Vicki Bakhshi, director in the Responsible Investment team at BMO Global Asset Management, talks to Pedro Gonçalves about the challenges and achievements of engagement and the big cultural change around responsible investing.
Do you believe engagement is necessary in order to make a difference as an investor?
We are big believers in engagement. Climate change and diversity are both examples where you can really see the impact.
There are some companies going in the right direction but I think engagement really accelerates it and pushes the pace of change.
On board-level gender diversity, I think it has been extremely effective, particularly in markets like the UK, and it is starting to get there in other markets as well.
On climate change, getting companies to adopt net-zero targets, I think that genuinely has been good. We have got about 3,000 companies now who have adopted net-zero targets of one kind or another. I think investor engagement has been important in doing that.
How can you see that engagement is making a difference?
Those two topics are where there has been widespread use of voting to back up engagement.
We have a diversity voting policy, which means we will vote against directors of companies who have all-male boards. In some markets we set a higher standard, requiring more than just one woman.
On climate change, we vote against directors or companies who do not meet our minimum standard.
I think engagement must be forceful to have its maximum impact. We have to be prepared to back it up with sanctions, such as voting, but also collaboration and speaking at AGMs. That, I think, is when it is most powerful.
Is it harder to engage in emerging markets?
We certainly see less engagement going on in emerging markets, and it can be more challenging to do, but that is what makes it all the more important that we do it.
Everyone is engaging [in developed markets] - would it make much difference if we were not participating? Maybe not. But when we are investing in a company like Bank Mandiri [for example], which is an Indonesian bank, we have been talking to [them] about their deforestation policy.
I am not sure there are many other investors doing that. So, we feel we can add a lot more value in our emerging market responsible investment work.
Is disclosure also an issue in emerging markets?
Because disclosure is often weaker in emerging markets, we think that by doing our research, we can find some great hidden gems with companies that do not get scored that well by the data providers because their disclosure is not very good.
We have gone out, we have talked to them, we have found out what they are doing, and actually they are doing a good job on ESG, which makes us confident to invest.
Do you think sustainable investing is mainstream now?
Now, it is absolutely mainstream. I think ten years ago it was much more patchy.
There is also more collaboration going on. When we engage now with things like Climate Action 100+, we are often doing collaborative engagement, rather than one-on-one engagement, which I think was more common before and it is more effective like that.
Another change, and this is true in my organisation, is that it is no longer the sole responsibility of responsible investment teams.
If I go back ten years, most of the engagement was done by the [RI] team. We went away, we did the engagement, we got back and told the asset managers about it.
Now the normal way of engaging with companies [is] we do it jointly with the investment team so that the both of us are there.
But we have got to the point of maturity where the investment managers know enough about ESG that they will just raise it in their own routines with companies even if the RI team members are not there.
That is where it becomes really mainstream; the RI teams are the central hub but we are not driving everything. That is a big cultural change.
Can an oil and gas company sit in an ESG-friendly portfolio?
Different clients of ours are making different choices here. What we are trying to do is offer a range of products, which fit those choices.
We have a lot of clients who do not want to have their money involved in fossil fuel extraction, so we offer a range of products that are responsible strategies which have a hard exclusion on all companies involved in the extraction of oil, gas and coal.
We do have other funds that are more mainstream, some of those have a limited amount of exposure to, for example, oil companies, and we are working with them on the transition.
I am really pushing on that: it is more effective than withdrawing altogether from the sector.