The Responsible Investment Association of Australasia has recently published its New Zealand Responsible Investment Benchmark Report.
The Report details industry data on the size and growth of the New Zealand responsible investment market over the 12 months to 31 December 2017.
The Report reinforces that a responsible approach to investing – one that systematically considers environmental, social and governance (ESG) and/or ethical factors is now the expected minimum standard of good investment practice in New Zealand.
Some of the key findings are that:
As at 31 December 2017, responsible investment constituted $183.4 billion assets under management (AUM), up a significant 40% over the 12 months. It is estimated that the vast majority of professionally managed investments in New Zealand are invested as responsible investments.
There has been a massive growth in responsible investments where the main strategy is to screen out investments that do not align with responsible investment goals such as gambling, alcohol, tobacco, weapons, pornography and animal testing. This is known as negative screening.
Broad responsible investment strategies – those that factor ESG considerations alongside traditional financial considerations in investment decisions grew by 9% to $97 billion.
Managed Funds that are invested using core responsible investment strategies are out-performing equivalent New Zealand shares as well as multi-sector balanced funds over all measured time horizons.
The following Table from the Report gives a breakdown of the primary responsible investment strategies adopted in the New Zealand market.
The Table shows the growth in responsible investment assets under management, and breakdowns the assets under management where responsible investment strategies are deployed into the following categories:
Core responsible investment strategies – 47% of the total – where the managers are primarily using techniques such as:
Negative screening – to weed out investments such as weapons manufacturers, that are deemed irresponsible.
Positive and best in class– to select investments for positive ESG characteristics or sustainability relative to industry peers.
Norms based screening – where investments are excluded or selected based on international norms such as those defined by the United Nations.
Broad responsible investment strategies – 53% of the total – where the managers’ primary responsible investment strategy is to integrate ESG factors into traditional financial analysis and investment decision making on the basis that companies with positive ESG factors are likely to have lower risk or can grow profits more sustainably.
The Report assessed the performance of New Zealand Funds using Core responsible investment strategies and compared them with their benchmark index and the average of equivalent mainstream funds as shown:
The Report shows that:
Core responsible investment New Zealand share funds outperformed equivalent funds and their benchmark index for all periods.
Responsibly invested international share funds out-performed their equivalent funds and benchmark in the three and ten year time horizons, but under-performed over 1 and five years.
Responsibly invested balanced portfolios outperformed the multi-sector growth fund average for all periods (with no benchmark data available for 10 years).
According to consumer research commissioned by the Responsible Investment Association of Australasia over 70% of New Zealand investors believe it’s important that KiwiSaver funds consider environmental, social and/or ethical factors.
In addition there is a growing body of research showing that socially responsible investing does not come at a detriment to financial returns. For example in 2015 Deutsche Asset and Wealth Management and Hamburg University conducted an analysis of over 2,000 empirical studies. They found that the majority of studies show a positive correlation between ESG standards and corporate financial performance.
How can Clients Benefit from Responsible Investing
Clients should proactively discuss their values, ethics and passions with their financial adviser. Authorised Financial Advisers are required to know their clients and up-coming changes to the law will require advisers to act in their clients’ best interests.
If you are coming to me for investment advice, I will be asking if:
You want ESG or ethical factors to be taken into account.
You want to exclude companies or industries which have an adverse impact on the environment or society.
You want to pro-actively seek out opportunities that have a positive social and environmental impact for example clean tech.
You want to prioritise investment in companies that have the best track record on ESG matters.