Responsible investment (RI) strategies based on wholesale sector exclusions are “lazy” lose-lose approaches that could leave managers in breach of their fiduciary duties, according to Simon O’Grady, Kiwi Wealth chief investment officer.
O’Grady said surgically removing entire sectors – such as oil companies – from portfolios could damage long-term performance while removing the ability of investors to influence corporate behaviour in the offending industry.
“Fund managers have a fiduciary duty to their investors to maximise risk-adjusted returns,” he said. “Simply cutting out sectors has the potential to breach that fiduciary duty.”
The current focus in NZ on sector exclusions was “disappointing”, O’Grady said, with managers competing to slash exposures rather than develop cohesive RI strategies.
In June, for instance, the $450 million passive fund firm, Simplicity, vowed to screen out firms involved in fossil fuel extraction, pornography, alcohol, weapons and gambling across all its, mostly Vanguard fund, portfolios – a policy that will see almost 2,800 securities deleted compared to the unadulterated indices.
In a release, O’Grady said NZ investors ideally should express their environmental, social and governance (ESG) concerns via locally-domiciled vehicles.
“Investments channelled through offshore funds, particularly passive indices, will usually come up short on their ability to drive positive change on key ESG issues,” he said.
Kiwi Wealth does screen out some stocks – such as controversial weapons and tobacco manufacturers – but “we try to keep exclusions to a minimum”, O’Grady said.
He said there were many good companies in so-called ‘sin sectors’ and scope for investors to use their collective financial muscle to improve corporate behaviour overall.
“The best strategy is engagement, not exclusion,” he said.
Recently, the $5 billion plus Kiwi Wealth bolstered its engagement strategy by hiring global corporate governance firm, Institutional Shareholder Services (ISS) to handle proxy-voting duties across its offshore equities holdings.
Previously, Kiwi Wealth had taken part in some proxy votes in its relatively new enhanced index Core Global fund or left the task to external managers.
“Now we’re voting on everything in ever corner of the portfolio,” O’Grady said.
ISS, which also counts the NZ Superannuation Fund and the Accident Compensation Commission fund (collectively worth about $80 billion) as clients, is the world’s largest proxy voting service, representing almost 3.7 trillion shares across 9.6 million corporate ballots each year.
“It’s important that we can include our relatively small assets in a much bigger pot,” he said.
Last week the Australian Securities and Investments Commission (ASIC) released a report urging both proxy-voting firms and their clients to “improve the way they engage”.
The ASIC review covered the four major proxy adviser firms operating in Australia including ISS. According to ASIC, proxy advisers need to clearly explain corporate engagement policies, voting guidelines and report details of their interactions with companies.
Proxy firms should give companies “sufficient time” to check facts in reports and react quickly if any errors are identified.
The ASIC report says companies also need to cooperate with proxy advisers to ensure the market receives accurate, clear and timely information ahead of a vote.
In a statement, ASIC commissioner, John Price, said: “Proxy advisers play an important role in our market by assisting shareholders to make voting decisions on company resolutions. Voting is a key shareholder right which enables investors to hold boards to account.
“Meaningful engagement between companies and proxy advisers can assist shareholders by improving the quality of information provided to shareholders in proxy adviser reports.”