Responsible investing missing the mark: White paper

New Zealand's responsible investment managers are too focused on exclusions, a new white paper says.

Wednesday, November 1st 2017, 6:01AM

Janet Natta

Most fund managers had made changes to the way they invest members’ funds, over the past year.

In 2016, the total responsible investment market in New Zealand reached $131.3 billion assets under management, up 67% from the previous year.

Kiwi Wealth had released a new white paper that says most New Zealand managers are doing that through exclusions or negative screens. But it said that was inflexible and limited in its ability to add investor value and achieve the public, social and environmental goals sought through responsible investing.

“That falls short of international best-practice and certainly not what we consider to be true responsible investment,” said Simon O’Grady, Kiwi Wealth chief investment officer.

“Sector exclusions are a blunt instrument. It’s an approach that can actually work against investors, and means managers may be neglecting their fiduciary duty to act in investors’ best interests in the extreme.

“Not only are sector exclusions inflexible and limited in building investor value, it’s an approach that doesn’t necessarily effect any real or positive change in the behaviour of companies within excluded sectors.”

Adviser Janet Natta agreed. She said while negative screens were better than nothing there should be more emphasis on positive screens.

She said different investors had different ideas of what responsible investment meant. Some were worried about sugar while others were concerns about fossil fuels.

Natta said she was worried about “green-washing” by funds that claimed to be responsibly invested. “The world needs to move on. When you look at what’s available in Europe it makes your mouth water but we can’t access that.”

The paper said only by fully incorporating environmental, social and governance (ESG) considerations could investors be given the best chance of achieving theri desired outcomes.

That meant truly responsible investment required a considered, nuanced approach, with clients acting in partnership with their fund manager.

“Responsible investment isn’t just about reflecting personal values. It’s about managing risk to long-term shareholder and stakeholder value.

“It raises many important issues for the New Zealand wealth management industry, and it’s a real challenge to strike the right balance on these issues while acting in the client’s best financial interests.”

The white paper said the dilemma for ESG-conscious investors was whether to keep their distance from things they did not like, or to own shares but engage to try to improve companies' behaviour.

"Total exclusions may ‘feel’ good to the investor but is not the most effective way to drive positive change. Excluding companies is not an effective way to influence better behaviour – owning shares and voting gives investors a voice and is more likely to work.'

John Berry, of Pathfinder Asset Management, which has a focus on responsible investment, said negative screens always included a value judgement - such as when a manager decided to screen out alcohol, or gambling.

But he said ESG factors, by contrast, were about factors that could affect business performance and share price.

Berry said managers needed to better articulate their investment strategies and declare them transparently, including on their websites, so that investors could easily understand what they were buying when they invested.

Tags: ESG funds management investment John Berry kiwi wealth Pathfinder Asset Management responsible investing