Stockholm (NordSIP) – On a recent visit to Stockholm, Jamie Jenkins, Head of Responsible Global Equities (pictured right) at BMO Global Asset Management, stopped by together with Robert Elfström, Director Nordic Region (pictured left), to share some insights into how he and his team have developed a philosophy to pick sustainable companies. Together, we identified an interesting paradox, when Jenkins explained why a controversial company like Amazon may be included into his portfolio while a typical ESG darling like Ecolab is excluded.
“I’m a patient investor,” starts Jenkins, “in my career and with our investors’ money. Everything we do is fundamentally long term, and we have demonstrated that sustainability and financial performance go hand in hand. The biggest myth about responsible investing is that it requires a performance penalty, but the reverse is true!”
At BMO, Jenkins has participated in building up a positive sustainability focus, which started over 30 years ago. In responsible funds, the team applies product- and conduct-based screens. Cluster munitions are excluded across all funds at BMO Global Asset Management (EMEA). Other exclusions have generated more debate internally, such as fossil fuel-related stocks. The responsible strategy Jenkins manages is fossil free, and yet it benchmarks itself on a regular index, with a tracking error of approximately 3%. “We don’t compare ourselves to an ethical benchmark, because we want to show that we are in the same league as all global funds.”
The portfolio, which has a quality-growth tilt, is relatively concentrated for a global fund, with 53 holdings at the moment. “Every time we buy a new company, it should intrinsically bring superior characteristics compared to the stocks we are selling to allocate money to the new position,” Jenkins explains. “Typically, we shy away from sunset industries, and for that reason, we are happy to be fossil free. We embrace innovation and creative technologies, and analyse the positive and negative impact of companies that grow fast.”
Engagement is another cornerstone of the strategy. “The engagement team counts 15 dedicated members, and BMO Global Asset Management has shown a firm commitment to ESG research for a long time. ESG needs to be interpreted, and navigating through the blizzard of ESG data is a task that needs to be taken seriously by dedicated resources,” adds Jenkins. “It gives me a lot of confidence that we have such a strong ESG-specialist research team.”
Portfolio managers work closely together with the internal ESG resources. The team, which is composed of ESG specialists in every sector, helps define a universe of “acceptable companies”, based on screenings against specific internal metrics, but that is not where the work starts. “We effectively pre-screen ideas,” Jenkins says. “We then think about ESG issues throughout our investment research, and identify clear risks and opportunities and they are fully integrated into our fundamental analysis.
For Jenkins, a “classic example” of a positive investment case is water technology company Xylem. “Ninety percent of the company’s business is related to water,” Jenkins explains. “They directly assess sustainability issues related to water. They supply de-watering pumps for instance, and they have a rapidly growing diagnostics business to assess the quality of water. We have identified structural opportunities in water, such as an ageing infrastructure in North America, as well as growing needs in emerging economies, and we believe Xylem is the right stock to invest in this market.”
In contrast, Jenkins mentions Xylem’s competitor Ecolab. “This American company also focuses on water, but it is a good example of how we draw a line. In general, Ecolab is considered as a highly sustainable company, but it fails one of our sustainability criteria, as it enables drilling for oil & gas in ecologically sensitive areas. WellChem Technologies, one of Ecolab’s subsidiaries is specialised in extreme deep-sea wellheads. It compares favourably with its competitors when it comes to safety, but we believe that the risks outweigh the benefits, and therefore we exclude Ecolab from our portfolio, even if many other sustainable funds hold the position for the positive benefits the company provides in the water sector.”
There is a fine line in stock picking and sustainability. “We need deep diving into data crunching,” continues Jenkins. “We peruse annual reports and websites in minute details, and find out whether a company has genuine credibility through its products and services.” The results of this analysis may sometimes surprise some people. The internet retail giant Amazon, for example, is one of Jenkins’s positions. “They produce excess packaging, which is detrimental to the environment, and they have appeared in the press for questionable labour practices in their supply chain, as well as aggressive tax planning. On the other hand, they are also the single most important buyer of renewable energy, and they are moving fast in implementing responsible packaging solutions. We also believe that Amazon will outperform financially. After all, we are a global growth manager, and our mandate is to deliver excellent returns,” Jenkins concludes.