Spring 2023

The Fiduciary Implications of Distinguishing Between RI and ESG

With the amount of data available, Responsible Investing (RI) and Environmental, Social, and Corporate Governance (ESG) considerations can seem overwhelming. In this article, Mark Webster, Director, Institutional & Advisory, BMO ETFs, finds a signal in the noise, breaking down the difference between RI and ESG, and examining key considerations for Investment Counsellors and Family Offices.

Apr. 18, 2023

Investment Counselling firms and Multi-Family Offices have core strengths in specific areas but may find that their resources are limited in others, potentially posing limitations in meeting investor requirements in specific mandates. The most obvious challenge is in what is generally termed Responsible Investment, a field with seemingly limitless opinions and aspirations. There are over 1,000 data points to distil, making it impossible to demonstrate genuine capabilities in a very important analysis and execution process.

Further complicating the issues, it can be difficult to distinguish between Socially Responsible Investing (SRI) and ESG factor considerations, potentially causing misunderstandings between investors and for their advisors. Some observers have spoken about there being a spectrum — a continuum from SRI to ESG factor considerations. Fortunately, one particularly valuable study relating to pension fund investment1 identifies a stark distinction between the two, identifying the fiduciary implications which may ensue if the two concepts are misunderstood or improperly executed:

  • SRI identifies themes or causes and may result in over- or under-weighting companies, industries or sectors to achieve measurable outcomes to meet qualitative or non-financial objectives;
  • ESG factor considerations are a fiduciary risk management approach that seeks to avoid controversial business practices which may impair capital. As such, they should be taken into account as part of the security evaluation process.
It can be difficult to distinguish between SRI and ESG factor considerations, potentially causing misunderstandings between investors and for their advisors.

Understanding RI and ESG implications

Understanding RI and ESG implications

Source: McCarthy Tetrault LLP, Pension Fund Investment: Managing Environmental, Social and Governance Factor Integration, Randy Bauslaugh and Dr. Hendrik Garz, May 1, 2019.

It is important to note that a lawyer specializing in workplace pensions and benefits made this distinction, not a data provider or an academic. Fiduciary duty is fundamental to common law, governing all discretionary decisions made by trustees and other fiduciaries. Because Investment Counselling firms operate with discretion, as do many Family Offices, it is critical for practitioners to guide client discussions to create a clear understanding of how their qualitative preferences about climate, human rights or corporate governance can be expressed in an investment portfolio. RI and ESG present a push/​pull effect on investors. They may be pushed to align capital with causes or non-financial outcomes they support but, in doing so, they are also distorting the data set with which to generate required rates of returns.

In contrast, ESG factor considerations, because of their fiduciary risk management nature, may pull the exposure to the centre, providing more market-like returns. Though this is not, in itself, a bad thing, critics may question if enough is being done to meet non-financial objectives.


A central consideration for Investment Counsellors is the challenge RI and ESG pose to their business models. Efficiencies are created when portfolios can be modelled to provide consistency and scalability as the firm grows. Customizing to individual objectives, which invariably results when waging RI discussions, will place significant demands on limited resources and could, potentially, increase the need for Compliance oversight.

It may be better to outsource RI/ESG exposures to an asset manager, so your firm has both robust data screening and consistent, scalable solutions. 

The advantage of investing in an ETF is that it has three liquidity levels, which provide counselling firms with greater flexibility to manage flows as required:

  1. Natural liquidity between sellers and buyers across Canada’s exchanges, measured by average daily volume;
  2. Market maker inventory (Capital Markets desks normally hold units in reserve to match Sell & Buy orders);
  3. Creation and redemption, which operates just as it would for any pooled investment.

In addition, an index ETF has explicit rules and exclusions, which replicate the constituent holdings of the relevant index, to determine whether the ETF’s exposure meets investor requirements while also seeking to generate required rates of return. The example below outlines the exclusions in the MSCI ESG Leaders indices, which certain BMO ESG Index ETFs follow:

Establishing rules: Refining the exposure

Business Involvement Exclusions - the Refinement
AlcoholProducer earnings 50% of revenue or over $1billion in revenue (LVMH)
GamblingProducer earnings 50% of revenue or over $1billion in revenue
TobaccoProducer earnings 50% of revenue or over $1billion in revenue
Nuclear PowerCompanies with over 6,000 mega watts capacity or over 50% capacity from nuclear sources / companies involved in uranium mining / companies involved in nuclear plan design or construction
Conventional WeaponryCompanies earning 50% of revenues or over $3billion in revenues
Nuclear WeaponryAll companies manufacturing systems or components
Controversial WeaponryAll companies involved in manufacture of landmines, cluster bombs, uranium weapons, blinding lasers, biological or chemical weapons
Civilian FirearmsCompanies earning 50% or more than $100million in revenues
Unconventional EnergyThermal coal, shale gas, oil sands, coal bed methane & coal seam gas
Conventional EnergyArctic onshore or offshore, deep water, shallow water or on/​off shore

Source: MSCI ESG Leaders Indexes Methodology, November 2020.

A central consideration for Investment Counsellors is the challenge RI and ESG pose to their business models.

Transparency in reporting

Transparency is part of the consensus-building process, and measurement helps to establish it. Investors want to know or to measure what their capital allocations achieve. We regularly use objective benchmarks to measure investment performance, and similar clarity is available for RI/ESG considerations through our BMO ETFs ESG Quarterly Report Card.

The report shows:

  • Aggregate ESG scores for the benchmark and for each ESG Leaders Index ETF;
  • Tabulates E, S & G at the component level, for both the benchmark and each ESG Leaders Index ETF;
  • Measures Carbon Risk reduction;
  • Reveals improvements in Social and Governance metrics; 
  • Performance of each ESG Leaders Index ETF relative to its broad benchmark;
  • Standard Deviation of each ESG Leaders Index ETF relative to its broad benchmark.

Investment Counselling firms cannot afford to skirt discussions on RI/ESG, but they must avoid the subject turning into a Pandora’s Box. A consistent, transparent rules-based index ETF solution provides a scalable, measurable solution for counsellors to implement RI/ESG into client portfolios, maintaining a high-quality screening methodology.

BMO Global Asset Management has a robust Stewardship policy, which engages with management of investee companies and, when required, votes for change in proxy events in accordance with its publicly available Corporate Governance Guidelines. This ensures that the best interests of investors are being represented right through the investment process, from definition to execution to monitoring.

Just as we engage with investee companies as part of our Stewardship activities, we welcome queries, comments, or criticisms from you. Please let us know what interests you.

For more insights and information, view our BMO ESG ETFs Quarterly Report Card.

1 Randy Bauslaugh and Dr. Hendrik Garz, McCarthy Tetrault LLP, Pension Fund Investment: Managing Environmental, Social and Governance (ESG) Factor Integration, May 1, 2019.


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