For professional investors only Fiduciary Management€¦ · For professional investors only This...

Classification: only to be shown if not public

Embedding ESG criteria in

Fiduciary Management

Christy Jesudasan

Jonathan Smith

Fiduciary

Management

WF 777303 – UK

For professional investors only


The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get

back the original amount invested.

Screening out sectors or companies may result in less diversification and hence more volatility in investment values

Investment risk


3

Today’s

Agenda

Introduction

Framework for providing advice

Portfolio in practice

Today’s agenda


Fiduciary Management:

Introduction

4

Classification: only to be shown if not publicWhat is fiduciary management?

5

ADVISE

IMPLEMENT

Portfolio

construction

Growth

assets

Matching

assetsInvesting

sustainably

150+

Fiduciary Management clients globally

c.£200bn

total AUM over a 150-year history

MONITOR

Source: BMO Global Asset Management as at 30 June 2019.

30+yrs

FM experience with £20bn AUM

Daily funding level monitoring /

de-risking

AUM £30bn

• Strong track-record

25+ experts

• 1st ever collective

investment vehicle in

the world

AUM £40bn

• 500+ 3rd party

managers and 800+

strategies

• 1st ever risk targeted

multi-manager fund in

the UK

£100bnliabilities under management

• 500+ LDI clients

• 1st in Greenwich LDI

Survey

• 1st ever LDI trade in

the UK

£150bn Under advice

• 30+ year heritage

15+ experts

• 1st ever Responsible

Investment Fund in

Europe

ESG is embedded

in everything we do

• Corporate culture and

policy

• Responsible Investment

team

• Dutch FM business

• Responsible fund range

• Voting and engagement

Investing

sustainably



Framework for providing advice

6

Classification: only to be shown if not publicPrinciples

7

Source: BMO Global Asset Management. For illustrative purposes only.

Return

Risk

Real world impact

Classification: only to be shown if not publicTrustees’ fiduciary duty when investing

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Source: Law Commission (2014) - “IS IT ALWAYS ABOUT THE MONEY?” Pension trustees’ duties when setting an investment strategy: Guidance from the Law Commission.

Sackers (2019) - A practical approach to ESG

Invest with the purpose

of paying member benefits

Act with Care, Skill and Diligence

(“prudent person principle”)

Classification: only to be shown if not publicWe discuss clients’ ESG beliefs and where advice could add value

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Knowledge of

ESG

Corporate

policy on ESG

Exclusion

choices

(best

practice)

Attitude to

engagement

Impact

investing

(dedicated

allocation)

Trustee Corporate Exclusion Engagement Impact

Training

needed

Strong

view

Low

Longer

term

Keen to

develop

HIG

HL

OW

Classification: only to be shown if not publicFiduciary duty: implications for ESG strategies

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Return

Risk

“Efficient

frontier”,

without ESG

implementation

Evidence suggests many

policies/strategies with positive ESG

characteristics will have better long- term

financial outcomes

However there may be a pay-off in

some circumstances; e.g. if the ESG

policy/strategy is expensive,

governance intensive or materially

limits the ability to diversify the

portfolio. These are less likely to be

permissible

ESG policies/strategies

based on non-financial

considerations may be

permissible if they do not

have a material negative

impact on financial

outcomes

Classification: only to be shown if not publicBeliefs: The benefits of ESG integration

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Source: BMO Global Asset Management, J.P. Morgan, Barclays as at Jul-19.

“We believe that considering environmental, social and

governance issues in investments makes sound financial sense,

as well as being the right thing to do: this view is increasingly

backed up by research and evidence.”

BMO Responsible Investment Team, ESG Viewpoint, Nov 2017

“Our key takeaway is that ESG can enhance your portfolio by

reducing volatility, increasing Sharpe ratios and limiting

drawdowns.”

J.P.Morgan, ESG Investing Dec 2016

“A positive ESG tilt in bond portfolios resulted in a small but

steady performance advantage. Issuers with high

Governance scores experienced lower incidence of downgrades

by credit rating agencies.”

Barclays, The case for sustainable bond investing strengthens,

Oct 2018

“”

“”

“”

Classification: only to be shown if not publicESG: theory and practice (active management)

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1 See BMO GAM paper “Performance with principles: How can ESG investing support financial returns?” for a detailed summary of the academic evidence.

BMO beliefs

Applying beliefs to your portfolio

- Assess how managers integrate ESG considerations

- Favour approaches with robust engagement/stewardship practices

- Favour approaches that have limited or no blanket sector exclusions

1) There is a positive relationship between company performance and ESG characteristics1.

2) ESG issues can be less well understood and harder to quantify than more traditional performance

drivers. This creates opportunities for skilled active managers to exploit.

Classification: only to be shown if not publicESG: theory and practice (asset allocation)

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1 See OECD paper “Investment governance and the integration of environmental, social and governance factors” for a useful summary, as well as some specific scenarios.

BMO beliefs

Applying beliefs to your portfolio

- Incorporate climate change into long-term expected return assumptions and risk analyses (e.g. scenarios)

- Consider schemes’ time horizon

- “Universal Owner” considerations are particularly relevant for LDI portfolios

- Consider ESG-specific opportunities and risks in alternative assets, e.g. infrastructure and catastrophe bonds

1) Some ESG factors, particularly climate change, will have a meaningful impact on long-term

economic growth and asset class performance1. A wide range of outcomes is possible depending

on global action.

2) We believe in the “Universal Owner” concept: investors can improve their long-term financial

performance by acting in such a way as to encourage healthy and stable economies and markets.

Classification: only to be shown if not publicGlobal Warming Pathways

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Diagram Source: Climate Action Tracker Database: ‘Warming Projections Global Update Paper - Dec 2018

Funding Level Data: Study by Ortec Finance - analysis of several Dutch Pension Schemes forecasted results from 2019 - 2100

• The ramifications of climate change can vary substantially depending on the global warming path taken

• These pathways form the basis of climate change related assumptions in ALM models

Funding levels could

drop by 80%?

Funding levels could

drop by 20%?


Property

Infrastructure

Corporate

Bonds

Transition and physical risks

• Transition and physical risks will affect all asset classes

• Such risks need to be incorporated into ALM models

Gilts

Property

Infrastructure

Corporate Bonds

Equity

Source: Cicero Climate Finance ‘Shades of Climate Risk: Categorising climate risk for investors’. Asset allocation for illustration, not representative of a particular scheme

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Portfolio in practice

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Classification: only to be shown if not publicIllustrative portfolio

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Target Band Description

Equity

strategy38% (28-48%) Global equity

Strategies / exposure

Value Stability / low vol

Momentum EM

Growth

Size

Liquid credit

strategy19% (10-30%)

Specialist

credit

managers

Global credit (active or Buy & Maintain)

HY Debt Absolute Return

EM Debt

Alternatives 21% (10-30%)Bespoke to

each client

UK/European Property

Infrastructure Liq. Alts strategies

IL Securities (catastrophe bonds)

LDI 22% (15-30%)

Bespoke

fund or seg

strategy as

applicable

Liquidity funds Dynamic LDI funds

Unlevered funds Higher Leverage funds

Swap LDI Funds Seg. LDI if applicable

Gilt LDI funds

Wider toolkit – non-standard

subject to client goals, illiquid

tolerance and training

Micro cap

Synthetic equity strategies

Synthetic credit strategies

Convertible Bonds

Hedge Funds & L/S strategies

Private Equity (L/S)

Closed End Infrastructure Private Debt

Equity Linked LDI funds

Credit Linked LDI (end game ) funds

Tail risk hedging (option and replication

strategies)

ESG integration?

Manager selection process

Engagement by 3rd party

managers

Credit external: Manager

selection process

Credit internal: embedded in

bond selection and engagement

Manager selection process

(results in responsibly themed

alts being used e.g. renewable

infrastructure assets, Social

housing etc.)

Engagement of counterparty

banks

Classification: only to be shown if not publicIntegrating ESG into LDI

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1. Counterparty selection and monitoring

2. Counterparty engagement

• Historic focus on corporate governance and business ethics

– Corporate governance (including board accountability and effectiveness, executive remuneration)

– Risk & compliance systems (including AML and KYC procedures)

– Business ethics and culture

• Emphasis for 2019: explore sustainability risk policies and practices regarding the counterparty’s management of their

environmental & social impacts with a focus on:

– Focus on counterparty banks with lowest environmental and social scores

– Include greatest exposure counterparties

Classification: only to be shown if not publicEvidencing the outcome of engagement work

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Number of engagements with

25 counterparty banks

Company #eng. 2017 -to date Themes Milestones

HSBC HOLDINGS PLC 17

Governance: executive pay, succession

planning, culture and business ethics; risk and

compliance: AML, KYC, financial crime; cyber-

security, ESG performance, green bonds.

Board composition (4); improvement in risk and

compliance mechanisms; sustainable finance

pledge; stop financing coal power stations, arctic

offshore drilling & oil sands projects; palm oil

company review

JP MORGAN

SECURITIES PLC11

Governance (board composition, diversity

executive pay, clawback disclosure); cyber-

security; tax

n/a

GOLDMAN SACHS

GROUP INC8

Governance (CEO succession, diversity,

executive pay)Executive compensation reform (2)

UBS GROUP AG-REG 6Governance (executive pay, succession plans,

culture and strategy)n/a

LLOYDS BANKING

GROUP PLC6 Governance, cyber security & data protection Committed to improve reporting on climate risks

BARCLAYS PLC 5

Governance (board remuneration, AML, cyber-

security), environmental evaluation of lending

practices, green bonds

Committed to align its reporting on climate change

with the guidelines published by the Task Force for

Climate Related Financial Disclosure (TCFD)

ROYAL BANK OF

CANADA5 Governance (board composition) n/a

TORONTO-DOMINION

BANK5

Governance (succession plans, executive

pay), environmental impact & disclosure

(TCFD)

n/a

GOLDMAN

SACHS

GROUP INC

8

Governance (CEO

succession, diversity,

executive pay)

Executive compensation

reform (2)

Company#eng. 2017 -

to dateThemes Milestones

87 20Number of milestones

(improvement in a company’s

ESG practices)



Summary

20

Classification: only to be shown if not publicSummary

21

DB schemes focus on

financial impact with

scope for non-financial

considerations

Integrate into asset

allocation and approach

to active management

Classification: only to be shown if not publicDisclaimer

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell

any products that may be mentioned.

BMO Global Asset Management does not provide tax, accounting, regulatory or legal advice to its clients, and all investors are advised to consult with their tax,

accounting, or legal advisers regarding any potential investment.

For professional investors only

This financial promotion is issued for marketing and information purposes only by BMO Global Asset Management in and the UK.

The information provided in the marketing material does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell or

otherwise transact in the Funds.

©2019 BMO Global Asset Management. Financial promotions are issued for marketing and information purposes; in the United Kingdom by BMO Asset

Management Limited, which is authorised and regulated by the Financial Conduct Authority; in the EU by BMO Asset Management Netherlands B.V., which is

regulated by the Dutch Authority for the Financial Markets (AFM); and in Switzerland by BMO Global Asset Management (Swiss) GmbH, which is authorised and

regulated by the Swiss Financial Market Supervisory Authority (FINMA).

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Classification: only to be shown if not publicContact us

©2019 BMO Global Asset Management. Financial promotions are issued for marketing and information purposes; in the United Kingdom by BMO Asset Management Limited, which is authorised and regulated by the Financial Conduct

Authority; in the EU by BMO Asset Management Netherlands B.V., which is regulated by the Dutch Authority for the Financial Markets (AFM); and in Switzerland by BMO Global Asset Management (Swiss) GmbH, which is authorised and

regulated by the Swiss Financial Market Supervisory Authority (FINMA).

Extensive worldwide investment capabilities

• Total focus on clients

• Comprehensive range of products

and solutions

• Defined expertise – including a suite of specialist investment

boutiques

BMO Global Asset Management (EMEA) – Head OfficeExchange House

Primrose Street

London EC2A 2NY

Tel: +44 (0) 20 7628 8000

bmogam.com

BMO Global Asset Management – Edinburgh6th Floor, Quartermile4,

7a Nightingale Way,

Edinburgh EH3 9EG

Tel: +46 (0) 207 628 8000

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Telephone calls may be recorded.

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