Mercer has tapped into the burgeoning demand for responsible investment (RI) options, raising more than $70 million since releasing a range of three wholesale products in NZ late last year.
Russell Garrett, Mercer NZ head of institutional wealth, said the suite of three environmental, social and governance (ESG) themed funds go beyond the now-standard bombs and smokes exclusions.
“In addition to the controversial weapons/tobacco exclusions that apply across all Mercer funds, our Responsible Investment Funds’ exclusions also extend to alcohol, gambling, adult entertainment and (some) fossil fuels,” Garrett said.
He said the funds incorporate a range of factors beyond negative screens with manager ESG ratings, ‘stewardship’ (such as share voting record and company engagement), and climate change exposure.
“For example, our Global Sustainable Equity portfolio (the global equity component within our Responsible Investment Funds) has a carbon intensity measure less than half that of the MSCI World Index,” Garrett said.
Currently, the funds feature four underlying managers: Schroders and Acadian offering core strategies; and, Stewart Investors and Wellington, providing concentrated, ‘thematic’ portfolios typically targeting growth companies with a sustainability edge.
“The same portfolio is used by Mercer’s wholesale investors in Australia and Europe/UK and is overseen by our global Responsible Investment team.”
Since the media storm in mid-2016 over potential exposure of KiwiSaver schemes to cluster munitions manufacturers most NZ institutional investors have developed RI solutions that follow, at least, the exclusion list published by the NZ Superannuation Fund.
However, the majority of institutional firms – including AMP, BT/Westpac, and Kiwi Wealth – have extended the RI focus across portfolios. As the Responsible Investment Association of Australasia (RIAA) found last year in its annual survey of the sector, the RI phenomenon in NZ – which grew by a record 2,500 per cent during the 2016 calendar year – was mainly an institutional affair.
However, retail interest – epitomised by the rebranding of Takapuna boutique Pathfinder last year as sustainable investment firm – was piquing, too. According to the RIAA, the number of ‘core’ responsible investment strategies offered in NZ increased from 12 to 21 over 2016 as the number of underlying SRI products almost doubled from 27 to 51.
At the institutional level providers are also moving beyond the broad approach to offer bespoke ESG products targeting specific factors. Last year, for example, Russell Investments, rolled out a carbon-lite index fund to Australasian wholesale investors.
While ESG etc may be the norm for institutions, the RIAA report says retail investors appear to have some performance anxiety about responsible investment funds.
“More work is needed to publicise the relative performance of RI Core funds versus equivalent mainstream funds and to engage stakeholders and influencers on the basis of misplaced perceptions,” the survey says.
At the same time institutional investors are grappling with more sophisticated ways to measure the non-financial outcomes of RI strategies. Russell, for example, recently tabled this impact investing performance model while Mercer senior responsible investment consultant, Alexis Cheang, told the group’s NZ conference last year of plans to report on portfolio sustainability outcomes inn 2018.