Socially responsible investing (Part 4): Growing pineapples in Alaska

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This month’s commentary looks at change – how consumer values are changing, how businesses are impacted and how advisers can respond.  The adviser response may involve new socially responsible product and this commentary also considers whether there is a risk of “greenwashing” when it comes to financial products.

Monday, May 22nd 2017, 9:00AM 1 Comment

by Pathfinder Asset Management

We live in a complex, changing and often confusing world. Businesses are forced to re-think and re-align to stay relevant. We all know the drive for change commonly comes from new technology. However, change also comes from consumers – reflecting personal values and priorities. 

For an example of how consumers’ environmental and social values challenge businesses, check the website of US listed cigarette producer, Philip Morris. Its homepage is headed “Designing a smoke-free future – how long will the world’s leading cigarette company be in the cigarette business?” That stark question, driven by consumer values, makes the tobacco producer’s website look like an anti-smoking campaign.

Another example comes from Mike Bennetts, CEO of petrol retailer Z Energy who told the NZ Herald, “we’re in the energy business so we’re somewhat agnostic about what we sell.” Currently, their revenue is from selling fossil fuels - in a decade or two, it might be from selling electricity. Their market is changing, and their business proposition is changing with it. 

One final anecdote is AWE, one of the largest energy producers in Germany. In 2012, its CEO was not a fan of renewable energy and said solar energy in Germany was “as sensible as growing pineapples in Alaska”. Yet only four years later, when RWE floated off its solar and wind assets, the stock market valued the new renewable energy company (Innogy) more highly than the legacy nuclear, coal and gas power assets. The market regarded the split as akin to the restructure of a financial institution, with RWE left holding the damaged “bad bank” assets.

The point of this is that businesses can be forced to change for a number of reasons. One reason is consumer values. This impacts not only how we consume as a society, but also how we invest. The result has huge implications for product and service offerings of financial advisers and fund managers.

Responsible investing: financial adviser views

How are those that direct client investment in NZ (financial advisers) reacting to the responsible investment trend? As with any approach to investing, there are a range of responses. Firstly, there are a small number of early adopters building their adviser business around responsible investment – we may see more as investor awareness grows.

A second group comprises the large number of advisers who want responsible investment products to be part of their client offering. It’s not the core foundation of their business, but they are being entirely rational to include some responsible product.  Here’s why:

1) Engagement: Clients enjoy talking about responsible investment issues - this is a great way to strengthen client engagement.

2) Returns: In the long run, well-governed companies that care about environmental and social risks should outperform companies that don’t care and aren’t well governed. The offshore data supports this style of product.

3) Reputation risk: Ignoring the responsible investment trend could lead to serious reputational risk for an adviser business (in the same way the cluster munitions publicity in 2015 was a reputation risk for KiwiSaver providers). 

4) Personal and business values: Google’s original code of ethics was “don’t be evil” which set a fairly low bar. More recently, Alphabet (Google’s listed parent) has redefined this as “do the right thing”. That code resonates for many NZ financial advisers and their approach to business and client relationships. For them, including at least some responsible investment product feels like “the right thing”.

A third category of advisers regard responsible investment as a waste of time – it’s a fringe fad that will never become mainstream. But is responsible investment really on a par with growing pineapples in Alaska? It seems to be gaining global momentum, in which case, it is here to stay.

Is greenwashing a risk?

In a 2016 survey of 1,000 KiwiSaver investors, 29% said they don’t trust fund managers who claim their product is responsible, ethical or sustainable. That is an extraordinarily high level of suspicion and highlights the need to build trust. Consumers are wary of greenwashing.

So how does an investor or adviser know if a manager really does take responsible investment seriously in its stock selection? One simple test, applied by some investors, is to check if the manager is a signatory to the United Nations Principles for Responsible Investment (UNPRI). The Principles were set up in 2006 to provide a framework for incorporating environmental, social and governance (ESG) factors into investment decision making. So far, 1,135 investment managers globally have signed up.

There are 6 UNPRI Principles - each is “aspirational” rather than “prescriptive”. They can effectively be broken into two parts. The first two Principles set the scope for behaviour of fund managers as asset owners:

1) Incorporate ESG issues into investment analysis

2) Incorporate ESG into ownership practices (i.e. be an active, rather than passive, owner)

The next four Principles are about promoting the wider acceptance and implementation of ESG:

3) Seek entities invested in to disclose on ESG issues

4) Promote acceptance of the Principles within the investment industry

5) Work with others to effectively implement the Principles

6) Report on activities and implementation of the Principles

There are currently 17 UNPRI signatories from New Zealand, nine of which are investment managers. However, in its survey of responsible investing, the Responsible Investment Association of Australasia (RIAA) found only three of the nine NZ managers can demonstrate leading practice in ESG integration. This could be a case of “buyer beware” for investors if relying solely on the self-certified UNPRI signatory status.

An alternative certification program for financial advisers and fund products is provided by RIAA. This requires commitment to ESG investing, implementation of responsible investment processes and transparency around information provided to investors. This is a relatively recent initiative for New Zealand and currently only two NZ fund managers (AMP and Booster) and seven financial advisers have signed up. More are likely to follow. The RIAA process is not simply self-certification, as it requires independent verification of data (by Grant Thornton or KPMG) and random audits of up to 10% of funds each year.

Can’t NZ just ignore responsible investing?

Advisers in New Zealand should care about the global trend towards investing responsibly. This trend is accelerating, no matter which way you look at it:

1) AUM growth path: AUM growth in socially responsible investment globally far outstrips conventional AUM growth (source:  Boston Consulting Group)
2) Market penetration: At least $1 in every $4 professionally managed in the US now incorporates responsible investing principles (source: Bloomberg)
3) Absolute size: Worldwide AUM managed responsibly is now a staggering US$23 trillion (source: Global Sustainable Investment Alliance)

Consumers are demanding change to match their values. This includes the global trend towards investing responsibly - a trend that NZ fund managers and financial advisers can no longer ignore. The idea of growing pineapples in Alaska sounds impossible - yet the equally improbable task of building a thriving solar energy industry in Germany has happened. Consumer values (coupled with massive government subsidies) were what drove that change.

John Berry

John Berry is a founder of Pathfinder Asset Management Limited, an independent director of Punakaiki Fund Limited and a member of the Responsible Investment Association of Australasia. Pathfinder is manager of its Global Water Fund and Responsible Investment Fund. This commentary is not personalised investment advice - seek investment advice from an Authorised Financial Adviser before making investment decisions.

Pathfinder is an independent boutique fund manager based in Auckland. We value transparency, social responsibility and aligning interests with our investors. We are also advocates of reducing the complexity of investment products for NZ investors. www.pfam.co.nz

Tags: John Berry Pathfinder Asset Management responsible investing

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