Biodiversity will undoubtedly be a major threat to the global economy in the future.
The threat is palpable, particularly when you consider some of the numbers associated with it. For example, about 1m plant and animal species face the threat of extinction and human activities are not only overusing the Earth’s biocapacity by an estimated 56 per cent, but they have also significantly altered two-thirds of marine environments.
Resource efficiency is closely tied to the biodiversity theme. Take water for example, it is amazing to think that it was only a couple of years’ back that Cape Town – a major global city – was running out of water, with residents potentially having to queue for daily rations
“Resource efficiency challenges are not going away any time soon. We will see a lot more in the coming years, with the world having to do more with what it has," says Nick Henderson who, alongside lead manager Jamie Jenkins, manages the BMO Responsible Global Equity fund.
Henderson says water is only one area where they look to meet the challenges of waste. Reusing precious metals, packaging and food waste are among the others targeted.
Xylem, a US-based water infrastructure business, is the type of company the fund targets to meet those challenges. Henderson says its Flygt brand provides de-watering products and services (pumps and other devices) to address droughts and flooding related challenges.
Apple (the fund’s largest holding) is another. It is reusing the precious metals in our smartphones rather than mining for more.
The fund avoids companies with unsustainable business practices, but will invest in companies where there are problems that can be resolved. Initial idea generation will come from company meetings, research around sector thematics, conferences and environmental, social and governance analysis. These ideas go through the ESG screening process, administered by BMO's responsible investment team, with contentious issues escalated to an advisory group.
The constraints include: no alcohol, gambling, pornography, weapons or tobacco, and fossil fuels. There are also restrictions on environmental impact, animal welfare, human rights and labour standards. This leaves an investable universe of around 1,000 stocks.
The investment team will analyse each company and a standardised research report is written for each stock, allowing for quick comparisons of holdings. An ESG tear sheet allows the team to revisit the ESG story and ensure it still holds true. After this, they will then have discussions with management teams of potential investments.
Henderson and Jenkins will then take control of portfolio construction where they will ease into stocks rather than take a big position early. The final portfolio typically holds between 40-60 stocks.
The fund has seven sustainability themes running through the portfolio:
- Connect and protect (opportunities based on technological advances);
- Digital empowerment through growing data-sets;
- Energy transition;
- Health and well-being;
- Resource efficiency;
- Sustainable cities; and
- Sustainable finance.
The team uses the UN sustainable development goals as a starting point to map the impact of investments. A recent analysis by the team found 84 per cent of the companies it invests in were linked to these SDGs.
The final portfolio typically has a mid-cap bias, something Henderson says is a by-product of not only targeting business with the scope for much further growth, but also because they have found it easier to drive engagement – a big focus for the fund – in this space.
The fund has returned 119 per cent in the past five years, beating the IA Global sector average of 84 per cent. Ongoing charges stand at 0.79 per cent.
What makes this fund stand out from the crowd is the strength of the responsible investing team. It is a separate unit of BMO, meaning bespoke analysis that is truly independent.
The fund's process is also very thorough, with in-depth customised analysis of companies, making for very considered stock selection. The success of the philosophy has been borne out by excellent performance.
Darius McDermott is managing director of FundCalibre
