Bank of Montreal (BMO) has launched two principal protected deposit notes linked to the BMO Environmental, Social & Governance (ESG) Index. The eight-year products, which are open for subscription until December 9, offer up to 160% participation - uncapped - in the positive price performance of the new index.
It is the first time a sustainable index has been used in Canadian structured products since HSBC launched two notes linked to the Investable Climate Change Index in December 2007 and March 2008.
BMO decided to launch its own ESG index after increasing demand from investors, according to Jerome Cloutier (pictured), managing director, global structured products, trading products, BMO. "The demand was there from investors to fill an ESG bucket in their investment policies, not just from retail investors but also from foundations and endowment funds," said Cloutier. "That's how the index came about."
The BMO ESG Index is a proprietary, quantitative and socially-screened index that provides exposure to select components of the Jantzi Social Index (JSI), a market cap-weighted, capped common stock index created by Sustainalytics and consisting of 50 Canadian companies that pass a set of broadly based ESG screening criteria. "We wanted to keep [the index] as simple as possible, so we went with Sustainalytics, the leader in the Canadian market in terms of ESG screening," said Cloutier. "They provide the data for the JSI. Our primary screen is the JSI, and then we apply a proprietary quantitative screen. That's it in a nutshell."
Although the ESG theme is rarely seen in the Canadian structured products market, there are funds that have adopted socially responsible investing (SRI), according to Cloutier. "In Canada, there are mutual funds that have an SRI tilt, but interest from investors for structured products within an ESG theme is definitely there."
BMO's plan is to use the index for principal protected notes, and not for products that put principal at risk, according to Cloutier. "The demand is really coming in the format of principal protection," he said.
ESG overall is important to BMO, according to Bindu Dhaliwal, associate general counsel and director of the ESG team at the bank. "We look at ourselves operationally, and how we can reduce our impact on the environment, but we also look at ESG in terms of our responsibilities to our shareholders, managing risk and creating long term value, and of course to our customers, providing them with products and services that take this into consideration," said Dhaliwal.
"As part of our commitment to provide our customers more choice in this area, this index is one of three products BMO has launched this year," said Dhaliwal. "BMO Global Asset Management launched two SRI mutual funds: Fossil Fuel Free Mutual Fund and Women in Leadership Mutual Fund."
BMO is the most prolific provider of structured products in Canada, according to SRP data. The bank launched more than 400 products between January 1 and November 9 this year, including three guaranteed investment certificates (GIC), 98 principal protected notes and over 300 principal at risk notes.
The vast majority of the bank's products are linked to equity indices of which the S&P/TSX 60, seen in 108 products, S&P/TSX Composite Low Volatility Index (82 products) and the S&P/TSX Composite Index Banks (37 products) are the most frequently used.
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