Climate change investment strategies based only on exclusions are unlikely to be effective, according to a new Russell Investments NZ client note.
In a brief paper sent out late last year, Russell NZ argues climate change, unlike more easily identified ‘sin’ sectors such as tobacco or nuclear weapons, does not “lend itself to simple implementation policies” such as negative screening.
“Divestment in secondary markets (where issued securities are traded between investors) may have limited impact on the company’s operations and also prevent concerned shareholders from voting for improvement,” the note says.
Authored by Russell NZ director institutional, Matthew Arnold, and senior analyst, Mihir Tirodkar, the paper says strategies targeting corporate engagement and positive portfolio tilts to the renewable energy sector offer a more viable approach to investing for climate change.
As of December this year, the new batch of KiwiSaver default funds (to be determined by April) will have to exclude fossil fuel stocks from portfolios.
“… if the goal is to make default KiwiSaver investors contribute to the low carbon transition, we believe there may be greater value in adopting engagement policies and positive screens that contribute to the funding of renewables and green energy development,” the paper says.
But while the mandated KiwiSaver default exclusions may ultimately prove futile, the Russell report says NZ investors will increasingly have to consider how climate change affects their portfolio settings.
Last year the NZ government elevated the issue up the official agenda with the Zero Carbon Act and mandatory climate-related financial reporting requirements that will flow through to most local fund managers. As well, the second Jacinda Ardern administration declared a climate crisis soon after the October 2020 election along with pledges to achieve carbon neutrality in the public sector by 2025.
“Despite implementation challenges, climate change is a tidal wave that has far-reaching and varied implications for most investors,” the Russell paper says. “We believe that Kiwi investors, institutional and retail, should be thinking about the climate issue and creating an investment strategy around their beliefs on the topic.”
In 2017, Russell launched a low-carbon index-based fund for investors in Australia and NZ while the manager has a couple of other strategies specifically geared to climate change. The group has also produced several climate research studies with a couple more on the way.
“We will be releasing two pieces of research for local investors in the first quarter of 2021; the first will evaluate carbon metrics and other climate exposure considerations, while the second will detail our thoughts and experience-to-date in implementing an effective decarbonisation strategy,” the note says.