The NZ responsible investment (RI) sector is being led by top-down factors rather than bottom-up demand, according to a new report.
Demand for RI products from both retail and institutional investors flagged last year, the latest Responsible Investment Association of Australasia (RIAA) NZ benchmark study shows.
The RIAA industry survey found just 8 per cent of respondents saw institutional investor demand as a key driver of growth in the NZ RI sector compared to 33 per cent in the 2016 study. By the same measure, retail investor demand dropped from 33 per cent last year to 25 per cent in the latest report.
Indeed, weak demand from the retail investors emerged as the single largest factor holding back growth in the NZ RI market – jumping from 24 per cent in 2016 to 40 per cent a year later.
“A lack of demand from retail investors and an associated perceived lack of awareness of responsible investment by members of the public, identified by 40% and 27% of respondents respectively, were the two most common observations – pointing to a need for capacity building and education of retail investors as to the availability and performance benefits of RI products,” the RIAA report says.
However, during the year concerns about product availability and performance as RI retardants both fell from 34 per cent in 2016 to 23 per cent in the latest survey.
The RIAA study also found NZ ‘core’ RI equity funds – those that screen out at least some stocks – outperformed benchmarks over the one-, three-, five- and 10-year periods to the end of 2017. Global equity RI funds in the report sample fell behind the index over one and five years but outperformed during the three- and 10-year periods.
“This pleasingly reinforces global studies as well as our own Australian performance research that support the conclusion that responsibly invested funds provide similar or stronger risk-adjusted returns to their mainstream peers,” the RIAA report says.
Despite the downbeat projections on investor demand, RI funds under management (FUM) grew by some 40 per cent over the 2017 calendar year – fueled mainly by large asset managers refining products along environmental, social and governance (ESG) lines.
“Survey responses identified that a key driver of growth in RI funds was the further desire by clients to align investments to mission with the second most cited driver being the understanding that ESG factors impact on investment performance,” the study says.
While overall RI FUM grew from about $131 billion to over $183 billion during the annual period, ‘core’ investments more than doubled to finish 2017 at $86.4 billion.
“Broad responsible investments – those integrating ESG considerations – grew by 9% to reach $97.0 billion,” the RIAA report says.
Both ‘sustainability themed’ and ‘impact’ investing remained static in NZ, the study says, recording FUM of $400 million (in two funds) and $100 million respectively over the last two years.
But there were signs that the nascent impact investing market in NZ was picking up, RIAA says, with a recent fund-raising effort (by the Ākina Foundation) and the growth of new industry networks.
“As we’ve seen in other markets, we anticipate that in future years there will be a rapid ramp up of activity and capital flowing to impact investments, from green bonds to social impact bonds, venture capital funds to private lending, micro finance to social infrastructure,” the report says. “NZ is now establishing a strong foundation for its impact investment activities.”
In a statement, RIAA chief, Simon O’Connor, said the NZ funds industry was also shifting the focus away from negative screening to an integrated ESG approach.
“In 2017 we have seen a move by investors to go beyond just screening out harmful industries, to a more proactive approach to responsible investing, driven in large part by a growing understanding that a responsible investment approach delivers better investment outcomes,” O’Connor said.
The RIAA NZ conference is scheduled for September 18 at Auckland’s Hilton Hotel.