Local funds management firms have been slow to back global ethical investing principles, according to the Responsible Investment Association Australasia’s (RIAA) first stand-alone report on the New Zealand market.
The RIAA ‘Responsible investment benchmark report 2015’ NZ edition (which in previous years was incorporated in the Australian report) found only nine fund managers, representing a collective $12.7 billion, had signed up to the Principles for Responsible Investing (PRI) – the United Nations-backed “aspirational” standards for sustainable investing.
“However, of the top 10 asset managers in New Zealand by assets (taken from Morningstar sources), only three of these are signatories to the PRI, and all three only because their offshore parent entities are signatories,” the RIAA NZ report says.
Simon O’Connor, RIAA chief executive, said by contrast 73 Australian fund managers, representing 80 per cent of the country’s total assets under management, had signed up to the PRI.
“Some large NZ asset managers are absent from the conversation,” O’Connor said.
The current PRI signatory list includes only three mainstream NZ funds managers – Devon Funds Management, Harbour Asset Management and Salt Funds Management – in addition to six property and private equity firms (notably, the $7.6 billion Wellington-based HRL Morrison).
A further eight NZ “asset owners” – principally three largest Crown financial institutions and a number of community trusts – are also PRI signatories.
“This indicates that at the institutional level beyond the large and mainly government asset owners, there remains a lot of scope for improvement in the take up of responsible investment generally,” the RIAA report says.
In fact, the NZ Super Fund and the ACC fund together accounted for 86 per cent of all NZ assets deemed as responsible investments in the RIAA study.
The ‘broad responsible investment’ style – epitomised by these large institutional investors that integrate ethical, social and governance factors into their portfolios – makes up about 95 per cent of the approximately $63.5 billion invested along responsible guidelines in NZ, according to the RIAA.
However, the report notes some cause for optimism at the retail end of the market, as measured by the increase in ‘core responsible investment assets’, defined as funds that apply “screening, sustainability themed or impact investment”.
‘Core’ responsible investments jumped from about $2.7 billion in 2013 to $3.2 billion in the latest RIAA study, with that increase split about 50/50 between net flows and performance, O’Connor said.
“With core responsible investment offerings being the best proxy for retail demand, this indicates a reasonably strong lift in retail demand for ethically screened funds of approximately 10% in the last year,” the RIAA report says.
“With Morningstar reporting total assets under management in NZ of NZ$80.8 billion (including NZ Superannuation Fund), core responsible investments represent 4% of the market. In Australia, the equivalent funds represent 2.49% of [total assets under management].”
O’Connor said the uptick in retail demand for responsible investments is partly due to KiwiSaver but “we’re seeing real growth in the private wealth market”.
“There’s increasing interest [in responsible investing] from high net worth investors, family offices, charities and others who want to align their investments with their missions and values,” he said.
However, O’Connor said the ‘impact investing’ trend – where investors fund projects with specific social goals – has yet to hit Australasia in a big way.
“There are no flows yet [to impact investments] in Australia or New Zealand,” he said. “Partly because there’s not many appropriate projects and the small deal sizes [in Australasia].
“But there’s lots of tyre-kicking going on.”
O’Connor said the mooted NZ government ‘social bonds’ might fall into the impact investing category.
“It was also a big topic at the Philanthropy NZ conference,” he said.
Meanwhile, last week research house Morningstar revealed it had teamed up with Amsterdam-headquartered, firm Sustainalytics, to launch “the industry’s first environmental, social, and governance (ESG) scores for global mutual and exchange-traded funds” later this year.
In a statement, Morningstar said: “For the first time, investors will be able to compare funds across categories, relative to benchmarks, and over time using ESG factors. They will also be able to drill down to see scores for each of the three — Environmental, Social, and Governance —pillars.”
The Dutch firm Sustainalytics has researched ESG factors for 20 years.
Swiss-based private banking business, Julius Baer, will be the first firm to licence the Morningstar ESG scores, the release says.