Responsible investment (RI) is not a buzz phrase – it is experiencing booming investor demand and is becoming the heart of the default investment model. But the global trend towards RI does not always reflect what companies and investment managers are doing at a micro level. With that in mind, Kiwi Invest quantitative and responsible investment strategist investigates the current status of RI in New Zealand…
- RI is now a movement, but much more progress is needed
The recent RIAA (Responsible Investment Association Australasia) 2020 Responsible Investment Benchmark Report identified that only 60 per cent of the industry has disclosed an RI policy, and less than half are applying environmental, social and governance (ESG) principles to all their assets under management.
Clearly, on that basis we can’t yet call RI a universally adopted philosophy or practice. Investors want it, and we are seeing some positive outcomes from it, but we have a long way to go. A number of investment managers and companies are yet to catch up and give RI the focus it warrants. Similarly, the bulk of the industry has still not twigged to the importance of RI as a driver of improved portfolio performance and ESG outcomes.
Despite the late-adopter behaviour of some, the New Zealand industry in general has been adopting RI at record speed, and we could be the world leader if we concentrate our efforts and everyone steps up. Globally there has been significant movement in recent years, with the 2018 Global Sustainable Investment Review finding that sustainable investing assets (those using ESG factors) in the five major markets (Australia and New Zealand, Canada, Europe, Japan and the United States) stood at US$30.7 trillion at the start of 2018, a 34 per cent increase in two years.
To maintain this trajectory, many in the industry are comparing their work against the standards of the global Principles of Responsible Investment (PRI), which provides a measuring stick against the global leaders in our field and a framework for transparency.
The increasingly baseline position of RI was evidently understood by the previous Labour-led Government, which is pushing default KiwiSaver funds (as one example) in an RI direction.
- Exclusions don’t achieve much
Excluding companies or industries from investment portfolios because they don’t meet RI criteria is not a particularly powerful tool, and does not contribute greatly to RI outcomes despite being the most talked about aspect of RI in public media. It is rather a small part of an overall RI strategy and is driven by fund manager preferences, client expectations and, increasingly, regulation. To really drive change, though, we think it’s much more important to increase the focus on being an engaged investor, voting for change and using our shareholder clout to encourage companies to improve – working from the inside, rather than the outside. This view is backed up by the PRI, where scores for exclusions aren’t high.
For instance, if we excluded every company that sold fossil fuels we would leave out some European Union oil companies that have been large investors in renewable and alternative energy sources. In those cases we look at what they have been doing, what is on their development horizon and how fast they can pivot away from a fossil fuel-dependent model.
A good example is the Finnish oil refining and marketing company Neste Oyj, which has become one of the EU’s leading renewable energy companies. The approach also takes into account the general industry climate, with OPEC losing its power and the COVID crisis drastically cutting into demand for oil. Many geopolitical factors are in play at any given time, which makes an active (and activist) strategy more effective.
- Passive ownership is being eclipsed by shareholder activism
The current Stop Hate for Profit campaign is targeting tech companies’ digital social platforms; it’s consumer- and user-driven activism that seeks to use the weight of numbers to drive change. Conversely, shareholder activism or active ownership uses the tools of proxy voting and direct engagement to create progress on ESG issues. Kiwi Invest, as an active shareholder, votes and collaborates with other investors to use our collective power for good, and we also provide a high level of transparency on our holdings, exclusions and voting.
As part of our policy on active engagement, Kiwi Invest makes all recent proxy votes publicly available. Examples include our vote against the reappointment of the board chair of BHP due to several ESG controversies with the company; we also joined 25 per cent of BHP’s shareholders in voting to withdraw from industry groups whose lobbying is inconsistent with the goals of the Paris Agreement. BHP is currently reviewing its industry associations.
Separately, Kiwi Invest was part of 44.5 per cent of shareholders who voted for Starbucks to meet packaging use and recycling goals, and since then, Starbucks has made progress on sustainability, including by testing compostable cups and planning to remove single-use plastic straws from all stores.
Social media is a major target of active engagement, and Kiwi Invest is currently co-leading the ongoing engagement about strengthened live-streaming controls on Alphabet (owner of YouTube and Google), Facebook and Twitter. Along with 85 funds (with approximately $13 trillion in assets under management) around the world, Kiwi Invest is asking these companies to prevent, detect and drive solutions for eliminating objectionable, harmful and/or hate-promoting content on their platforms. Towards that end Kiwi Invest has previously joined with other investors in voting against the reappointment of several directors of tech companies on the basis that they had failed to move swiftly enough on the problem of harmful content.
- Consumers have a basic expectation of responsible investing, and this needs to be an integrated approach rather than a token fund
Kiwi Invest is the investment manager for the Kiwi Wealth KiwiSaver Scheme, which is a default provider. The public surveys we have done from 2016 onwards have revealed that people have a basic expectation that RI is happening – that our portfolio managers are steering clear of companies that produce goods (e.g. tobacco, controversial weapons) or engage in behaviour (eg illegal or exploitative labour practices) that are harmful to humans, other species or the environment. Recently announced New Zealand Government requirements for climate risk reporting reflect some of these expectations.
Survey respondents have also told us they don’t have the desire or the expertise to select products themselves, but they want RI across the board, to at least a minimum standard, and they want positive outcomes from their portfolios.
We’re continuing to observe the practice of greenwashing in the fund management industry. While some of us are using responsible investment activities to push for concrete progress on key ESG issues, others unfortunately are merely pandering and using RI as a marketing ploy. Some fund managers exercise very little control over their investments and the companies they’re invested in – or simply have a token ESG or ‘impact fund’ – and investors are left in the dark. To help address and arrest this conduct, we’re pleased the Financial Markets Authority is now setting expectations that fund managers who are promoting funds as ‘green’ or espousing ESG principles are doing what they say.
- It makes good business sense
There is plenty of data proving that strong ESG ratings are in fact a good indicator of future financial performance. The evidence we see is that, if formulated in the right way, ESG factors are some of the strongest performance indicators for equity performance. For example, the Global Quantitative Fund I manage takes into account a variety of factors –over the last few years ESG scoring has been one of the strongest stock performance factors.
- For the fundamentals of investing in New Zealand to change, the industry has to change
On reading the RIAA report, I was surprised at the proof of a lack of buy-in to the potential of ESG to deliver better investment performance. We think the performance case for integrating ESG into portfolios is strong, yet the industry only rated this fourth in the survey as a growth driver for RI.
Related to this, impact investment is coming onto the scene as a way of creating more targeted and specific ESG outcomes, at the expense of slightly lower financial returns. In our view many clients would be interested in impact investment, but the illiquid nature and non-financial return aspects of this type of investment make it challenging to incorporate into core products.
Consumers have a basic expectation that their portfolios are managed responsibly. We think there’s more to this than meets the eye – fund managers are able to use RI to both push for better ESG outcomes and better portfolio performance. The exclusion of controversial industries, although important for other reasons, contributes to neither of these goals and is a big distraction from what really matters. With policymakers, regulators and a number of managers recognising the demand, the slow-adopter companies and investment managers will need to get on board or find themselves left behind.
Steffan Berridge is the quantitative and responsible investment strategist for Kiwi Invest. Kiwi Invest is the investment team behind all of Kiwi Wealth’s funds.