Diana Clement: Responsible investment a force to be reckoned with

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Taking care picking assets can have a bigger impact than choices by consumers

Investing responsibly means integrating environmental, social and governance issues into decisions. Photo / Getty Images
Investing responsibly means integrating environmental, social and governance issues into decisions. Photo / Getty Images

What's your money up to? Are your KiwiSaver and other investments funding industries that damage the environment, use child labour, encourage gambling or produce tobacco? There are few Kiwis who, hand on heart, could say "no".

Give a thought to these issues:

• Worldwide there are more government subsidies for fossil fuels than for sustainable investments.

• 100 million people are expected to die as a result of climate change by 2030, according to humanitarian organisation DARA.

• 1,129 people working in unacceptable conditions died in the collapse of the Rana Plaza building in Bangladesh earlier this year.

Do companies you invest in act responsibly? We're all aware of the concept of buying Fairtrade coffee or avoiding companies that use sweatshop workers. Investing responsibly - that is, integrating environmental, social and governance issues into investment decision making - can have an even greater impact than consumer choices at the checkout, says Rodger Spiller, a responsible investing specialist and financial planner at Money Matters.

The good news is that responsible investment, once the preserve of devoutly religious people or greenies, is going mainstream.

A few years ago it was a cottage industry with a few committed individuals and organisations providing funds for a tiny minority of concerned souls. At the end of 2013 there are more options for investors, more performance data and a greater focus on engaging with companies that don't meet the responsible investing grade, says Spiller.

The more money that goes into responsible investments, the more managers can put pressure on companies to tidy up their act.

Ian Woods, head of environmental, social and governance research at AMP Capital Investors, says it is about using the power of the shareholder to make change. "The shareholders are the owners and when the owners want change they will get change."

Another change in the responsible investing domain in recent years is that carbon and fossil fuels are becoming far more important than gambling and tobacco. Casinos and cigarette manufacturers aren't going to kill us en masse, although there will be deaths and/or misery directly or indirectly as a result of their operations.

The most common criticism of responsible investment is that investors pay for their ethics through poorer returns. Speakers at the annual Responsible Investment Briefing in Auckland earlier this month referred to benchmarking by the Responsible Investment Association Australasia, which they say blows this myth out of the water.

The report found that the average responsible investment fund investing in Australian shares (as many of ours here in New Zealand do), returned 11.34 per cent over 10 years compared to the S&P ASX 300 index at 9.05 per cent for the same period. Both responsible international share funds and multi-sector growth funds beat the average for all funds in their sectors over the same period.

Spiller points out that although it was Australian research, Kiwis with diversified portfolios in professionally managed funds will be investing in the same investments that were compared.

If the $24 billion New Zealand Super Fund can invest responsibly with headline-grabbing growth, any investor can.

In fairness, the Super Fund's scale gives it easier access to responsible investments than Joe Bloggs would have. But although retail investors are often limited to less flexible pooled funds, they do have options, says Super Fund head of responsible investment Anne-Maree O'Connor. "It is important that investment advisers become more knowledgeable about the [responsible investing] products that are available and that retail investors ask the questions of their advisers."

Current thought, echoed by the Super Fund, is that improving environmental, social and governance factors can improve the long-term financial performance of a company. The idea is that companies that are successful at the management of environmental, social and governance issues will outperform over the long term.

O'Connor says the fund's focus on responsible investing leads to better quality decision making when it chooses investments because it knows the prospective companies better. It also reduces the downside "tail" risks that can devalue an investment in its life cycle such as regulatory issues and brand risk.

There are other reasons to invest responsibly. United States-based HIP Investor, which was quoted at the Auckland responsible investing event, argues that investors' portfolios need to be ready for climate change. If investment funds remain tied to past assumptions and ignore emerging trends they will soon face increased risks and potentially severe losses, it says.

Woods says investors need to price in the risk of climate change. It's a form of hedging against future events that could affect investments.

In this country, 350 Aotearoa is calling for KiwiSaver and other fund providers to divest themselves of fossil fuel investments, which they say is the largest cause of climate change. The idea is that climate change coupled with the fossil fuel industry's business plan pose risks to the future growth of investments. Selling these investments now makes the funds more resilient to future shocks.

Instead of leading the transition to renewable fuels, the fossil fuel industry is lobbying to thwart efforts to reduce CO2 emissions and continues to prospect for new oil, says Ashlee Gross, 350 Aotearoa's campaign co-ordinator. The organisation wants to change that at the board level. It believes by advocating that people not invest in these companies it is sending a powerful message.

The 350 Aotearoa campaign asked KiwiSaver providers if they invested in fossil fuels and only one - SuperLife Ethica - said that it had divested of those stocks.

There are legal risks of not investing responsibly as well, says Spiller. Professionals who sell investments ought to be asking themselves and their clients whether investment decisions that don't consider environmental, social and governance factors are prudent. Spiller cites a legal opinion from Australian law firm Baker & McKenzie, which questioned whether trustees were doing their fiduciary duty to make the best investment for beneficiaries if they didn't consider the responsible investing aspect of it.

Kiwis who want to invest responsibly have fewer options locally than larger markets such as Australia, the United States and the United Kingdom. There are a number of local fund managers such as Craigs Investment Partners and Pathfinder that provide responsible investing funds to the public. Tyndall offers a wholesale responsible investing fund, which can be accessed via financial advisers. Growing in this space is AMP Capital, which has three funds: a balanced fund, a global shares fund and a New Zealand shares fund, launched a year ago.

Australian funds such as Hunter Hall and Australian Ethical Investment are also readily available in New Zealand.

KiwiSaver options include SuperLife's Ethica KiwiSaver fund, Grosvenor's Ethical Kiwi Fund, Craigs KiwiSTART, the Anglican Church's Koinonia Fund and Mercer KiwiSaver, which offers the AMP Capital funds.

There is more under the bonnet of funds than meets the eye. Some simply negatively screen investments, avoiding investing in the likes of casinos and oil companies.

Others invest actively in responsible stocks.

An investor might, for example, be concerned about a wide range of issues such as pollution, natural resource scarcity, climate change, labour conditions in factories, human rights, corruption and transparency. Or he or she might simply want to avoid funds and companies that invest in the fossil fuel industry.

Unfortunately, New Zealand does not have common standards, certification, labelling and independent verification that could help investors easily find funds that fit their criteria.

New Zealand also lacks access to responsible fixed-interest investments. Green and social bonds are becoming popular overseas and are often oversubscribed when issued, says Woods.

It makes sense that people who invest in responsible companies would also want their fixed-interest savings to be targeted at the same market.

- NZ Herald

Diana Clement is a freelance journalist who writes about personal finance and careers. She has worked as a journalist for more than 25 years in both New Zealand and the UK. Diana has contributed to a large number of local and international publications. Her pet topic is the secrets of saving money.

Read more by Diana Clement

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