KEY POINTS:
When it comes to choosing investments, New Zealanders appear more concerned with returns than righteousness.
For direct investors, as long as there is good information available about companies, investment decisions can be guided directly by their conscience as far as they want them to.
But most New Zealanders'
investments - including superannuation savings - are managed on their behalf by fund managers.
Their attempts to set up socially responsible investment (SRI) funds have so far either foundered or are continuing at a crawl.
Among New Zealand's top five fund managers, there's only one retail investment fund, provided by Asteron, which operates under an SRI basis.
Another, operated by Tower, is no longer accepting funds and is in the process of being wound down.
Socially responsible investments among the wholesale managed funds are also limited, comprising mainly particular mandates requested by clients such as churches or charities with sufficient funds to make their tailormade portfolios viable for the manager.
The Government's New Zealand Superannuation or "Cullen" fund has recently copped flak for investing in so-called "sin stocks".
Greens co-leader Russell Norman argues the fund has a higher standard to meet when investing money compulsorily collected from the public.
But for private sector fund managers, structuring SRI products still presents some thorny problems. While the United Nations and other groups have produced various guidelines on SRI criteria, ethics, morality or even social and environmental responsibility are largely subjective.
"I certainly get a bit confused sometimes between things like ethical investment, corporate responsibility, social responsibility and so forth," says Ralph Stewart, chief executive of AXA, one of New Zealand's largest fund managers.
An ethical investment screen will typically prevent investment in companies whose main business is tobacco, alcohol, gambling and arms and might prevent investment in other diversified companies which derive more than 10 per cent of income from such sources.
Tower Asset Management's Tony Hildyard says banks can pose problems because they have large clients in these industries.
Pharmaceutical companies can be excluded because of ethical issues around stem cell research or contraception, particularly if the investor is a religious group.
"You can see the sorts of conflicts you have trying to be all things to all people."
ING has some ethical investment mandates at a wholesale level. The firm's marketing and investor services manager, Steven Giannoulis, says casino operator SkyCity is a good example of the difficulties in putting together an SRI fund.
Despite clearly being what many people would regard as a "sin stock", SkyCity contributes a lot to charities, works to mitigate the effects of problem gambling, and derives significant revenue from operations other than gambling.
"It sort of blurs the ethical line quite considerably," Giannoulis says.
James Lindsay, of Tyndall Investment Management, which manages Asteron's retail SRI fund, says there are many different ways of managing socially responsible investment.
Managers can seek to change companies' behaviour by active engagement with them, which can be less detrimental to the overall fund's performance, rather than excluding them from portfolios altogether.
"If you start excluding stocks, then there definitely can be an impact on performance."
The Asteron SRI fund had performed reasonably well but it wasn't "swamped with cashflows".
Hildyard says the perception that SRI requirements affect performance was what ultimately sank Tower's efforts to start such funds.
"All our clients told us there was huge demand for it, particularly from the charitable trusts and things like that. As it turned out there wasn't, at that stage. "
The trustees of super funds and other large investors and their clients may be interested in SRI investments but, as things stand, their primary obligation is to ensure the best possible returns for a reasonable level of risk.
"If you're a superannuation fund trustee and you get advised that this is probably an underperforming strategy, you don't necessarily have the power to make an ethical decision," says Hildyard. "If there was no penalty for being ethical, they'd all be ethical. I don't know that there is a penalty, but it's not clear."
AMP chief investment officer Leo Krippner acknowledges the argument that SRI criteria may affect performance, "but there's a theory on the other side as well".
"Equity managers that make sure that they're investing in ESG [environmental, social, governance] friendly entities are also, by the nature of doing that, making sure they're investing in sustainable enterprises, and that means that the performance of the company should be steadier than something that is not as sustainable.
"For example, they're not going to get cut off at the knees later on when people bring in stronger environmental rules.
"There's two sides of the coin as to the theory. No one really knows which one will hold out true."
However, there appears to be increasing evidence that SRI does not negatively affect returns.
Krippner points out that AMP has two SRI funds in Australia - one which owns Australian shares, another which owns overseas shares.
"The performance of the Australian equity SRI fund has actually been above that of our other Australian equity funds, and while the international SRI fund has a very short history, it's also a top performer."
Meanwhile, ethical investment fund the Co-operative Insurance Sustainable Leaders trust recently topped the UK unit trust performance charts by buying shares only in ethical and green companies.
Financial adviser and SRI expert Rodger Spiller of Money Matters describes the perception that SRI means lower returns as "the dinosaur view".
He says there is increasing recognition among international fund managers that there is money to be made in SRI.
Both Spiller and New Zealand Exchange chief executive Mark Weldon point out that David Blood, the chief executive of Al Gore's investment company Generation Management, has conducted research suggesting that companies with good sustainable practices end up making more profit over the long term.
"The reason is they tend to be more energy efficient, have better labour productivity and retention rates."
COMPANIES FOR KIWIS TO LOOK AT
Options for New Zealanders interested in investing on a socially responsible basis:
Tyndall Investment Management
Tyndall manages retail transtasman equity socially responsible investment (SRI) funds on behalf of Asteron and Guardian Trust.
It is understood that Tyndall's overseas investments are not managed under SRI guidelines.
Tower
Tower has one global equity retail SRI fund which it set up several years ago. But because of lack of investor demand it is no longer taking in new money and will be wound up.
The company is about to place an "ethical overlay" on its global bond fund, which invests mostly in government or large corporate debt instruments.
AMP Capital Investments
AMP has two New Zealand equities SRI mandates for particular clients. AMP's international equity investments are managed with no specific SRI filter.
AXA
Ralph Stewart, chief executive of AXA New Zealand, says his company has "a defined policy and strategy" relative to corporate responsibility, but "we don't operate ethical funds in this part of the world".
Stewart is not aware that AXA New Zealand's investments in overseas companies are made according to any particular SRI or ethical guidelines, rather they are made on "investment fundamentals".
ING
ING's Steven Giannoulis says his company doesn't offer an ethical investment option beyond special mandates for particular wholesale clients.
"I'm not saying we're unethical investors but we don't specifically do an ethical investment option.
"ING, like most other New Zealand fund managers, contracts out management of money on offshore markets."
Elsewhere
Financial adviser and SRI expert Rodger Spiller of Money Matters says Australian firms Australian Ethical Investments and Hunter Hall have ethical or SRI type products available for New Zealand investors.
He says investors can also get further information from the Ethical Investment Association NZ and Australia.
Among New Zealand's largest fund managers, excluding Asteron and Guardian Trust, there are no retail SRI funds.
