‘Engagement needs teeth’: BMO GAM lists sustainable action focus in 2021
BMO Global Asset Management has identified key engagement priorities in 2021, tackling destruction of biodiversity, promoting social justice and reducing inequalities and the race towards zero emissions. On the biodiversity front, the asset manager will expand its engagement with businesses to halt deforestation, improve land and freshwater management and combat ocean pollution. It will also encourage companies to contribute to a ‘just’ transition and lay out targets consistent with net-zero emissions in 2050.
Vicki Bakhshi, director of the responsible investment team at BMO Global Asset Management, delves into the challenges and opportunities that lie ahead.
Asset News: While tackling areas like biodiversity, where there is a paucity of data and processes, what challenges do you face?
Vicki Bakhshi: Social engagement is much more difficult in biodiversity and labour standards, especially to get metrics to understand how well companies are doing. That is a big part of our approach for 2021: to assess key sector research on how biodiversity is being impacted, especially in certain sectors such as the food and drink industry, transport, mining and financials. It is difficult to measure and set a benchmark for best practices. To achieve this, we work with companies to map and gather the metrics.
We need to start a process to measure the impact and press other companies. It fits well with the work that is being done by the United Nations. The key challenges are in the food sector and across agriculture, due to the impact on the supply chain. Companies should get to know their supply chain and provide their supplier with tech solutions to deal with the challenges.
While there is a lot of focus on climate change, we are also looking at the UN negotiations around the biodiversity framework. Within biodiversity, deforestation has been a focus for us. An example of our engagement is on palm oil, where we have worked extensively with producers, buyers such as food companies and banks that finance these operations. We have worked with Bank Mandiri in Indonesia, including meetings in person, to have a strong lending standard on palm oil and introduce a sustainable finance strategy. Companies are receptive to engagement and they value the advice as more investors are ESG-focussed today. These firms do not want negative media reports or bad ratings from data providers. While they are open to dialogue, what is difficult is taking it from an agreement of important issues to implementing it. That is where our dialogue lies, in pinning down companies on how they are measuring these impacts and what are they doing to deal with it.
We will also be incorporating this in the voting policy. Engagement needs teeth. In terms of climate change, biodiversity and deforestation, if we see companies failing to meet the minimum standards, we will vote against management.
We want to see immediate net zero emissions strategies, including short-term targets, linking climate change to executive pay and lobbying actions.
What is your approach towards fossil fuel companies?
Across our portfolios, we are engaging ambitiously across all sectors, to ensure companies align their strategies to net zero emissions by 2050. Additionally, we want to see immediate strategies, including short-term targets, linking climate change to executive pay and lobbying actions. We need big energy producers and mining companies to be a part of the solution. There is a shift towards diversifying businesses and increasing spending on renewables is becoming part of the solution. We do have funds with no fossil fuel and gas exploration exposure, as some of our clients do not want to be invested in these industries.
From a responsible investment perspective, could you detail your strategy in the renewable energy space?
On the listed side, we have investments in Orsted, a Danish company which is a market leader in the building and maintenance of offshore wind farms, as well as some investment in infrastructure through private equity funds. In some cases, our investment focus is through the supply chain. Clean energy, supplies of components of electric vehicles or light weight parts suppliers may be a focus, rather than big auto companies that may be looking at electric cars but still have high exposure to combustion engines. We have to be wary that it is a very popular area and need to choose the right investments. We look at the supply chain to see value addition and which makes sense in exposure. Energy efficiency is an important area where we invest – these are tech-driven companies focussing on reducing emissions, cloud services and others.
How do you tackle the data around Scope 3 emissions?
We have the data estimates and Scope 3 emissions data consists of many different types of data. What we need to understand is the materiality for each sector. For example, for banks, Scope 3 is vital whereas in the utilities sector, it is relatively small. There is good information emerging and we are doing a lot of work with Climate Action 100+ and the Transition Pathway Initiative to define sector pathways. We do worry about data quality and consistency but there are good initiatives, and we are likely to see improvements.