BMO is launching a new suite of ETFs that are focused on giving investors exposure to the companies that are best incorporating ESG principles into their businesses — and they’re willing to exclude some of the best-known stocks in Canada and the U.S. to do so.
On Tuesday, the bank’s global asset management division is making eight new ESG ETFs available for investors on the TSX. According to a list of responsible investment products in Canada on the Responsible Investment Association’s website, the release appears to bring BMO level with Desjardins as the Canadian firm with the most ESG ETF products on the market.
Of the eight, four are MSCI-equity-index-based ETFs that are made up of the leading ESG stocks in Canada, the U.S., globally and in EAFE (Europe, Australasia and Far East) countries. To be considered for inclusion, companies must pass through a series of screens and then post an ESG score that ranks in the top half of the companies in their given sector.
That meant companies such as Royal Bank of Canada, BCE Inc., Manulife Financial Corp. and Air Canada failed to make it into the BMO MSCI Canada ESG Leaders Index ETF.
“The entire thesis of doing good with your money is sometimes going to exclude some of the names that are very popular in the media or generally and historically high-performing names,” said Kevin Gopaul, the global head of ETFs at BMO Global Asset Management. “I think this is what investors want.”
MSCI and BMO begin their process by immediately eliminating entire sectors such as gambling, tobacco, nuclear power, weapons and alcohol from consideration. Next, they removed companies with low overall ESG scores and those that are involved in ESG controversies. In the last step, they remove names that don’t crack the top 50 per cent of their sector on ESG matters.
This process also led to significant exclusions in the BMO MSCI USA ESG Leaders Index ETF which does not include companies such as Facebook Inc., Apple Inc, Amazon.com Inc. and Netflix Inc.
BMO’s role doesn’t end there. Gopaul said the asset manager is also devoted to using its capabilities as a shareholder of the companies it does invest in to fight for change from the inside. Gopaul points to BMO’s voting record as a shareholder. The bank has voted 24.5 per cent of the time against management in North America. Its major competitors, according to a Proxy Insight report, only did so in the single digits.
When asked if he’s concerned that some companies may take objection to not being included in the ETFs, Gopaul said that that was what he was looking for.
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“This is the whole approach to engagement,” he said. “This is exactly what we want — these types of discussions.”
Also included in BMO’s new suite of products are two corporate bond ESG ETFs and a global high dividend covered-call fund. BMO is also releasing the first ESG asset-allocation ETF, a fund of funds made up of the new ESG products, which is meant to replicate an entire portfolio.
While BMO is giving investors a wide array of options, Gopaul recognizes that the ETFs won’t be for every responsible investor. The ETFs do not exclude the oil-and-gas and cannabis sectors, which some responsible investors are against owning in their portfolios.
Because the ETFs are index-based, Gopaul said, it would be difficult to remove sectors such as oil and gas from the equation and still create products that are balanced and properly replicate the returns of certain geographic areas. BMO does remove fossil fuels from a mutual fund it offers, the Sustainable Opportunities Global Equity Fund, which may still be a viable option for investors wishing to avoid oil and gas.
Gopaul said BMO isn’t sticking to one responsible investing strategy. It’s offering a multitude of them with an apparent goal in mind — to be leader in responsible investing in Canada.
“To be the authority, you need the products, the collateral, the education and you need the commitment,” he said. “If you think of those criteria, we have the ability to be the authority in the country.”