New Zealand's responsible investment conundrum spurs invite to New York conference

A shift by NZ fund managers to back responsible investment has got international interest. Photo / 123RF

The rapid shift by New Zealand fund managers to back responsible investment last year attracted international interest and an invite to an exclusive conference in New York for Kiwi Wealth chief investment officer Simon O'Grady.

A number of KiwiSaver providers were found to have unwittingly invested in cluster munitions manufacturers and big tobacco through global index tracking exchange-traded funds.

That spurred a run by fund managers to find ways to ditch those investments and the creation of specific ETFs excluding those sectors.

"Things went from tokenism around responsible investment to a really full-on 'we're going to integrate this across the industry'," O'Grady said. That created an interesting case study and "there was interest into why did that happen."

The second New Zealand Investment and Operations Outlook Survey released earlier this month showed 64 per cent of 100 local fund managers noted concern to be seen doing the right thing on environment, social and governance standards, up from just 20 per cent a year earlier.

Kiwi Wealth's responsible enhanced index portfolio was in partnership with JP Morgan Asset Management (JPMAM) and draws heavily on responsible investment environment, social and governance principles to avoid certain sectors, while overlaying those guidelines at an individual stock level.

The New Zealand fund manager opted for a bespoke option to make sure its investors avoided the extra tax they'd face with Australian domiciled unit trusts, which O'Grady said meant "after-tax excess returns were considerably higher than the fees they're paying" to operate the more intensively managed portfolio.

He was invited to speak about New Zealand's experience at the JPMAM 2017 ESG Investing Roundtable conference last week to chief investment officers at some of the world's biggest asset managers.

A major topic at the conference, and one Kiwi Wealth grappled with, was the fiduciary duty of investment managers and the need to put the customer first.

"We have no right take their money and use it to do social good unless we can demonstrate it's in their best interests," O'Grady said.

That means responsible investment has to show the ESG principles generate better risk-adjusted returns, otherwise "it's a cost on the client to support the brand benefit for the organisation - that's not the right thing to do."

The issue becomes murkier when the debate shifts to one of relative ethics, which O'Grady says will inevitably happen. Investors need to "short-circuit" that and bring the discussion back to how responsible investment drives "not just good, but better portfolio performance" with more engaged management and stock selection, he said.

O'Grady's trip comes ahead of the Responsible Investment Association Australasia's New Zealand conference in Auckland next week where he's scheduled to be part of a panel discussion on rising consumer concerns about how their money is invested.