Regulation surged into contention last year as one of the most influential factors driving the uptake of responsible investment (RI) in NZ, the latest industry body sector survey shows.
According to the Responsible Investment Association of Australasia (RIAA) ‘benchmark’ report, more than a quarter of NZ fund managers in the survey cited ‘regulatory requirements’ as a core driver of RI growth in 2023 compared to just 9 per cent in the previous year.
The result coincides with the introduction of the climate disclosure regime in NZ last year that saw most licensed fund managers lodging inaugural reports.
A similar proportion of respondents in the latest study attributed RI expansion to the growing integration of environmental, social and governance (ESG) factors in risk management processes: again, just 9 per cent ticked this box in the 2022 poll.
“Reflecting the growing interest in RI from regulators and policymakers, regulatory requirements increased significantly as a reason for market growth, from 9% in 2022 to 26 % in 2023,” the RIAA report says. “This was reflected by the change in inclusion of ESG in risk management process, showing that internal adoption of ESG in risk management is increasing and moving the RI market.”
Meanwhile, acknowledgment that ESG influenced financial performance and improved long-term returns or risk management jumped up to first and second as RI growth engines with respective scores of 43 per cent and 39 per cent – both rated 30 per cent in the prior period.
The 2022 most-cited RI-enhancer – demand from retail clients – was one of the few to fade in the most recent survey, dropping from 35 per cent to 30 per cent in the latest rankings.
Most other RI growth-driving factors held steady year-on-year, bar ESG as a fiduciary duty (down to 9 per cent from 13 per cent in 2022) and peer competition (falling to 4 per cent from 9 per cent).
Despite the tailwinds, the survey identifies several dead-weights acting as a drag on RI growth, notably ‘greenwashing’, which topped the concerns in 2023 on 61 per cent – close to doubling the previous year reading of 35 per cent.
“The highest increase was in risk concerns, (39%, up from 4% in 2022), and performance concerns was also cited by 39% of respondents in 2023,” the RIAA report says. “This indicates that regulatory actions in RI are affecting the sentiment of investment managers and returns-related apprehensions remains a barrier.”
RIAA, co-headed by Dean Hegarty and Estelle Parker, measured the NZ responsibly invested funds management pool at $207 billion in 2023, up 13 per cent year-on-year, equating to 56 per cent of the total fund assets (2022: 52 per cent).
The online survey tapped 23 respondents out of a ‘research universe’ of 50 NZ-based managers and a 20 offshore-headquartered investment firms that offer strategies here.
Also last week, Forsyth Barr released its third annual ESG and carbon exposure analysis of the NZX, noting a slow-down in progress compared to its previous studies, “partly due to companies having now addressed the more accessible and straightforward opportunities”.
“Another aspect is companies being conservative given the current scrutiny on public aspirations. A third element is that reality is setting in when it comes to managing short-term viability alongside long-term sustainability ambitions,” the Forsyth Barr report says. “We found the Leaders are extending their lead, with those later on the agenda getting left further behind.”
Furthermore, NZX companies faced headwinds in a faltering economy and new government priorities that added extra challenges for the ESG-aware.
“This year exposed the realities of navigating Carbon, Environmental, Social, and Governance (C&ESG) priorities amid economic volatility and changing political agendas,” the Forsyth Barr report notes.
“With growing greenwashing concerns, the focus has shifted to ensuring the authenticity of C&ESG efforts to safeguard trust, corporate reputation, and the credibility of the C&ESG agenda.”