BMO Global Asset Management plans to exclude companies with fossil fuel reserves from its Responsible funds range, which has assets under management of £1.5bn.
Investors Chronicle highlighted last week that one of these funds, F&C Responsible UK Income (GB0033144857), holds mining company BHP Billiton (BLT). BMO said it allowed BHP Billiton into its Responsible funds because it and miner Anglo American (AAL) are among the few extractive companies that meet its ethical investing criteria, due to "well-established sustainability standards".
But this week BMO announced an updated policy on fossil fuels, which the company says it has been working on for the past few months. The updated policy aims to support the transition to a low-carbon global economy by divesting from companies with reserves in oil, natural gas and coal. It was drawn up by BMO's governance and sustainable investment team and its external responsible investment advisory council, which includes Justin Welby, the Archbishop of Canterbury. The advisory council is chaired by Howard Pearce, formerly of the Environment Agency Pension Fund.
Vicki Bakhshi, head of governance and sustainable investment at BMO Global Asset Management, EMEA, says: "If all current known reserves are extracted and burnt, we know that the world would not meet the two degrees temperature limit established under the Paris Agreement. As such, we have come to the view that investment in companies with fossil fuel reserves is increasingly incompatible with the ethical and sustainability objectives of the Responsible Strategies range that we run. We also see a growing investor demand, from both institutions and individuals, for investment strategies that allow them to avoid investment in these companies, yet there is a distinct lack of choice of such strategies in the market. By implementing this policy not just on a single fund but our entire Responsible range, we are offering a set of investment strategies that allow investors to align their beliefs with their desire for long-term returns."
The funds that will exclude companies with fossil fuel reserves are:
■ BMO Responsible Global Emerging Markets Equity (LU0432286846)
■ F&C Responsible Global Equity (GB0033145045)
■ F&C Responsible Sterling Bond (GB00B4RB3Z95)
■ F&C Responsible UK Equity Growth (GB0033396481)
■ F&C Responsible UK Income
The global and emerging market funds already have no holdings in companies with fossil fuel reserves so can implement the new policy immediately. The other funds have holdings in such companies worth about £20m, because fossil fuel extracting companies account for a large part of the UK stock market. The funds' managers have until 1 January 2020 to implement the changes because they need time to find alternatives from a narrower investment pool, and so they are not forced to sell these companies at poorer prices due to time pressure. The long lead-in time to full divestment is also an attempt to prevent the yield on the income funds from being negatively affected.
Darius McDermott, managing director at Chelsea Financial Services, thinks F&C Responsible UK Income should be able to replace the income from BHP Billiton, which has a yield of about 4.5 per cent, from other holdings. He adds that it makes sense to give the funds nearly three years to fully divest.
But Adrian Lowcock, investment director at Architas, says: "I would have thought they would have put together plans to divest sooner. It shouldn't take a fund manager that long to find alternatives, but from their point of view I assume they don't want to be held hostage by the market."
Ethical issues
Ethical or responsible funds with holdings in companies their investors might not consider ethical is a concern for investors in this area.
"The problem with responsible investment funds is they talk the talk, but you really need to look at what the underlying holdings are," says John Ditchfield, partner at Castlefield, which specialises in responsible and ethical investing. "The investment industry does a shocking job of being upfront on what ethical or responsible means, which is a real shame as it creates the impression that [responsible investing] is just a greenwash."
But he thinks it is good that asset managers are starting to address a key issue such as climate change via divestment. "I don't know how you can say you are taking a responsible investing approach and not have a view on fossil fuel policy," he says. "There's a growing movement to divest from fossil fuels that's being led by big institutional money like Norway's sovereign wealth fund [which has divested from energy companies that derive more than 30 per cent of revenues from coal]."
Tanya Pein, director of the UK Sustainable Investment and Finance Association, adds: "BMO is one of the most experienced responsible investment providers, with a strong record in leadership in this sector. Where they lead, others follow."
She says private investors need to consider how the implications of climate change affect their portfolios, and put that to the managers of the funds they invest in. "It is widely considered by industry experts that fossil fuel reserves are overvalued, and that there is high valuation and dividend risk in this sector," says Ms Pein. "The retreat from fossil fuels is worldwide, the switch into renewables is accelerating and the smart money has been divesting for some time."
