Responsible investment up 28 per cent to $142 billion

A rise in the number of New Zealand investment managers taking social and environmental factors into account has boosted total responsible investment by 28 per cent to $142 billion.

Seven more investment managers including Government-backed Accident Compensation Corporation now meet the criteria to be considered to be engaging in leading practice responsible investment, an annual report from the Responsible Investment Association Australasia (RIAA) has found.

Nicolette Boele, executive, policy and standards for the RIAA, said it had seen a big jump in the number of responsible leaders in 2020, which went up from 14 to 20.

“And we only ever count the money that is managed by leading responsible investors.”

Other new leaders included Harbour Asset Management, Salt Funds Management, Mint Asset Management, Russell Investment NZ and Southern Pastures.

Boele said nearly half (43 per cent) of professionally managed funds, which includes KiwiSaver providers, were now managed in a way that was considered to be leading practice for responsible investment.

That compared to Australia where only a quarter of managed funds were doing so.

“New Zealand has really pulled ahead of the Australian market.”

Boele said factors driving the increase in assets managed responsibly included financial outperformance – by and large responsible investment had outperformed over the longer term, changing consumer expectations.

“You guys woke up to red skies from Australian bushfires, Southland had the floods, really climate has been a really big focus in 2020.”

On top of that KiwiSaver default funds also had to get rid of fossil fuels from their investment portfolios.

“There was a big shift in consumer demand.”

The third driver had a been very strong signal from regulators and government that New Zealand is targeting zero carbon by 2050.

“What does that mean? It means the investment industry is also looking at ways to not just look at what listed companies they own but also cash and fixed income assets.”

She said the bottom line of it all was an acknowledgment that responsible investment was better for the long term.

“If you want good stable returns then do responsible investing and that is why we are seeing consumers are interested, industry itself are doing more of it and they are doing it across more assets.”

Boele said when judging if an investment manager was a leader it looked at all the information that was publicly available about the manager.

“If they are not courageous enough to say this is what we do, we are not interested. That is why leaders are transparent and report publicly not just on their activities to improve the environment and social sustainability but also on the outcomes they achieve – that is a really key point.”

She said they were also really strong stewards.

“They are voting on the stocks they own and engaging companies on the really tricky things.” That included examples like talking to Facebook over its streaming of the Christchurch terror attack.

“Investment managers are out there saying, ‘hey Facebook it’s not okay’. They are engaging to change companies’ behaviours and they are also really systematically and explicitly considering these environmental and social sustainability factors when valuing companies and putting portfolios together.”

Boele said consumers who wanted to know where to put their money based on what they wanted to avoid or target could use tools like Mindful Money and Responsible Returns to screen out investment funds with certain companies.

“We know consumers have very different interests and values, which makes it really tricky.”

But she said using the tools could help people narrow down the supermarket of investment funds available.

She hoped it would get easier for consumers in the future and was encouraged by the Financial Markets Authority introducing a framework for responsible investment, which would help investment managers be better at not unintentionally misleading consumers on these issues.

“Even the investment sector is grappling as the consumers are that when you hear this magic term ESG [environmental, social and governance] – that’s not going to deliver necessarily cleaner rivers or more affordable housing. That’s to say that investment managers are taking a wider look at companies when they think about risk and they are looking at environmental, social and governance factors.”

Boele said considering ESG factors was just business as usual.

But good investment practice now involved managers that aligned their investments with certain outcomes.

She said consumer research with Mindful Money showed 78 per cent believed ethical and responsible investment returns outperformed in the long run and 93 per cent of New Zealanders who do not already have an responsible product would like to switch their investment to one in the next year.

“That tells you there is a movement in capital away from those that aren’t doing it, to those that are.”

Boele said New Zealand was creeping ahead of Australia because of regulation here and because quite a few New Zealand managers that just missed out on qualifying in 2019 had now stretched and got there in 2020.

New entrants like ACC had also added a large amount of funds under management.

“Probably the growth will slow down a little bit in future years because of that but who knows we could get another big one come in.”

She expected responsible investment to continue to grow but said the rate of growth was likely to be lumpy.

But she pointed to legislation in Europe, the US and even China, which was now looking to make this kind of investment mainstream.

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