What is really behind Responsible Investing and ESG ratings?

Mint portfolio manager David Fyfe explains Mint's approach to responsible investing and ESG.

Saturday, November 20th 2021, 10:51AM

by David Fyfe

Responsible investing is generally acknowledged as the inclusion of factors, such as environmental and societal issues, into the investment process alongside the traditional financial analysis.

Recently, we saw the Responsible Investment Association Australasia (RIAA) release its annual benchmark report for 2021. This report assesses Aotearoa’s fund managers and the Responsible Investment (RI) practices they undertake.

As a pleasing sign of progress, the report showed that funds with leading Responsible Investment practices are approaching up to half of New Zealand’s professionally managed funds at $142 billion.

RIAA as an organisation aims to be recognised as Australasia’s authority on Responsible Investing standards and practices. It has more than 450 members managing over US$29 trillion in assets globally. Its mission is to “promote, advocate for, and support approaches to Responsible Investment that aligns capital with achieving a healthy and sustainable society, environment and economy”.

They aim to achieve this by providing a platform for its members and the broader community to engage and focus on what leading practice looks like.

They also look to influence policy makers and regulators, as well as providing tools for investors and consumers to navigate the RI world, amongst a range of other RI related initiatives including product certifications.

The RIAA benchmarking report undertakes a survey of managers through a questionnaire around 4 key areas of focus, including:

Firms commitment to RI – assets under RI strategy’s, RI policy transparency and disclosure
RI & Risk Management – RI/ESG factors integrated into process, screening and its disclosure
Stewardship – active ownership via voting, corporate engagement and collaborative initiatives
Allocating Capital – evidence of processes benefiting stakeholders and contributing to solutions

We are proud to say that within this framework, Mint Asset Management was recognised as a Responsible Investment Leader, scoring highly (over 75%) in the four categories outlined above.

This acknowledgement confirms, from an independent party who are sector leading in their actions, that what Mint considers, undertakes and discloses around Responsible Investing is aligned with understood best practice.

Independent assessment and transparency is something we value at Mint and for that reason, we are also signatory’s to the “Principles for Responsible Investment” established by the United Nations (‘UNPRI’).

Similar to RIAA, UNPRI aims to provide a consistent framework for reviewing business practices across industries and companies. Mint reports and is assessed annually by the UNPRI on our ESG (Environment, Social and Governance) investment process framework and its controls. Our current A+ A rated assessment is available on our website.

At Mint, we spend plenty of time assessing our investment universe and its interaction to ESG factors.

More recently, we have turned the focus back on ourselves and we look to align Mint with best practice and continual improvement.

One, of many, steps we are taking in our own self-assessment is our pathway towards the Toitu Carbon Zero certification. This process is helping us to identify, measure and set reduction goals for our greenhouse gas emissions.

As we work our way to an independent audit of our greenhouse gas inventory, our focus remains on what we can do as a business to reduce our footprint in a sustainable manner.

For emissions that we are unable to reduce or are unavoidable, carbon credit offsets provide a sensible way to balance our emissions impact. However, like our conversations with corporates, the absolute reduction of emissions will always be the focus.

Responsible Investing can take many approaches, with many differing drivers as to why it is undertaken. For some, RI is only about avoiding the wide universe of so-called ‘sin stocks’ from portfolios; for others, it’s more important to integrate ESG into the wider investment process.

At Mint, we believe that Responsible Investing, or ESG, considerations are key to making a fully informed decision in any investment process. When investing over a long time horizon, companies that are better at managing risk should be able to have better and sustainable outcomes.

Hence, RI/ESG factors are a specific set of risks that need to be considered, managed and monitored. For this reason, at Mint, we integrate this into our investment process.

We do this via a two-pronged approach; firstly, we have specific exclusions for sectors we believe are not suitable within our ESG framework (manufacturing tobacco, pornography, fossil fuel extraction to name a few, our Socially Responsible Investing policy is here). Secondly, we integrate ESG scoring on each stock into our process.

Each investment analyst at Mint is responsible for a full ESG assessment for every investment we make or consider.

This involves assessing all available details released by companies but also through active engagement and continual conversations with each company under consideration.

Our assessment interrogates the three key pillars of Environment, Social and Governance. Within each pillar we have evolved our own proprietary score card which we then use for assessing companies on their policies, practices and outcomes.

While it’s an extensive assessment, some key environmental considerations include suitable climate change policy disclosures, measurement of carbon emission intensity and transition risks.

On Social matters, we look for the company’s focus on diversity, workplace safety, privacy practices, supply chain assessments and modern slavery policies, amongst others.

From a governance perspective, we look for suitably structured boards with appropriate diversity, skillsets and independence; all aligning with corporate governance best practices (ie. NZX Corporate Governance Code).

Collating all this together ourselves in a comprehensive process allows us to have a complete picture of all our investments. At Mint, we believe that integrating the best of valuation and financial metrics with the qualitative side of ESG evaluations will drive stronger outcomes for investors.

ESG assessments and selection are not a single fund solution at Mint, this imperative work sits across all of our funds. Specifically, in our NZ Socially Responsible Investment Fund we target greater overweight exposures to companies that we believe are better ESG performers in a portfolio wide construct.

This fund rewards the market leaders in each sector through its portfolio selection. This tilt, we believe, provides a pathway to industry leading risk adjusted returns.

At Mint, we do not shy away from the fact that we believe Responsible Investing is a key facet of any investment process. It is not just a discussion point or a pathway for future endeavours, but very much embedded in our current process and part of our ethos.

To download a copy of the RIAA report please visit: responsibleinvestment.org

Disclaimer: David Fyfe is a Portfolio Manager in the Investment Team at Mint Asset Management Limited. The above article is intended to provide information and does not purport to give investment advice.

Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement here.

Tags: Mint Asset Management