Episode 26 : 03/15/2017

ESG: Doing well and doing good with your portfolio

Ali Caffery

Associate Portfolio Manager


Matt Smith
Managing Director
BMO Global Asset Management

Ben D. Jones
Managing Director – Intermediary Distribution
BMO Global Asset Management

Let's keep the conversation going.

Thank you!

Thank you for your interest. We look forward to helping enhance your client conversations.

Thank you!

Thank you for your interest. We look forward to helping enhance your client conversations.

Start a Conversation

Want to submit feedback, suggest a topic, or just get in touch?

Contact Us

ESG: Doing well and doing good with your portfolio

In this episode, we explore ESG investing, why its popularity has grown, the role it plays in a portfolio and what actions advisors can take to implement socially-responsible directives for their clients. Our guest is Ali Caffery, a Portfolio Manager at Envestnet. Envestnet is a web-based platform for financial advisors that provides resources for the wealth management process, including performance reporting, portfolio solutions and research tools. At Envestnet, Ali implements ESG screens in portfolios and helps advisors understand that doing well and doing good do not have to be mutually exclusive.

In this episode:

  • Defining ESG and impact investing
  • Why ESG has become a growing trend and will continue to grow
  • Engagement vs avoidance

Like what you hear?

Subscribe on iTunes, Google Play, Stitcher, or Spotify.

Ask a question or share your experiences with us.



Ali Caffery – You do not have to give up returns in order to do good in your portfolio.  We examined impact managers on our platform and compared them to non-impact managers.  And what we found was that clients did not give up return, but actually gained it.  

Ben Jones – Welcome to Better conversations. Better outcomes. presented by BMO Global Asset Management.  I’m Ben Jones.  

Matt Smith – And I’m Matt Smith.  In each episode, we’ll explore topics relevant to today’s trusted advisors, interviewing experts and investigating the world of wealth advising from every angle.  We’ll also provide actionable ideas designed to improve outcomes for advisors and their clients.  

Ben Jones – To learn more, visit us at bmogam.com/betterconversations.  Thanks for joining us.  

Disclosure – The views expressed here are those of the participants and not those of BMO Global Asset Management, its affiliates, or subsidiaries.    

Ben Jones – Today, we head a little deeper into the pool known as socially responsible investing, or SRI.  Also known as impact investing or ESG, which stands for environmental, social, and governance.  We explore some of the realities and insights that you may not be aware of.  You may also remember in episode nine when we spoke with Dawn Wolf about guiding the social and environmentally conscious investor.  We received a lot of listener feedback about that episode with many listeners wanting to dive a little deeper.  So today, we’re wading into this conversation topic again.    

Matt Smith – On today’s show, we’ll be exploring why ESG investing is an emerging topic, what role it plays in a portfolio, and what actions advisors can take to implement ESG with their clients.  Our guest is Ali Caffery, a portfolio manager at Envestnet.  Envestnet is a web-based platform for financial advisors that assist them with wealth management process, including performance reporting, portfolio solutions, and research tools.  Ali’s team conducts research and due diligence, creates and manages portfolio solutions, and more.  

Ben Jones – Matt spoke with Ali over the phone and they began by discussing what defines impact investing and its growing popularity.  

Ali Caffery – ESG, which stands for environmental, social, and governance; and SRI, which stands for socially responsible investing, are two terms that you will often hear used interchangeably.  But both refer to what we at Envestnet call impact investing.  We define impact investing as the intentional practice of aligning investments with personal values to seek both a social and a financial return.  And it’s centered around the idea that combining finance and the markets can be a force for positive social change.  But, if you want to break down each of the terms, each one refers to a specific investment approach.  So, socially responsible investing was one of the first terms that was accepted by the broader investment community and it describes a values based investment approach in which, on a best efforts basis, investors try to avoid the most harmful industries or companies.  ESG on the other hand incorporates impact by examining global issues within three categories, which I can touch on.  So, environmental, or the E component within ESG, addresses climate change not only from a conservation standpoint meaning excluding companies that exhaust resources or contribute to waste and pollution, but also from an innovation standpoint by investing in companies that are dedicated to creating renewable energy sources or those focused on optimizing resources or recycling practices.  So really, those companies that are pushing the envelope to come up with solutions for environmental purposes.  So, the S.  So, that’s environmental.  Now, social, or the S component in ESG, examines company working conditions, labor practices, pay equality, diversity policies, and how companies interact with their local communities.  Then finally G, the G within ESG, considers how company management leads and acts in an ethical way.  So, governance factors may include board diversity, transparent accounting procedures, and avoiding conflicts of interest or controversies.  

Matt Smith – This is becoming a more and more important topic and certainly getting a lot more interest by both advisors and investors.  Why do you think this is such an emerging topic?  

Ali Caffery – Yeah, impact investing is an emerging topic for a couple of reasons.  First, investors and consumers are becoming more socially aware and educated on company ESG practices in part because of the amount of information that’s available to them.  More often, we hear about how consumers are choosing a particular brand because they support a social cause or avoiding others that are known to be involved with major controversies.  So naturally, this mindset has carried over to investment practices and clients are requesting that their portfolios exclude the companies that they avoid as a consumer.  So, we as others, have seen particular interest among women and millennials.  And a recent study by Morgan Stanley found that more than 80% of high net worth millennials and more than 70% of women express interest in socially responsible investing.  These two groups, they tend to care about the world, its environment, its people, and its diversity.  Secondly, I would say that it’s an emerging topic because individuals and institutions have recognized the growth in the space.  Impact investing is one of the fastest growing segments of the investable marketplace and according to recent data that’s come out from the US SIF Foundation; investors consider ESG criteria across 8.2 trillion in professionally managed assets.  This is a 33% increase from just 2014 and it means that 1/5 of all the assets under professional management are now sustainable or responsible in some way.  

Matt Smith – So, in your opinion or research that your firm has done, do you think — is the demand coming from investors, advisors, institutions? Where is this demand coming from?  

Ali Caffery – Well, advisors are asking for solutions because the demand is coming from their clients both individuals and institutions alike.  From individuals, we recognize that millennials and women are particularly interested as we previously talked about and we think that it’s essential for advisors looking to grow and retain business to consider the investing preferences of women and millennials.  If they don’t, they may miss an opportunity to reach a massive pool of potential assets.  So, if you look at the numbers, millennials alone stand to benefit from a $30 trillion wealth transfer within the next couple of years.  Meanwhile women currently control about $20 trillion in assets and are projected to inherit 70% of more than 41 trillion over the next couple generations.  On the institutional side, institutions such as pensions, endowments, or foundations are increasingly coming under pressure from investors or donors who are interested in values based investing approaches.  Additionally, institutions like foundations see it as a way to align their investment portfolios with their overall organizations’ mission.  So, let’s take an example.  Faith based organizations.  They often support social causes such as helping lower income families.  And within certain impact strategies, faith based organizations can invest in affordable housing programs.  This only furthers the organization’s reach on how they can do good and sends a consistent message to potential donors.  

Matt Smith – That’s great.  Those wealth transfer numbers — I know my children, my millennial children, will be listening to this podcast and wondering what part of that 30 trillion is coming their way.  So, I need to manage some expectations after this episode comes out.  

Ben Jones – As you just heard, Ali has the studies and statistics to back up her claims.  Impact investing is certainly a trending conversation.  And maybe you’ve had a client come through the door and ask about how he or she could invest in this manner.  Matt and Ali discussed what actions you can take to implement ESG investing and how to manage competing priorities inside of a portfolio.  

Ali Caffery – Well, I think that advisors can start by having an honest and a thoughtful conversation with their clients to first understand their values and the issues that resonate with them.  I’m often asked by advisors how can I approach this topic with my clients?  And I suggest by saying something along the lines of we work together to achieve your investment goals, but do you have any social aspirations that we can fulfill within your portfolio.  I can work with you to customize your portfolio in ways that align with your values and that can also achieve competitive financial returns.  And I think that last part is key: achieving competitive returns would be very important to the conversation.  Then, once an advisor understands the client views and concerns, they can propose a portfolio solution to address them.  And the good news is that many options exist to address each client’s needs.  

Matt Smith – I’m interested in whether or not Envestnet has an opinion on what the ideal portfolio is or are you just implementing your client’s vision? And by this I mean do you have an opinion about whether a strict approach is better than a best in class approach, or vice versa? How do you think about that?  

Ali Caffery – In general, the ideal impact portfolio provides competitive market returns, incorporates ESG factors, and adheres to the client’s values.  To achieve the competitive market returns, we believe that any portfolios should be well-diversified and include multiple assets classes to achieve the client’s optimal risk/return profile.  From an ESG standpoint, our portfolios take into consideration multiple impact factors and we don’t favor a particular theme or strategy, but more so believe that broad ESG exposure will typically meet most impact investor’s needs.  To answer your second question, unless a client’s sole focus is to maximize impact within their portfolio, a best in class investing style is a better approach in our opinion.  A best in class screening approach is designed for investors aiming to achieve alignment with their values while still ensuring prudent management of their investments.  So, it excludes companies involved in the production or distribution of certain products and allows investors to avoid companies involved in major controversies in which the company’s operations have, maybe, negative impacts on the environment, society, or external stake holders.  A strict screen approach seeks to minimize exposure to companies with specific products, services, or operations that do not meet the client’s personal conviction criteria.  The company’s involvement in the production or distribution of these products is often given a low tolerance threshold based upon their annual revenues from that product.  For example, any company that derives X percent of revenue from alcohol will be excluded.  But what sometimes happens in this situation is a disconnect between what the client truly wants to avoid and what they actually end up avoiding.  For example, Starbucks.  They now serve alcohol in some of their locations, and it would be excluded on a very strict alcohol screen.  In most cases, the client hadn’t intended to screen out Starbucks, but had intended to screen out a Coors Brewing or a Boston beer company, or some large alcohol manufacturer.  But, having that zero or really low tolerance for certain products unintentionally avoids companies that would otherwise be included.  

Matt Smith – I’m interested in how you manage competing priorities.  So for instance, how do you score the tobacco company that has a highly diverse group of executives?  So, the tobacco part might be a negative, but the diversity of their board, for instance, might be a positive.  I’m sure there’s lots of other examples that companies score well on some — really well on some factors, and then poorly on others.  How do you deal with those competing priorities?  

Ali Caffery – Yes.  Yeah, of course.  And knowing that we have to take on a balancing act and we’ve done that within a defined framework.  And the framework that we typically employ involves two major components.  First, baseline eligibility criteria, and second, overall impact rating.  So, baseline eligibility criteria means it’s a company that is involved in a certain product or controversy area, then that company is deemed ineligible.  So, for our impact quantitative portfolios for example, they exclude adult entertainment, alcohol, firearms, gambling, coal, and tobacco just right off the bat.  Similarly, if a company is involved in a major ESG controversy as determined by Sustainalytics’ and their methodology, the company is also deemed ineligible for the portfolio.  And these ESG controversies may include consumer rights, employee rights, environmental controversies, or governance and human rights issues.  So, for example, we’ll be launching in a new quantitative portfolio that focuses on gender equality.  So, for the gender impact QP, we look for companies that are leaders in their actions and initiatives to empower and advance women.  Exxon Mobile is a known supporter of the women empowerment principals and they demonstrate good practices in terms of advancing women.  In fact, Exxon Mobile Foundation supported a program in 2008 to help legal advocates for African women and entrepreneurs to develop 30 new advocacy projects that directly affected over 3,000 women in Africa, while also raising awareness for the inequalities and legal barriers that they face.  However, despite doing this good work, Exxon Mobile is a company that is not eligible for the gender impact QP because of its involvement in major controversies relating to human rights violations.  So, Exxon Mobile is currently facing a class action lawsuit related to actions of their security forces that they employed in Indonesia during a period of civil unrest in the country from 1999 to 2001.  And during this time, the military forces that were hired by Exxon Mobile to protect their assets were responsible for kidnappings, murders, rape, torture just across the region.  So, this is a major controversy and due to the scale of atrocities involved, Exxon Mobile would be deemed ineligible for the portfolio.  So, overall it’s a balancing act in which we have to weigh each of the factors to determine if it’s eligible.  

Matt Smith – That’s a really good example of a company that has issues on both sides, positives and negatives, so thank you for that example.  Ali, I’m interested in your thoughts — your firm’s thoughts — on how you deal with conflicts of ideology.  So, some people aren’t go to have a problem at all with gun manufacturers, but want a portfolio that screens out the use of — maybe, let’s say, contraceptive devices or something that’s involved in abortion.  So, how do you deal with these conflicts?  I’m guessing part of your answer is that you can accommodate the client or the advisor’s independent views, but I’m interested in how you deal with those conflicts of ideology.    

Ali Caffery – Yeah, well, everyone’s views are different.  So, we thought to create an impact products suite with broad market acceptance.  And our goal was to exclude the most harmful industries or companies while also incorporating proactive impact elements.  Envestnet doesn’t take a view on company involvement in certain product areas, but tries to capture those products that are most often excluded by socially responsible investors.  In a case in which broad ESG considerations do not resonate with the client, then our overlay capabilities are a great way to customize views to deal with conflicts in ideology.    

Matt Smith – There are a lot of questions and myths that surround this new form of investing and impact investing can sometimes get a bad rap because some think it’s not as optimal as traditional investments.  I asked Ali how she responds to these myths. A question everyone wants to ask when it comes to this topic, you know there’s a lot of ways to screen out companies or use your investments to make an impact on the world, but it’s also — they’re investments.  And whether we’re talking about an individual who’s just investing for themselves or an institution that might have a fiduciary duty to the beneficiaries of the portfolio, how do you think about the return-seeking objective? Does investing socially responsibly, does it sub-optimize the return seeking process? How do you think about that issue?  

Ali Caffery – So, this is one of the concerns we often hear from those considering an impact strategy and I think it’s a common misconception and a source of hesitation for investors.  Some of the confusion arises from the idea that impact investing is a form of philanthropy or grants, which it’s not.  So, therefore it will not perform as well as a traditional investment manager.  But, impact managers do seek to provide competitive returns and the financial return is just as important as the social component.  What we’ve found — to your question, the answer is no.  You do not have to give up returns in order to do good in your portfolio.  We examined impact managers on our platform and compared them to non-impact managers.  And what we found was that clients did not give up return, but actually gained it.  So, in this analysis, we reviewed over non-impact SMAs and impact SMAs that had an ESG or specific SRI mandate.  So, we looked at 1,000 non-impact SMAs and over 400 impact managers.  Over an eight-year time period, that represented a full market cycle from 2007 to 2015.  What we found was that impact SMAs outperform their non-impact counterparts by more than 15% over a complete market cycle.  So, this translated to an additional 1.61% on an annualized basis.  Of course, this is only a snapshot in time, but others have found this to be true as well.  And we’ve concluded that doing well and doing good do not have to be mutually exclusive.  In fact, we think that ESG investing has a potential to become an advantage for investor returns.  If consumers, governments, and companies increasingly choose products and services from companies that value these factors, then revenues and profits at these firms stand to benefit.    

Ben Jones – This point might be particularly intriguing to advisors or clients who are wary of implementing ESG strategies because of perceived performance trade-offs over traditional investment strategies.  Lastly, Matt and Ali discussed different options for making a social impact through avoidance, activism, and engagement.  

Matt Smith – What might be better engagement or activism?  So engagement would be the idea that rather than not holding a firm’s security, you hold it and then you have a voice with the board.  Or, versus avoidance.  So, what’s Envestnet’s opinion on engagement versus avoidance?   

Ali Caffery – Well, activism and avoidance are both important impact strategies and we express each within our portfolio solutions.  Avoidance is a key component because some business lines or products are just fundamentally at odds with impact investor’s views.  Coal for example has severe environmental, health, and safety implications that impact investors would want to avoid.  And no matter how much you engage with them, it’s their core business and it’s not going to change.  Additionally, activism is important because it provides the opportunity to improve the processes of a partially misaligned business.  So, we ask ourselves how can you create change if you are avoiding all the companies that don’t have the highest impact ratings. So, in our opinion it’s okay to hold a company that doesn’t check every ESG box if there’s a way to engage on the issues.  And impact managers can make a difference by voting proxies and sitting on committees to shape policies so to bring pressure on these companies to make positive changes.  

Matt Smith – Great.  The data is proving out that this can be a really positive thing just both for returns and for the investor.  But, are there any challenges facing impact investing?  

Ali Caffery – Yeah, of course.  There’s a couple challenges that come to mind.  One major challenge still facing impact investing is one we briefly mentioned on how you report on the social returns to investors.  And today, many managers provide an impact annual report which discusses and reveals all the good work that they’ve done over the past year.  And this is a great start, but it only scratches the surface for investors whose expectation is to know the impact of their investing dollars.  We can quantify the financial return and show performance versus the benchmark on a daily basis, so the next step is to have that same capability for social returns.  The goal would be to provide integrated, quantifiable, and measurable impact performance so investors can see the difference that they’re making.  Another challenge that comes to mind continues to be the educating investors and advisors on impact investing in general, including what it is, what solutions are available to them, and then battling the misperceptions on performance.  We’ve seen a disconnect between the interest expressed in impact and then the commitment to implement it within a portfolio strategy.  And part of the reason we believe is that investors are either unaware that they can align their portfolio with their values or they think they’ll have to give up returns.  So, advisors educating investors and having this conversation with their clients to dispel some of the common misconceptions will help resolve this issue.  But overall, to end on a positive note, impact investing has seen incredible growth and is a strategy that we continue to believe will become more mainstream.  

Matt Smith – Ali, that’s really great, a lot of good information for our listeners.  Thank you very much for being on our podcast today.  

Ali Caffery – Well, thanks so much for having me.  

Matt Smith – We hope our show has improved your ability to engage your clients in conversations by helping them have a comprehensive view of impact investing as well as dispelling the related myths.  Whether or not your client chooses to implement these strategies, the conversation should help you deepen your understanding of their objectives and values, which is a win/win outcome.    

Ben Jones – Remember, you can find links to Envestnet’s thought leadership, our previous episode on SRI investing, and much, much more on the show notes page at bmogam.com/betterconversations.  We’ll be taking a little bit of a spring break from production returning with episodes airing every other Wednesday through the end of the year starting on April 19th.  We have some really exciting topics that you’ve requested, including succession planning for your practice and navigating conversations around goal based reporting.  Please keep all of your suggestions and comments coming by e-mailing us at betterconversations@bmo.com.  Thanks to Ali at Envestnet for diving deeper into the subject of ESG with us today and thanks to the team at BMO which includes Pat Bordak, Gayle Gibson, and Matt Perry, as well as the team at Freedom Podcasting including Jonah Geil-Neufeld and Annie Fassler.  

Ben Jones – Thanks for listening to Better conversations. Better outcomes. This podcast is presented by BMO Global Asset Management.  To learn more about what BMO can do for you, go to bmogam.com/betterconversations.  

Matt Smith – We hope you found something of value in today’s episode and if you did, we encourage you to subscribe to the show and leave us a rating and review on iTunes.  And of course, the greatest compliment of all is if you tell your friends and coworkers to tune in.  Until next time, I’m Matt Smith.  

Ben Jones – And I’m Ben Jones. From all of us at BMO Global Asset Management, hoping you have a productive and wonderful week.    

Disclosure – The views expressed here are those of the participants and not those of BMO Global Asset Management, its affiliates or subsidiaries.  This is not intended to serve as a complete analysis of every material fact regarding any company, industry, or security.  This presentation may contain forward-looking statements.  Investors are cautioned not to place undue reliance on such statements as actual results could vary.  This presentation is for general information purposes only and does not constitute investment advice and is not intended as an endorsement of any specific investment product or service.  Individual investors should consult with an investment professional about their personal situation.  Past performance is not indicative of future results.  BMO Asset Management Corp is the investment advisor to the BMO funds.  BMO Investment Distributors, LLC is the distributor.  Member FINRA SIPC.  BMO Asset Management Corp and BMO Investment Distributors are affiliated companies.  Further information can be found at www.BMO.com.

C11: 5546913 

Related Podcasts

Notice to Canadian Residents: The information on this podcast series is not intended to be construed as an offer to sell, or a solicitation to buy or sell any products or services of any kind whatsoever including, without limitation, securities or any other financial instruments in Canada.

You are now leaving the BMO Global Asset Management web site:

The link you have selected is located on another web site. Please click OK below to leave the BMO Global Asset Management site and proceed to the selected site. BMO Global Asset Management takes no responsibility for the accuracy or factual correctness of any information posted to third party web sites.

Thank you for your interest in BMO Global Asset Management.

You are now leaving the BMO Global Asset Management web site:

The link you have selected is located on another web site. Please click OK below to leave the BMO Global Asset Management site and proceed to the selected site. BMO Global Asset Management takes no responsibility for the accuracy or factual correctness of any information posted to third party web sites.

Thank you for your interest in BMO Global Asset Management.

You are now leaving the BMO Global Asset Management web site:

The link you have selected is located on another web site. Please click OK below to leave the BMO Global Asset Management site and proceed to the selected site. BMO Global Asset Management takes no responsibility for the accuracy or factual correctness of any information posted to third party web sites.

Thank you for your interest in BMO Global Asset Management.

You are now leaving the BMO Global Asset Management web site:

The link you have selected is located on another web site. Please click OK below to leave the BMO Global Asset Management site and proceed to the selected site. BMO Global Asset Management takes no responsibility for the accuracy or factual correctness of any information posted to third party web sites.

Thank you for your interest in BMO Global Asset Management.