Responsible and ethical investing in New Zealand has reached a critical point.
New Zealand now has $188 billion allocated across capital markets in accordance with environmental, social, governance and ethical factors. This is the highest proportion of financial markets covered by responsible investing strategies of any market across the globe. In this context, it is tempting to suggest this once niche style of investing has become mainstream.
Yet, as an industry, we're far from having completed the task.
The Responsible Investment Association Australasia's (RIAA) annual Benchmark Report shows responsible investment growing in 2018 to a record $188 billion, a threefold increase over five years, and reaching 72 per cent of all professionally managed assets.
New legislation, a rapidly warming climate, shifting consumer expectations, a hyper-transparent world and the importance of maintaining a social licence, have all become triggers for shifting the operating context of companies and influencing share prices and markets. The investment community today is responding to these drivers to better manage a broader array of risks to ensure the delivery of the best possible investment outcomes for clients.
However, responsible investment can do so much more to deliver the capital required for NZ to meet its most pressing social and environmental challenges, consistent with national commitments to the Paris Agreement on climate change and the UN's Sustainable Development Goals.
It has been estimated that for the world to achieve the globally agreed Paris objectives of keeping world temperature increases to well below 2 degrees celsius, a significant US$1.5 trillion needs to be invested annually.
Add to this the challenge of achieving the critical societal and economic goals of the UN's Sustainable Development Goals – to reduce poverty, protect our ocean and terrestrial ecosystems, provide clean water, education, sustainable cities and beyond – and it is clear that further trillions of dollars need to be invested.
As daunting as that seems, NZ's growing responsible investment community is a part of a momentous global shift in capital markets that has seen responsible investments swell to $US31 trillion around the world.
From screening out harmful industries such as tobacco and controversial weapons; integrating environmental, social and governance (ESG) considerations such as how human rights are managed within supply chains; corporate engagement and voting to influence corporate behaviours; and impact investing in social impact bonds and green bonds to tackle social and environmental problems. The finance sector is moving to better understand the full suite of sustainability issues that are shaping corporates and economies and responding with an array of responsible and ethical investing strategies.
Responsible investment however will really start delivering when we, as an industry, recognise the role we play in shaping NZ, by the companies we invest in (or don't), the social enterprises we lend to (or don't), the energy infrastructure we build (or don't), the transport projects we finance (or don't), the hospitals that are funded (or aren't), the affordable housing that's built (or isn't). These decisions actively influence New Zealand's future.
New Zealand has stepped up as a nation through its commitments to the Paris Agreement and the Sustainable Development Goals, and its delivery via the passing of the Zero Carbon Bill and the Wellbeing Budget.
But the government alone can't deliver on these goals. The finance sector must step up.
Pleasingly, four elements are emerging that show what's possible.
First, the industry has come together through the Sustainable Finance Forum to embed sustainability considerations into the finance sector, to ensure finance is aligned with critical environmental, social and economic goals. The Forum, established as part of the Aotearoa Circle, will set out a sustainable finance roadmap that underpins future sustainable prosperity and reverses the decline of New Zealand's natural assets. This will build in to the very regulatory structures of the finance sector a deeper clarity on climate change risks, as well as enabling further capital to be mobilised for these ends.
Secondly, consumers are starting to ask questions, wanting to know that their retirement savings are invested consistently in a healthier and cleaner economy. Consumer research undertaken between RIAA and Mindful Money found that more than 70 per cent of New Zealanders expect their investments to be made responsibly and ethically, and want to preference providers that are best on sustainability.
Third, the industry is maturing. This year's Responsible Investment Benchmark report highlights the green shoots of investment activity beyond just exclusions of harmful activities. Increasingly, responsible investment is moving to seek out investments that contribute positively to communities and the planet, alongside delivering better financial returns. This is demonstrated by the growing focus on impact investment and sustainability themed investments, with impact investments reaching $358 million in 2018 up threefold on 2017, with innovations such as social enterprise funds, and growing interest in green bonds.
And finally, what has become critical in underpinning this sector is the good news that responsible investments continue to deliver outperformance. Recent research, including our own, continues to underscore this point: that investing responsibly provides unequivocally positive contributions to risk-adjusted returns, by avoiding key risks, and finding the best investment opportunities. RIAA's recent Australian Benchmark Report reiterated this with outperformance by responsible investment funds against their benchmark over one, five and 10-year time horizons.
The finance sector has now identified responsible investment as the foundation of good investment practice, but the focus now needs to shift beyond just avoiding harm, to demonstrating its ability to build a brighter future, one that is aligned with the needs and desires of all Kiwis. Because the very prosperity of NZ depends on it.
- Simon O'Connor is the CEO of the Responsible Investment Association of Australasia (RIAA).