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Why responsible investing counts

The RIAA has recently put out its latest report on how much money is responsibly invested in New Zealand and Simon O’Connor, CEO Responsible Investing Association of Australasia, shares his views on Good Returns TV.

Monday, September 11th 2017, 4:29PM

How’s New Zealand going in the latest numbers?
It’s been tracking really favourably over the last 12 months. We’ve hit around $130 billion of assets under management in New Zealand. It’s been invested under responsible investment strategies; that is, ethically invested. All those mainstream institutions are applying an environmental and social lens to their investing. That’s up quite substantially. The big rise in the last 12 months has really been around screened funds, and that comes from KiwiSaver providers.

In your report, you commented that there had been a massive shift by KiwiSaver providers to negative screening. That’s something you’ve never seen to that level before?
That’s right. Today, we’ve reported 2500% growth in screened assets under management in New Zealand, so it’s quite an astronomical figure. We’ve hit around $40 billion of assets – primarily Kiwisaver providers, but also other managed funds.

Did the media bring that about?
Effectively. There was a big media focus in August last year on the holdings of some of the KiwiSaver funds, particularly in controversial weapons, landmines, cluster munitions and tobacco. That really fed through to a political response, a legal response and, ultimately, a consumer response. It indicated that most New Zealanders just aren’t happy to build their retirement savings on the basis of these investments. 

We’re in the tenth year of KiwiSaver and they only made this shift to negative screening because of public pressure. Doesn’t that say something about the way they’ve been embracing RI?
It indicates a bit of a shift in mindset, really. I think what it indicates is that, ultimately, consumers do expect their funds to be managed in a way that does no harm. Previously, fund managers and KiwiSaver providers may not have expected their role to consider these kinds of issues. What has become really clear in the last year is that this fundamentally is the role. Most providers of financial products have to consider the values of their consumers.

It appears that very few of the retail managers are embracing ESG substantially. Is that a poor outcome?
I think what we’re seeing is that more of the institutional investors and fund managers in this market are starting to consider an ESG integration approach, whereby they really do consider the environmental and social factors in all their investment decisions. What is probably still lacking is a very clear and comprehensive description of what that means. Over the last couple of weeks, we’ve released the report in Australia and New Zealand, and through that process, we’ve assessed about a hundred fund managers. What we aim to identify is those that are really showing a comprehensive and leading approach to ESG integration.

In New Zealand at a retail level, it’s actually very small, isn’t it?
I think there are a couple of managers there that really come through with that strong approach.

They included Harbour and Southern Pastures?
And H. R. L. Morrison and AMP Capital.

When it comes to RI, we in New Zealand are total laggards, globally. Why do you think that is?
I think there are two ends of the spectrum in the market. You’ve got some of the globally strongest leaders sitting there, such as an NZ Super Fund, for example. Then you’ve got others who just haven’t embedded what that means to them as fiduciaries and providers of financial products, in terms of considering these issues really deeply. I think it often takes a signal like this, a big consumer switch like this, to really understand what that means and to really push the market forward. Pleasingly, since that, we’ve got lots of screens in place now and we’re also seeing a lot of really comprehensive RI policies coming out.

Are managers being a bit lazy around this? Shouldn’t they be leading the charge like the Super Fund?
There are certainly managers in this market that have real strengths in areas like corporate governance, for example. They’ve been really strong on that for a long time. There’s been some weakness around some of the environmental and social elements. This is a global shift we’ve been seeing in the last couple of years, where a strong uptake is occurring, not just here but globally. We have finally reached that point where there’s an acceptance that environmental and social issues actually matter from a valuation perspective and from an investment returns perspective. This is an awakening that’s occurred here, but it’s occurred in other markets, too. It’s really shifting things dramatically.

In your view, how are the RI funds going performance-wise?
In the research that we’ve just put out, we show the average responsible investment fund in the Aussie market, and we’ve seen outperformance over three, five and ten years. Equally, with the balanced funds, we’ve seen really strong outperformance, which is great. What I’m pleased about, though, is that there’s this mounting body of evidence, separate to our own research, that supports this premise, too. Fundamentally, what it shows is that the companies we’re investing in – those who manage sustainability issues and these risks that traditionally have been deemed “non-financial” – are the companies that actually perform really well from a financial perspective in the long-term. That’s really become much more comprehensively supported by the evidence.

From an adviser’s perspective, they shouldn’t write off RI on a performance basis?
The evidence is to the contrary. In fact, you’re going to miss returns by ignoring RI, ESG, ethical investment etc. We’re actually seeing outperformance. These ESG signals are becoming some of the most important to determine future share price movement.

Are there enough retail products in the marketplace? Most of the money presented in your report is sitting in a wholesale environment – it’s not retail money.
I think there is a limited number of products out there. It’s probably still a bit challenging to get good products across different asset classes. The “chicken-and-egg” situation is definitely real. What we’ve seen in other markets is that we’re sort of hitting a tipping point, where there’s sufficient capital flowing into these products, and products then start coming to market. We’ve certainly seen that in Australia, and I would think we’re probably a year or so away from seeing much more product come through into this SRI and ethical market here in New Zealand. We’re certainly talking to a lot of managers at the moment who are thinking about product.

What’s your message to advisers about adopting RI?
I think there’s been this hesitancy in advisers. We’ve seen plenty of research that says client demand for this stuff is high, but financial advisers are still assuming that client demand for it is low. What we’ve seen loud and clear through this KiwiSaver issue is that, actually, there is an expectation from Kiwis that these things are considered in the way investments are done. Advisers ought to be on the front foot, asking their clients about these issues, not waiting for them to come up. Whether that’s through their Fact Find, or having appropriate products on their APLs, it’s really critical, to the extent that we’re starting to see advisers losing business from not having sufficient offerings.

You’re actually seeing that?
We’ve heard stories and mandates being lost from clients in wealth management firms, off the back of not providing sufficiently comprehensive advice on responsible investment.

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