Greater Transparency Paves the Way for ESG Investing
With change accelerating in RI/ESG reporting standards, asset managers must proactively deliver transparency in their investment process and performance. Erika Toth, Director, Institutional & Advisory, BMO ETFs, sets a baseline for those conversations with an inside look at the MSCI ESG Leaders Indexes.
Uncertainty about RI/ESG reporting
As my colleague Mark Webster alluded to in his June commentary, greater scrutiny is being directed towards RI/ESG exposures — both from industry veterans and governments alike.
Meanwhile, divisive debates regarding RI/ESG analysis continue to fester. Politics and partisanship have engulfed the dialogue, causing further confusion. Recent issues include:
- Florida prohibiting ESG integration for all state pension funds (approx. $228 billion in AUM), the implication being that ESG considerations are more political than investment-related.1
- Texas targeting pro-ESG fund managers for potential divestment – including BlackRock, Credit Suisse, UBS and others. The blacklist is mandated across all state pensions.2
- Climate change continuing to be the highest-ranked risk in the latest Canadian Institute of Actuaries report, followed by pandemics and infectious diseases.3
- Insurance premiums risings to defend against the risk of climate litigation.4
- Higher energy prices and conflict in Europe accelerating change towards renewable power.5
ESG exposures also face criticism for sometimes confusing reporting standards. Lack of consistency on measurement criteria among IFMs has, in the past, undermined institutional confidence in how RI/ESG exposures are evaluated. However, significant improvements are already in the pipeline according to recently published guidance from Canadian and U.S. regulators. For example:
- The U.S. SEC has proposed enhanced disclosure requirements that are designed to protect investors and deliver deeper education on RI/ESG portfolio construction.6
- Canadian Securities regulators are conducting reviews on ESG-related fund disclosures to manage the “increased potential of ‘greenwashing’.”
- The CFA Institute has compiled ESG disclosure standards with the intent of educating investors, addressing current gaps in regulation, and harmonizing disclosure practices in different markets.
On both sides of the border, reform appears to be a high priority. One of the positive outcomes will likely be greater transparency for asset managers who seek to understand how their investments impact the world.
A disciplined approach to ESG investing
Perhaps helpful in clarifying recent controversies, MSCI ESG Leaders Indexes use a rules-based approach focused on transparency and discipline. Sector weightings are neutral relative to the benchmark and target 50% of the market capitalization within each sector.
All exclusions to the funds are very clearly stated – companies earning a significant portion of their revenues from tobacco, alcohol, gambling, conventional weapons, civilian firearms, nuclear power generation are omitted from the indexes. Businesses embroiled in controversy are also removed. The result is a cap-weighted portfolio with low tracking error.
But note, ESG indexes tied to broader markets will typically track more closely than regions with fewer names to screen from. For example, the relative depth and breadth of USA, World and EAFE markets leads to a tracking error of 1 to 2%. Meanwhile, Canada is at approximately 3%, and China and India come in between 6 and 7% due to their smaller investable universes.
Our ETF suite provides access through low-cost solutions that capture ESG performance in a predictable way, and can sustain liquidity in the roughest of markets. Although the funds were added to the BMO ETF product lineup in 2020, the underlying indexes track are not new – see the list below. Interested parties may contact their BMO ETF Institutional Specialist for more detailed information on these track records.
Underlying Index |
Inception Date |
MSCI World ESG Leaders Index |
2007 |
MSCI USA ESG Leaders Index |
2010 |
MSCI EAFE ESG Leaders Index |
2010 |
MSCI Canada ESG Leaders Index |
2011 |
MSCI China ESG Leaders Index |
2013 |
MSCI India ESG Leaders Index |
2013 |
MSCI World ESG Leaders Index
The portfolio has either matched or outperformed its parent index returns over longer time periods. For example, although YTD, 1- and 3-year returns currently lag, the data shows 5- and 10-year returns beat the benchmark. Tracking error is low at 1.29%, standard deviation and drawdown rates are comparable, and it remains well diversified at over 700 companies.
Over shorter time periods, you will be more likely to see outperformance or underperformance. But the longer the time period, the closer to the parent index returns it will be.
MSCI ESG China Leaders Index | MSCI ESG India Leaders Index
Our China and India country index ETFs were converted into their present versions by a shareholder vote at the end of 2021. The results were broader portfolios, direct holdings (rather than ADRs), and a higher quality bias in the equity selection.
Significant carbon risk reduction took place across the board. China and India led the pack with 63% and 60% fewer emissions, respectively. The Leaders indexes for the U.S., Canada and World provided less of a reduction on an absolute basis, but the numbers were still meaningful:
Carbon Risk Reduction by Region 2022 |
|
China |
63% |
India |
60% |
USA |
54% |
Canada |
47% |
World |
45% |
Sources: MSCI Leaders Indexes, as of September 30, 2022.
Continuous ESG monitoring is critical
Family offices have access to extensive data on ESG performance, yet lack a clear model upon which to wage their discussions. Without reliable methods for understanding impact, such as discounted cash flow, how do we arrive at informed opinions?
We believe in establishing a clear objective and achieving incremental progress in that direction. To that end, we offer the BMO ETF ESG Quarterly Report Card, a powerful tool that establishes a baseline for conversations with clear data and reliable performance-tracking against the benchmark. Transparency is key with ESG investing, and this report delivers it.
For further guidance on the BMO MSCI ESG Leaders ETFs, please consider the resources below or contact your BMO ETF Institutional Specialist.
- BMO Quarterly ESG Report Card
- CFA Institute’s recent materials on Global ESG Disclosure Standards for Investment Products
Responsible Investing ETFs
| Equity | |||
| BMO MSCI ACWI Paris Aligned Climate Equity Index ETF ZGRN Distribution Yield: N/A | Q Mgmt. Fee: 0.25% Risk Rating: Medium | BMO MSCI Canada ESG Leaders Index ETF ESGA Distribution Yield: 3.1% | Q Mgmt. Fee: 0.15% Risk Rating: Medium | BMO MSCI USA ESG Leaders Index ETF ESGY ESGY.F (hedged to CAD) Distribution Yield: 1.3% | Q Mgmt. Fee: 0.20% Risk Rating: Medium | |
| BMO MSCI EAFE ESG Leaders Index ETF ESGE Distribution Yield: 3.1% | Q Mgmt. Fee: 0.25% Risk Rating: Medium | BMO MSCI Global ESG Leaders Index ETF ESGG Distribution Yield: 1.8% | Q Mgmt. Fee: 0.25% Risk Rating: Medium | BMO MSCI India ESG Leaders Index ETF ZID Distibution Yield: 1.4% | A Mgmt. Fee: 0.60% Risk Rating: High | BMO MSCI China ESG Leaders Equity ZCH Distribution Yield: 0.0% | A Mgmt. Fee: 0.60% Risk Rating: Medium to High |
| ESG Themes | ||
| BMO Brookfield Global Renewables infrastructure Fund GRNI Distribution Yield: N/A | Q Mgmt. Fee: 0.8% Risk Rating: Medium | BMO Clean Energy Index ETF ZCLN Distribution Yield: 0.8% | A Mgmt. Fee: 0.35% Risk Rating: High | BMO Woman In Leadership Fund WOMN Distribution Yield: 0.0% | A Mgmt. Fee: 0.35% Risk Rating: Medium |
| Asset Allocation |
| BMO Balanced ESG ETF ZESG Distribution Yield: 2.4% | Q Mgmt. Fee: 0.18% Risk Rating: Low to Medium |
| Fixed Income | |||
| BMO ESG Corporate Bond Index ETF ESGB Duration: 5.8 Distribution Yield: 3.3% | Q Yield to Maturity: 4.3% Mgmt. Fee: 0.15% Risk Rating: Low | BMO ESG US Corporate Bond Index ETF ESGF (hedged to CAD) Duration: 7.8 Distribution Yield: 3.6% | Q Yield to Maturity: 4.2% Mgmt. Fee: 0.20% Risk Rating: Low | BMO ESG High Yield US Corporate Bond Index ETF ESGH (unhedged) ESGH.F (hedged to CAD) Duration: 4.3 Distribution Yield: ESGH: 5.5% ESGH.F: 5.6% | M Yield to Maturity: 6.6% Mgmt. Fee: 0.45% Risk Rating: Low to Medium | BMO Sustainable Global Multi-Sector Bond Fund ZMSB Distribution Yield: 3.6% | Q Mgmt. Fee: 0.60% Risk Rating: Low to Medium |
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