taking ESG into account can actually help protect against volatility and downside risk.3

Data from the Responsible Investment Association (RIA) shows that nearly 75% of responsible managed funds domiciled in Canada outperformed their category averages over a one-year period, with similarly high (over 50%) proportions over longer three- and five-year periods.4 That’s why it’s vital for Advisors to take the time to understand what RI is – and what it’s not. We already know that Canadians want to learn how to invest responsibly: according to recent research, 79% of retail investors want to be proactively informed about RI options from their financial services provider, yet only 23% have ever been asked if these products interest them, suggesting a sizeable information gap.5

The Client Conversation: Becoming the Subject Matter Expert

So how do you incorporate RI into the client conversation?

As a first step, education is paramount in order to be effective. While you don’t need to be a specialist on every aspect of RI, you should be able to tell the story, including what it represents today, and what it means in terms of strategies, and the various approaches. Whether that means taking a course (see my list of educational resources below), or speaking to an expert, it’s incumbent on Advisors to grow your knowledge base as part of your professional development.

To start you down the path, click here for a tool to decode the intricate world of RI – helping you maintain an up-to-date toolkit so you can continuously add value, and differentiate your offering for clients.

Whether it means taking a course, or speaking to an expert, it’s incumbent on the Advisor to grow your knowledge base as part of your professional development.

I would then encourage Advisors to proactively broach the conversation and let clients know the different ways RI can manifest in their portfolios should they be interested. For example, you can recommend that you will diligence investment managers on their behalf to assess how ESG factors are integrated. Taking it one step further, pose the question: “do you have any specific values or beliefs you would like to see incorporated into the management of your portfolio?” If clients are passionate about certain causes (e.g. gender diversity, or climate change), then take them through their available options – from negative exclusion to thematic, or impact investing, the latter of which yields both a financial and social/environmental return.

Importantly, it’s about ensuring that clients aren’t stuck in the mindset that RI only represents ethical investing, or divestment, and widening their perspective to the many accessible – and robust – strategies.

Bringing its full-service ethos into the RI arena, BMO Global Asset Management recently launched eight new ESG ETFs, adding to its existing suite of active RI funds to give Advisors – and their clients – the ability to choose the right responsible investment strategy for them.

Accountability: Delving Under the Hood

In terms of integrating RI into client portfolios, holding investment managers accountable is key, and the biggest component of this is delving under the hood, because “greenwashing” – a form of marketing spin that uses green values to deceptively persuade – is real and rampant as RI demand grows. The ESG integration approach is particularly relevant here since it has yet to be defined in exactly how it’s accomplished, and it transcends “RI/ESG” branded products. As a result, how ESG factors are taken into consideration is unique and proprietary to every manager; there is no standard benchmark. But that doesn’t mean it can’t be a valid and robust approach if there’s a material impact on buy, sell and hold decisions. For Advisors, that means asking pertinent questions like “what data sources are you using to screen for ESG?”; “do you have your own proprietary scoring method?”; “how does your approach affect your buy, sell and hold decisions?”

Holding investment managers accountable is key, and the biggest component of this is delving under the hood.

Some managers can answer basic questions readily because they have a stock response ripe and ready. If, however, you dig a little deeper, you’ll undoubtedly be able to discern the leaders from the laggards. Advisors should also question how managers use engagement and proxy votes to encourage ESG best practice with companies, which will help you inform your clients – and engender trust in the process.

Moving Forward with Climate Change

Looking ahead over the medium term, there’s no doubt that climate change will take the focus of the ESG landscape. As such, Advisors should educate themselves on the issue, and try to assess how much climate risk has been priced into their clients’ portfolios. In the run up to the critical COP26 climate meeting later this year, we can anticipate further government intervention, and while this is somewhat removed from the end client, we expect to see disruption in the financial sector if more top-down climate regulation is introduced. Therefore, prioritizing climate change as a central piece in holding investment managers accountable to these environmental factors will help soften the impending blow in the next three to five years.

Crucially, for Advisors, it’s a matter of not disregarding the RI movement and taking it for granted, because the alternative is to fall behind – particularly as client demand escalates. Realize that it’s not simply about branded funds, although these will be the right option for some: it’s about scrutinizing ALL investment strategies through an RI lens, and proving that ESG integration is a demonstrable part of every manager’s skillset and understanding. Ultimately, it’s an opportunity for true partnership – helping your clients fulfill their desire to make a difference, while maintaining healthy returns.

1 Accenture, “The ‘Greater’ Wealth Transfer – Capitalizing on the Intergenerational Shift in Wealth,” 2012.

2 Morgan Stanley Institute for Sustainable Investing, “Sustainable Signals – The Individual Investor Perspective,” 2019.

3 BMO Global Asset Management, “Performance with Principles”, 2017; University of Oxford and Arabesque Partners, “From the Stockholder to the Stakeholder,” 2015; Bank of America Merrill Lynch, “ESG Part II: A Deeper Dive,” 2017; Morgan Stanley Institute for Sustainable Investing, “Sustainable Reality,” 2015.

4 RIA Canada Q2 Funds Highlights, July 2019.

5 2019 RIA Investor Opinion Survey.

BMO Global Asset Management Disclosures:

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

This article is for information purposes. The information contained herein is not, and should not be construed as, investment advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance. The testimonial(s) in this article may not be representative of the experience of other people/advisors. The testimonials are no guarantee of future performance or success. These are solicited testimonials.

®/™Registered trade-marks/trade-mark of Bank of Montreal, used under licence.

* As compared to an investment that generates an equivalent amount of interest income.

®/™Registered trademarks/trademark of Bank of Montreal, used under licence.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. Certain of the products and services offered under the brand name, BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).

BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing.

Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.

BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the ETF facts, fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO Life Assurance Company is the issuer of the BMO Segregated Funds individual variable insurance contract referred to in the Information Folder and the guarantor of any guarantee provisions therein. The BMO GIF Information Folder and Policy Provisions provide full details and govern in all cases. BMO GIF products are offered through BMO Life Assurance, a separate legal entity than BMO Global Asset Management and wholly owned by BMO Financial Group. Segregated funds are only available for sale by individuals with appropriate insurance licences and are not considered a mutual fund. Segregated fund fees are higher than mutual funds as they include insurance fees to provide for the guarantees on deposits at maturity or on death.

Legal and regulatory disclosures

This information is for Investment Advisors only. By accepting, you certify that you are an Investment Advisor. If you are NOT an Investment Advisor, please decline and view the content in the Investor or Institutional areas of the site. The website is for informational purposes only and is not intended to provide a complete description of BMO Global Asset Management’s products or services. Past performance is not indicative of future results. It should not be construed as investment advice or relied upon in making an investment decision. Products and services of BMO Global Asset Management are only offered in jurisdictions where they may be lawfully offered for sale. The information contained in this Website does not constitute an offer or solicitation by anyone to buy or sell any investment fund or other product, service or information to anyone in any jurisdiction in which an offer or solicitation is not authorized or cannot be legally made or to any person to whom it is unlawful to make an offer of solicitation. All products and services are subject to the terms of each and every applicable agreement. It is important to note that not all products, services and information are available in all jurisdictions outside Canada.