New Zealand investment managers may be neglecting their duty to put investors' interests first by taking an exclusion-only approach to responsible investment, a major KiwiSaver provider has warned.
Kiwi Wealth, a KiwiSaver provider which is owned by the government, ACC and the NZ Superannuation Fund, has published a white paper on its take on responsible investment at the New Zealand Responsible Investment Conference in Auckland today.
The amount of money invested responsibly in New Zealand grew by 67 per cent to $131.3 billion in 2016 but most of its was driven by KiwiSaver providers moving to exclude tobacco and controversial weapons investments as a result of revelations by Radio NZ and the NZ Herald and a public backlash.
But Simon O'Grady, Kiwi Wealth chief investment officer, says excluding certain sectors or companies falls short of international best practice and may not be best for investors.
"Sector exclusions are a blunt instrument. It's an approach that can actually work against investors, and means managers may be neglecting their fiduciary duty to act in investors' best interests in the extreme.
O'Grady said sector exclusions were an inflexible approach which were limited in their ability to build investor value.
"...it's an approach that doesn't necessarily effect any real or positive change in the behaviour of companies within excluded sectors."
Instead Kiwi Wealth's white paper points to a need for investment managers to take environmental, social and governance considerations into account.
"As a bare minimum, zero-tolerance exclusions are helpful for those sectors that are illegal or have strong public policy arrangements against them, such as whaling, tobacco and controversial weapons.
"But to best meet responsible investing and fiduciary objectives, you have to incorporate ESG factors at the security level as an active part of the investment process."
But O'Grady said exchange traded funds, which many KiwiSaver providers use to get low cost access to global markets, don't allow fund managers to do this.