Can you invest responsibly and get good returns, too? Yes, say the experts. Brenda Ward finds out why this form of investing has become today’s hottest share-market trend.

Do you feel uncomfortable with the thought that your savings could be invested in banned weapons, polluters, or tobacco? If you do, you’re not alone.

The financial industry got a shock last year when Kiwis reacted angrily to media reports about where default KiwiSaver scheme providers were investing their members’ retirement savings. A story revealed that nine of the default KiwiSaver scheme providers had either direct or indirect investments in companies making cluster bombs, anti-personnel mines or nuclear weapons.

People were quick to protest. More than 12,000 signed a petition calling for KiwiSaver scheme providers to drop investments in companies making weapons and bombs.

Banks and investment funds responded rapidly, and the result has been dramatic.

Companies like Kiwi Wealth, part of the same family of companies as Kiwibank, committed to having all its KiwiSaver investment funds certified based on Environmental, Social, and Governance (ESG) standards. Others introduced policies excluding industries, or launched ethical funds.

Simon O’Connor, CEO of the Responsible Investment Association of Australasia (RIAA), says this uproar was probably “the most significant event in responsible investment globally in the past year”.

“Kiwis sent the industry a clear signal that investors expect their investments or retirement savings to be invested in a way that matches their values. KiwiSaver shifted from 4 per cent of funds under management with an ESG investment strategy, to 60 per cent.” This was an enormous percentage increase and a huge step forward.

What is ESG investing?

Dr Rodger Spiller of Money Matters, a Kiwi financial adviser who’s been part of the responsible-investing movement since the 1980s and wrote his doctorate on the topic, says ESG covers three aspects:

Environmental: How a company impacts nature. For example, greenhouse gas emissions, waste and pollution, and resource depletion, including water.

Social: Relationships with customers, employees, suppliers, and the community. For example, healthy and safe working conditions and not sourcing materials produced through slavery or child labour.

Governance: The principles and practices by which a company is directed. For example, business ethics, board diversity and structure, and the quality of leadership.

Responsible funds can be stars

Your money can do good – and also do well, say both Spiller and O’Connor.

Research shows when funds exclude some industries, returns do not suffer over the longer term. In fact, companies committed to ESG often perform well. Says O’Connor: “Every year we do an analysis of ESG funds against various benchmarks, and we’re seeing really strong performance by these funds – in fact, outperformance of certain ESG equity funds over three, five, and ten years.

“There’s no reason why a fund that’s excluding industries should deliver returns that are less than any others.”

He says companies that don’t manage ESG issues make worse investments. “ESG has become a proxy signal that indicates businesses are well managed.”

Which funds are ESG?

In Australia and New Zealand, RIAA certification shows that a fund acts on ESG principles, with certification achieved only after a robust assessment.

O’Connor says the RIAA has about 20 members in New Zealand (of its 200 members across the region) and now has 150 products certified, 35 of which are available in New Zealand. You can find products on www.ResponsibleReturns.co.nz.

He’s seen a 2,500 per cent boost in funds which exclude companies with poor records and have positive ESG investment policies since August last year, when the KiwiSaver story broke.

Leading the charge in this country among institutional investors is the NZ Super Fund, which globally is a very strong leader in responsible investments, says O’Connor.

“On a scorecard, I guess the New Zealand market went from a D to a B-minus in ESG, and there are pockets that are A class, which is great.”

Spiller says there is a great deal of variability in how funds approach ESG, so it pays for investors to look for a charter that spells out the fund’s approach. They should also look at a fund’s published portfolio to see what it is actually investing in, and read quarterly reports to investors that include information about engagement activity done on behalf of investors.

Leading by example

Chief investment officer Simon O’Grady says Kiwi Wealth has had a responsible investment policy for several years and recently revised it.

“At Kiwi Wealth, we buy into responsible investing, and what we’ve elected to do is not to offer a set of responsible funds, as well as others that aren’t. But as a fully responsible investment firm we have embedded best practice right at the
individual security level across all our KiwiSaver investment funds.”

The company recently asked its customers what they wanted. The answer came back: “We want you to be responsible – and to offer good returns.”

There are three tiers to Kiwi Wealth’s Responsible Investing Policy:

· Excluding companies related to tobacco, whaling and nuclear weapons.

· Applying broader ESG-based policies that are consistent with the company’s investment policy to every security in a portfolio.

· Taking account of greater areas of sensitivity, such as industries which have a propensity to victimise people or the environment.

And the investor is benefiting, O’Grady says.

“There’s growing evidence that if you incorporate ESG in the way you select investments, better-scoring companies tend to be better investments in a risk-and-return sense.”

What’s next?

The next step, says the RIAA’s O’Connor, is more choice.

“We’ll see more products coming into the market, so investors can find funds matching their own needs. We’ll start to see ESG across all investment styles, including conservative through to growth funds.”

Kiwi Wealth’s O’Grady says Australia and New Zealand are already ahead.

“In Asia, companies are only just beginning [to look at it]. I was in the US recently, presenting on issues on implementing ESG. There, few companies are able to embed the policies – and most are still stuck at the ‘exclusion’ level.”

Spiller says the KiwiSaver story was a wake-up call.

“The story was a bit of a nightmare for many readers, who woke up and realised their money was invested in things they would certainly not be wanting to invest in if they’d thought about it.

“So, that’s been helpful, but I think the big issue is to increase demand.

“It’s also important that investors and local fund managers move beyond simple exclusions to also invest in ESG leaders and engage with companies to encourage them to continuously improve.”

First published 1 February 2017

By Brenda Ward

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