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By Christian Charest | 10-10-2018

A closer look at Desjardins' low-CO2 ETFs

Desjardins' Jay Aizanman explains how the low-carbon theme is applied to the new line-up.

Christian Charest: For Morningstar, I'm Christian Charest. On Sept. 27, Desjardins launched six new exchange-traded funds that have very specific responsible investing mandates that focus on a theme of low-carbon emissions. To get a bit more insights into these funds, I'm joined today by Jay Aizanman, Director of Business Development at Desjardins Global Asset Management in Montreal.

Jay, thanks for joining us.

Jay Aizanman: My pleasure.

Charest: So, before we get into the specifics of each fund, can you tell us a little bit about the low CO2 theme? How exactly is the theme going to be implemented in these new funds?

Aizanman: Well, the low CO2 theme is not a theme that we came up with haphazardly. Climate change is, first and foremost, one of the largest priorities on the minds of investors worldwide, and it reflects the views of Desjardins and the cooperative.

So, implementing carbon reduction was tied into our own values as a leader in this arena. So, what we've done from our own corporate perspective is told investors that we were going to lead the way by lowering our carbon emission ratio on our own public portfolios by 25% by 2020. So, we ended up coming up with a number that was concrete, and we are not the only institution to do it. Caisse de dépôt and other major institutions have also pledged that particular number as a carbon reduction target. That being said, having a target like that then allows us from a portfolio management perspective to use the underlying carbon intensities per company per revenue and find a way to portfolio management to lower the portfolio's actual carbon intensity relative to the benchmark by 25%. So, that's where it originated from.

Charest: So, the idea then in the management of the funds is to pick the specific companies that perform best according to your CO2 screens, not necessarily screening out whole industries. Is that correct?

Aizanman: Well, exactly. So, we have a lot of risk mitigators in the way we've constructed it. And these are really interesting. It was a great exercise in portfolio management with our ESG team. We have our own dedicated environmental, social and governance team here. And it was a great exercise of bringing together the portfolio managers and the ESG experts to find a way to not just eliminate 25% of carbon but actually to identify all of the carbon emissions from all of the underlying companies in every index and then sector-by-sector going through each one while maintaining sector neutrality to the underlying benchmark. So, basically, people would believe that you are reducing your carbon and therefore, you are eliminating all your energy stocks. Well, the reality is that our energy weight at the end of the day will look like the energy weight of the underlying index. What we are doing is we are getting rid of -- or we are eliminating the worst polluters. And by doing that we end up finding ways by eliminating one, two, three, four stocks per sector, the worst emitters that the overall average will come down below our 25% target. And we do this every quarter to make sure that the 25% carbon reduction is maintained.

Charest: Now, let's look at each of the new ETFs individually. The lineup includes five equity ETFs, two of which are market cap-weighted and three which are factor-based and one fixed income ETF. So, let's start with the two cap-weighted ETFs. What stock universe are they based on?

Aizanman: Well, we launched a Canadian, which is based on the TSX 98 largest capitalization weights and the S&P – or the U.S. based on the S&P – or not the S&P, but the 500 largest U.S. capitalization companies. Looks and smells like the underlying traditional benchmarks.

Charest: Right. So, as you just explained, the sector weights within the index, they are going to be similar to the unscreened version. Okay. Similarly, your three multi-factor ETFs also target Canadian and U.S. equities, but there's also an international equity fund. What are the factors that these strategies will use and how are the factors going to be mixed?

Aizanman: The approach to, again, bringing together our ESG expertise and our portfolio management expertise was quite sophisticated, and again, a lot of fun from a manufacturing perspective. The approach in all of the ETFs that are responsible investing that are under the current launch, they are all going to go through normative screening and ESG, what we call an ESG best-in-class. So, we are cleaning, if you will, from an ESG, from a responsible perspective all of the underlying indices. And once those indices are clean and we use, again, sector neutrality as a risk mitigator, we then apply the six academic risk factors that are recognized worldwide as being representing the largest amount of percentage of risk factors that are, again, academically accepted. So, the well-known connotations are value; small-cap, so size; you have momentum, companies with momentum behind them; you have low risk, so low-vol; and you have profitability and asset growth. So, these six factors are not contrived factors. These are academically-accepted factors that are applied to, what I described earlier, that prescreening of ESG and best-in-class.

Charest: And finally, you have a Canadian fixed income fund that's actively-managed. What is going to be the investment strategy for that fund and who is the manager?

Aizanman: Well, Francis Scott who is lead manager on the universe mandates that we manage for mutual funds and private wealth and institutional clients, is going to apply -- again, working with the ESG team -- is going to apply throughout the portfolio because carbon emissions are available for provinces, corporates and governments, he will be able to apply the same screening methodology to target 25% lower carbon emission relative to the universe while still trying to maintain the same sector exposures and the same underlying exposure. So, he is going to be working with just another layer of sensitivity to ensure that at the end of the day he will try to perform better than the traditional benchmark, the FTSE TMX, and will attain a 25% lower carbon reduction.

Charest: Now, Desjardins even before the launch of these new ETFs was already a leader in socially responsible investing in Canada. Are there plans to expand this ETF lineup even further?

Aizanman: Yeah, this theme of investing responsibly, again, is part of our DNA. At Desjardins, we believe we are leading the market or the offering or democratizing the availability of investment solutions for individual investors. The theme of ESG investing is really pervasive around the world. Institutions have long adopted the responsibility of transforming their portfolios in a responsible manner. As a matter of fact, in Europe, it's almost a prerequisite. Desjardins has made a pledge, again its in our own portfolios, to reduce carbon emissions to focus on renewables for our own investments; to purchase carbon credits, for example, to offset our own greenhouse gas emission. So, we've made these public pledges, so we are leading the way.

Now, to answer your question directly, yes, we have both the family of ETFs, which we've launched, and we will have eight products once the two more are launched. But we also have a family of mutual funds that are completely in line or aligned with the values of Desjardins.

Charest: Jay, thank you very much for explaining all this to us today.

Aizanman: It's my pleasure. Have a great afternoon.

Charest: For Morningstar, I'm Christian Charest. Thank you for watching.

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