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Investing responsibly and for returns

Investors are increasingly looking for strategies that avoid investments in fossil fuels, the Responsible Investment Association of Australasia found.

john HeadshotsTRY sq John Berry 3 minute read

KiwiSaver investors care about the impact of their investing on the planet, and KiwiSaver providers increasingly acknowledge this by offering more products.

The Responsible Investment Association of Australasia (RIAA) released its report last week into the growth of responsible investment in New Zealand. The growth is significant, with a $31 billion increase over a year earlier. In fact, it identifies responsible investment as growing twice as fast as the wider investment market.

As a sign of how investor interest in responsible investing is developing, RIAA say investors are increasingly looking for strategies that avoid investments in fossil fuels, human rights abuses and animal cruelty. Undoubtedly more fund managers will oblige and adjust their products to meet this demand.

Interestingly, at the other extreme, fewer investors are searching for investments that exclude tobacco stocks. This may seem odd as tobacco is the industry most widely avoided by fund managers.

The drop-off in investors searching for tobacco exclusions does not mean that Kiwi investors suddenly believe tobacco stocks are more acceptable. More likely this tells us investors now expect tobacco exclusions to always be applied, so there’s no need to search for it.

This signals we may have reached the point where a KiwiSaver or fund holding tobacco companies should carry a health warning. It should explicitly tell investors it includes tobacco stocks.

The surging interest in responsible investment has challenges for fund managers. Possibly the biggest challenge is the integrity of data. Carbon footprint numbers and environmental, social and government (ESG) scores from external providers are not perfect. Managers need to recognise this and continually develop their processes to make the best of available data.

There are also challenges for investors. The RIAA Report mentions the word “greenwashing” several times. It is an investor’s right to know that a KiwiSaver’s “green” claims match the reality of how the KiwiSaver actually invests. Managers cannot make financial products greener just by wishing them to be more sustainable. Marketing departments should not get ahead of what their investment team is actually doing.

There is a big focus in New Zealand on the fees of KiwiSaver funds, but there also needs to be an acknowledgement that the cheapest fund cannot deliver the best responsible investment process. Actively researching the ESG metrics of companies, engaging with companies, searching for impactful unlisted companies to invest in and collecting data on carbon emissions all has costs.

Ultimately what investors should most deeply care about is their returns after fees. If investing actively and responsibly costs more than a passive investment strategy, but delivers better returns, then the responsible option is more than just a values-alignment.

It’s good news that the popularity of responsible investment is growing faster than the wider market in New Zealand.

It’s also good news the evidence points to financial returns that are similar and can be even better. Growing wealth plus well-being is a win/win for investors.

John Berry is chief executive of ethical fund manager and KiwiSaver provider Pathfinder Asset Management which is part of Alvarium Wealth

(This article was originally published by Stuff September 13, 2021) 

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