Five reasons why responsible investment will keep growing

Responsible Investment Association chief executive Simon O'Connor gives five reasons why RI will continue to grow this year.

Tuesday, January 19th 2021, 6:21AM

by Simon O’Connor

The unprecedented year of 2020 has presented many challenges and left us many lessons, but for those in the finance sector, it’s simultaneously been a time of dramatic momentum for responsible and ethical investing which is redefining how we do investment over the years ahead.

It’s unsurprising, as the financial case for responsible investing compounds on the moral. Not only have responsible investments weathered the COVID storm much more strongly than their mainstream peers, the most recent Responsible Investment Benchmark Report New Zealand from the Responsible Investment Association Australasia showed in 2019, responsible investment multi-sector growth funds outperformed the mainstream across 1, 3 and 5 year time frames.

Although reflective of a global shift, the push to formalise and embed environmental, social and governance (ESG) considerations into investment decision making has been stronger in the New Zealand market than many other markets over this past year. As you sit down to do your planning for the year ahead, here are five developments you need to be paying attention to that will shape our industry in 2021.

Mandatory climate risk disclosure

It was a global first when the NZ government made the announcement in September that it will require NZ businesses – including financial services businesses – to mandatorily disclose their exposure to climate change risks. As currently proposed, all investment managers with over $1 billion in total assets under management, as well as banks, insurers and crown financial institutions, will be required to report consistent with the global recognised framework of the Taskforce on Climate-related Financial Disclosures (TCFD).

This will rapidly change the amount of data that investors are both able to access and disclose themselves, and will put great pressure immediately on NZX listed companies to improve their disclosures, so that investors can meet their own reporting obligations from 2023. Leaders are already moving, from listed companies through to crown financial institutions (NZ Super, for example, recently released their own TCFD climate report) and in 2021 we’d expect to see many getting out in front with their first attempts to report against the TCFD.

Fossil free default KiwiSavers

Climate change risk disclosures, though, are not the end game. Rather, it is the reduction of investor exposure to the broad suite of risks presented by this rapidly changing climate in order to protect and grow those investments that is the main goal.

Again, NZ was the first cab off the rank in 2020 with the shift to require default KiwiSaver providers to not only have responsible investment policies in place, but also to set industry exclusion requirements, including avoiding fossil fuels. With the all important default provider tender recently closed, these new default provider requirements have effectively already set a new benchmark of expected practices in investment management for NZ. We expect that the ramifications of these requirements, especially the fossil fuel exclusions, will rapidly roll out across much broader industry participants than just default KiwiSaver funds, in the same manner of the 2016 push to exclude nuclear weapons, cluster munitions and tobacco effectively became industry norm within a year.

FMA guidance for responsible investments

Long awaited guidance from the Financial Markets Authority (FMA) was released early in December that will further shape the way the industry discloses its approach to responsible investment, and should be on the summer reading list for all investment managers. With responsible investment becoming a requirement of default KiwiSaver funds, it is effectively becoming the benchmark for all investment management in NZ, and as such, there are no readers that this doesn’t apply to.

In short, the FMA guidance shouldn’t surprise – don’t mislead, obfuscate, omit or make false claims, and then substantiate any claims, disclose your approach and any outcomes from your claimed responsible investment objectives, and consider external assurance or certification to validate claims. It’s a smart and sensible set of guidance, but one that formalises and lifts the bar to say, now responsible investment is a formal part of the FMA’s enforcement mandate, so give it the attention it deserves.

Far from ad hoc developments, these all constitute part of a broader momentum towards sustainable finance – that is, embedding concepts of sustainability formally into the financial system, to better manage risks, but also to better align the finance system with a sustainable and thriving future.

Sustainable Finance Forum Roadmap

And if you’re wondering what next, add to your summer reading list the Aotearoa Circle’s Sustainable Finance Forum Roadmap launched in November 2020. The Roadmap sets out a clear coordinated plan for how we embed sustainability into the financial services sector, as well as mobilise capital towards the clean and sustainable industries and businesses we need to deliver on the Paris Agreement and SDGs.

The culmination of close to two years’ work from a collaboration of financial institutions, civil society, academia, regulators and government, this Roadmap forms a significant blueprint for the decade ahead, and lays out the next steps and developments that will be required of investors and policy makers.

Expect to see moves to broaden responsible investment requirements beyond just KiwiSaver providers, with further standardisation of sustainable finance products, in light of the need for consumers to have confidence that products are delivering on claims and are true to label. Formal assurance or certification of such claims will likely become common place, such as through RIAA’s own Certification Symbol that has seen increasing demand.

Financial advisers should also expect lifting requirements that they are meeting the sustainability and values-based expectations of their clients. And disclosure requirements will continue to lift, including around portfolio holdings, responsible investment approaches, but also engagement and voting outcomes, likely to be captured under an industry wide stewardship code.

Consumers are on the money

Finally, the voice of our customer has never been louder and clearer, and that is that there is an expectation that money be managed in a way that does no harm and supports a better future. This is starting to lead to money moving between providers, towards more responsible and sustainable investment managers, but also to financial advisers who can respond to these demands.

2020 consumer research undertaken by RIAA with Mindful Money shows the growing sophistication and demand by clients for more sustainable investment options. Significantly, the research reinforces that the long held myth of underperformance of responsible investments is now well and truly dead, with nearly 80% concluding these investments would perform better than mainstream investments. But furthermore, the findings give a clear indication of the ballooning interest by consumers in responsible and ethical investment, with 93% of those who don’t invest ethically today, stating an intention to shift in the next five years.

These are all trends and developments that in aggregate show a major shift underway in financial markets in NZ that will continue to shape the way we do investment in 2021. This marks a moment in time whereby responsible investment has come of age, and is now a formal part of investment management – it is the mainstream.

Simon O’Connor is the CEO of Responsible Investment Association Australasia.

Tags: Opinion responsible investing Responsible Investment Association