Head of Mackenzie Sustainability explains how her firm screens out weapons, highlights why advisors now need to be talking about trade-offs and transparency with clients
The onset of the Israel Hamas war has reminded many investors of the business of warfare. Shares of defence companies have shot up. Lockheed Martin, for example, saw a roughly 8% bump in its share price following Hamas’ attack on Israeli civilian targets on October 7th — which started this latest war. The stock has been trading at that premium ever since. But as Canadian investors read the news with shock and horror, many advisors are also facing questions from their clients about allocations to defence companies, concerned that their portfolio might be gaining from a war.
Fate Saghir, head of Sustainability at Mackenzie Investments, outlined the many concerns that some investors may have regarding weapons investments. She highlighted the steps taken by asset managers over the past decade to ensure their Responsible Investment/ESG/Sustainable products are also divested from weapons manufacturers. While values-based investing has always been an area of deep subjectivity and individual preference, she believes that advisors can help their clients in a moment like this by providing transparency into their portfolio holdings and a clear breakdown of what they’re trading off.
“For investors that really do want to include their values in their investment portfolios, this is where advisors should be talking about sustainable investment products, or products where investment objectives clearly articulate an ESG mandate,” Saghir says. “That takes ESG beyond just risk consideration, to using ESG to align risk-return and their clients values.”
Most actively managed funds that have some element of ESG or Responsible Investing mandate hold, at minimum, to two Canadian government conventions. One, implemented in the 90s, is a convention against anti-personnel mines. The second, dating back to 2015, is a convention against cluster munitions. Saghir notes that all of Mackenzie’s actively managed mandates hold to those two conventions and describes them as ‘table stakes’ for similar asset managers.
While different asset managers pursue different ESG policies, Saghir notes that Mackenzie’s indicated “sustainable investment funds” include screens for controversial weapons. That means excluding any companies involved in nuclear, biological, or chemical weapons like white phosphorous or depleted uranium.
That means these funds don’t include massive defence contractors like Lockheed Marting or Boeing, which can impact total returns especially during a period of conflict.
As advisors look for funds that can align with their clients’ values, Saghir believes they need to be closely examining the underlying prospectuses of these funds. There is a great deal of ambiguity in the ESG space, as indicated by the sometimes interchangeable nomenclature around ESG, sustainable, or responsible investing. By looking under the hood at these funds, advisors can help show their clients exactly what they are — and are not — invested in.
As they outline the exact mandates of each fund and holding, advisors also need to be talking about trade-offs. Saghir reiterates that as advisors strive to deliver alpha while they maintain a commitment to their clients’ values, they may be walking a tightrope. They may have to forego the potential for future gains in defence stocks and as they do so Saghir believes they should be reiterating to their clients why they’ve avoided this potential source of alpha.
Avoiding conflict-related holdings and divesting from controversial weapons could be considered a longstanding feature of sustainable investing and ESG. Nevertheless, Saghir accepts the significant challenges of values-based investment management in an age of constant information and rapidly changing news cycles. Saghir believes that as advisors enter difficult conversations about values-based investing, defence stocks, and social issues, they need to focus on seeking transparency from their asset management partners and offering transparency to their clients.
“We aim to be transparent in our disclosures,” Saghir says. “We evaluate strategies before we launch new funds, we continuously evaluate our exclusions policy, but we iterate the transparency to ensure that investors and advisors know what they’re investing in…Advisors can start to explore the sustainable investment options available in the Canadian market and as they do so, we believe that transparency and discussing trade offs will be the most important thing to do.”