Advisers should pay more attention to ESG factors: Super Fund

Advisers and fund managers who do not consider environmental, social and governance (ESG) factors in their investment decisions would be derelict in their duty, the NZ Super Fund's head of investment analysis, David Rae, says.

Friday, November 20th 2015, 6:00AM

by Susan Edmunds

The fund has released a new whitepaper which outlines why it thinks responsible investing pays off.

It is required to invest in a way that does not prejudice New Zealand’s international reputation.

The paper said that by identifying and managing ESG factors the Super Fund could be more confident in its ability to allocate capital towards more attractive areas and better manage long-term investment risk.

Rae said ESG considerations were material to long-term returns.

“Identifying and managing environmental ESG factors helps us to find new opportunities, steer our capital towards more attractive areas, and manage long-term investment risks. We expect that our returns will be higher, and downside risks lower, over the long term. These benefits arise from avoiding the poor performance and enterprise failures that can arise from lax governance, and weak environmental and social practices.”

He said it was different to treating responsible investment as a hurdle, or only as a way to manage risk.

"Being a responsible investor implies that we must behave as the owners of assets rather than just investors in various securities. It is also important to ensure that our agents, be they fund managers, boards, or company executives, act in our interests and are seeking to maximize long term returns for the fund."

Studies had shown ESG factors were linked to better returns, he said.

“Good ESG practices reduce the cost of equity by reducing environmental and social risks, lessening information asymmetries through better disclosure from managers to owners, and keeping management aligned and motivated.”

Rae said New Zealand fund managers were getting better in terms of their understanding of ESG considerations but there was still room to improve.

"One area where there is a weakness is with advisers. I'm not sure advisers and brokers are getting it."

That could include basic considerations such as ensuring their clients' voting rights were used. "There are still some advisers behind the curve. To some extent the investment public is not putting pressure on to be more proactive. If the demand is not there, there is no incentive to do it."

Some clients did not have "line of sight" on what happened to their money once they placed it with an adviser or broker, he said.

The fund reported a return of 5.54% in October and 9.42% over the past 12 months.

Tags: NZ Super Fund