Del Hart: Positive trends in investment

Del Hart. Photo / Supplied

Opinion

OPINION:

Responsible investment is a continually evolving concept. As managers of the NZ Super Fund, we believe environmental, social and governance (ESG) considerations, including climate change, are fundamental to long-term risk and return.

There is now a growing expectation that the financial sector is socially, environmentally and financially sustainable. Globally, the concept of sustainable finance is taking hold.

The Fund sits at nearly $60 billion. It's highly diversified, with investments in a range of markets and sectors all around the world.

We manage it both in-house, where we have built our own capability, and via external managers with specialised skills or access to particular markets and investment opportunities.

Our commitment to ESG considerations extends across both our directly managed investment activities and those undertaken on our behalf.

The shift to sustainable finance expands beyond pressure from asset owners.

Increasingly, leading international investment managers, contracted by asset owners like ourselves, are incorporating sustainable finance principles into their strategies.

This shift is evidenced in figures released this month by the Global Sustainable Investment Alliance: sustainable investment has grown to US$35.3 trillion — one third of global capital markets.

Previously, many managers saw ESG considerations as falling outside their remit. Less than two decades ago it was difficult for asset owners to include ESG requirements in their contracts with investment managers, and for many, it was unusual to consider ESG in manager selection.

More recently, instead of focusing solely on optimising returns, managers have been transitioning their focus to include how investments can also deliver better social and environmental outcomes.

This means crafting strategies that meet an asset owner's financial mandate as well as broader social expectations. Managers are deepening their expertise and now offer an increasing number of options with a sustainable focus.

Today, good managers already integrate ESG risks as part of investment decisions and increasingly see sustainable investing as a necessary component of best practice investment management.

Managers are even driving the development of best practice guidelines through organisations like the UNPRI.

What was once a transactional asset owner/manager relationship is becoming a partnership. At the Guardians we work closely with our managers to ensure they understand our mandate, purpose and responsible investment framework; only then will we commission an external manager to invest on our behalf.

This means considering responsible investment capabilities in our manager selection, due diligence and monitoring processes.

Once a manager is selected, relevant requirements — such as ESG integration, voting, engagement, implementation of our Climate Change Investment Strategy and adherence to our exclusions and reporting requirements — are, to the extent commercially feasible, incorporated into our contractual arrangements.

We continually assess our managers on their ESG practices, and the results are integrated into our evaluation processes, influencing whether we maintain, dial up or dial down managers' mandates.

In New Zealand, we have enough financial weight to help apply ESG considerations to the Fund's direct investments in the private markets. We can also seek to influence, through our own leadership and engagement, the listed companies in which the Fund holds shares.

Globally, however, we are small relative to the big international players. Having the largest investment managers globally advocating for sustainable finance is, however, a powerful sectoral influence, and we're starting to see this play out in a number of ways.

There is a growing understanding that good ESG disclosure from companies is paramount to ensuring sustainable finance can be incorporated by investors and real-world impacts are better understood.

To truly understand ESG risks and benefits, they must be able to be measured.

Internationally, accounting standards for sustainability are rapidly emerging.

In some jurisdictions reporting standards are becoming mandatory, including for investors.

A primary example of this is the TCFD requirements which are challenging both companies and financial sector organisations globally to report on climate strategy, including their degree of alignment with the Paris Agreement and net-zero carbon 2050 goals.

In New Zealand, new legislation will make it mandatory for large financial institutions and listed companies to report annually on governance, risk management and strategies for mitigating climate change impacts.

There is also a global trend towards valuing and accounting for natural capital, given the need to manage natural resources, habitats, biodiversity and ecosystem services (things like clean water, carbon sequestration, pollination).

These types of measurements are beginning to deepen investors' and companies' focus on broader impacts, outcomes and intergenerational equity.

Leading investment managers are investing heavily in data to find ways to do this. They're developing new data-driven ESG performance analysis tools including more sophisticated data collection, analysis and reporting techniques. This enables deeper, more objective, and more customised insights and real-time information.

More broadly, there is also a global movement towards positive investing or impact investing — as the name suggests this is to invest in a way that intentionally provides social and environmental benefits as well as financial returns.

These trends reinforce the need for companies to be on top of how they incorporate sustainability issues in their governance, strategy, risk management and reporting, to ensure they remain attractive to institutional investors and banks in the long-term.

With global policy, regulations and societal sentiment all changing in favour of sustainable investment practices, we are reviewing our responsible investment strategy.

This is a long-term piece of work that aims to ensure we are continuing to manage the Fund in line with global best practice and are meeting stakeholders' expectations of us as a responsible investor.

In particular, we're looking at ways to improve the ESG performance of the Fund's global listed equity holdings, and how to increase the number and scale of positive investments that provide social and environmental benefits in addition to the financial returns the Fund requires.

The recent release of the Aotearoa Circle's Sustainable Finance Forum's (SFF) Roadmap for Action and the upcoming establishment of the Sustainable Finance Centre are major steps forward in the adoption of sustainable finance principles.

We welcome these excellent initiatives and look forward to contributing to New Zealand's transition to a more resilient, inclusive, robust and agile financial system.

● Del Hart is Head of External Investments and Partnerships, Guardians of New Zealand Superannuation.