Sustainability, ethics, ESG – does anyone care?

Investing / opinion

The funds management sector has moved quickly to develop funds where sustainability, ethics, and ESG are integral parts of investment strategy. And the industry is recognising responsible investment management as an important category option

8th Feb 23, 3:02pm by Andy Mahony

Source: 123rf.com Copyright: artemisdian

We regularly receive queries from readers, but felt this one was pertinent to share given the recent events in Auckland.

“Hello. I note in your awards categories there is no category at all for best fund manager sustainability, ethics, ESG. Nobody there cares? Nobody noticed Auckland recent floods due to climate change?”

Our thoughts go out to those affected by the floods in greater Auckland. I am based in Auckland, so I have seen the devastating impact of the floods up close. In an investment context though we do have some strong views about the challenges this debate brings with it.

Regarding our Awards categories, the category where sustainability, ethics and ESG is considered is our Responsible Investment Manager of the Year. This was the first award for responsible investing in New Zealand in 2020. The Responsible Investment Manager of the Year award recognises the Fund Manager that demonstrates the most commitment to responsible investing and its benefits to stakeholders. It is complex and constantly evolving, and with the proliferation of data and differing viewpoints there is no easy way to determine the best fund manager on sustainability, ethics, and ESG. The 2022 winner was Harbour Asset Management. The other finalists are presented here – FMOY Awards 2022

Environmental, social and governance (ESG) factors have been considered in various portfolios for many years now, but Covid-19 and the Russia-Ukraine war has shone a light on the topic. Since Biden was elected as US President, the Securities and Exchange Commission (SEC) launched the Climate and ESG Task Force to develop initiatives to proactively identify ESG-related misconduct consistent with increased investor reliance on climate and ESG-related disclosure and investment. Several issues specific to New Zealand have also surfaced in recent years concerning investments into companies manufacturing cluster bombs and anti-personnel mines, supplying weapons to the Saudi Arabian military, producing nuclear weapons, or with links to the Myanmar military. But where can you find more information to help you understand how a Fund Manager is managing your or your clients’ money responsibly?

At the surface level you can search through several fund documents, including the Product Disclosure Statement, Statement of Investment Policy and Objectives, Responsible Investment Policy (if available), Proxy Voting Reports (if available) or Other Material Information documents. You can also search the Responsible Investment Association Australasia directory or signatories to the United Nations Principles for Responsible Investment. However, there is no standard framework and there is a fine line between communicating well and marketing spin.

The fundamental approaches a Fund Manager can apply range from integration of ESG factors and corporate engagement, to screening, to sustainability themed investments and impact investing. The latest benchmark reports by Responsible Investment Association Australasia (RIAA) revealed ESG integration as the most common primary or secondary responsible investment approach in Australia, whilst it was a close second in New Zealand after negative screening. Research IP has always integrated ESG considerations into our research and we believe global and Australian Fund Managers have been more progressed in this respect compared to New Zealand Fund Managers.

If you are interested in this approach to investing, we implore you to read our paper on the topic of responsible investment – Beneath the surface of Responsible Investing, the ultimate guide.

The paper aims to bring some attention to the breadth and nuance of responsible investing. However, what we do know is that becoming a signatory to the Principles for Responsible Investment (PRI) is no longer a differentiator, it is the standard, but the discussion has also moved on. The PRI are really about enhancing returns and better managing risks. They are not connected to the UN Sustainable Development Goals, so are not focusing on a broader, more impactful and/or ethical approach. For example, in relation to climate change, PRI is saying "take account of climate change to reduce the long-term risk of your portfolio", it is not saying "take account of climate change because we should care deeply about how we care for our planet and the world we are passing to future generations."

When we extrapolate this into the world of financial advice, where does this lead us? Financial advice is generally principles based, so advisers need to assess if ‘suitability’ includes taking account of non-financial factors, and how these may fit a client’s values. Advice must be suitable and an adviser must have reasonable grounds for the advice. If the advice includes a comparison of managed fund products, an assessment of each managed fund should be undertaken.

Looking forward there are many unanswered questions as responsible investing advances. When will we hit net (carbon) zero? How can investors and fiduciaries respond to biodiversity and natural capital under the Taskforce on Nature-related Financial Disclosures? Will the responsible investment focus widen from just a manager’s funds to also include the manager's underlying business? How do standard strategic asset allocation (SAA) models account for sustainability, can they? How will we define, measure and report on ‘impact’ to ensure tangible benefits result from each dollar invested? Will we see better non-financial reporting more broadly to enable more quantifiable ‘impact’?

For regular updates on responsible investing check out the RIPPL Sluice. This is published monthly and provides examples of responsible investing in action – RIPPL Sluice

Access to the RIPPL Effect reports is here.

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2 Comments

by pacifica | 10th Feb 23, 3:36am 1675953400

"due to climate change"? or more appropriately due to inability to design infrastructure for the level of intensification and drainage capacity, the inability to assess risk and adequately fund maintenance upgrades accordingly and the inability to maintain drainage infrastructure of blockages prior to known weather events like other major cities could do. In NZ we tend to fund net zero posturing and not so much the actual infrastructure needs required for our population growth. We cannot even build houses reliably and our planning departments approve them in high risk flood zones, further depleting infrastructure capability. It's not climate change causing the massive flood damage here but it does not help long term when we cannot plan for rainfall events. Neither does putting a net zero label on something and saying job done leaving us completely unprepared for the next heavy rainfall event. Fund less sustainability climate change "consultants" and more civil & mechanical engineers capable of designing drainage for an actual city. Sadly we don't train engineers in NZ in big projects, most have to go overseas to get the skills required. Buying a pine plantation that may or may not exist though is still a key part of our net zero goals presented to councils and government... pity our population is too big and needs too much tech connectivity so they cannot live in the forest and caves without real adequate shelter and sewage systems.

When asked which countries are most green people tend to name Norway and Sweden of all places... See the Government Pension Fund of Norway where large investment can be said to be the most unethical in arms manufacture, tobacco, petroleum companies, restricted pharmaceuticals, heavy polluting manufacturing etc. It remains then that perhaps we should invest in things that return enough capital to actually enact better and more future proof living in our cities, increase productivity and high skill jobs and reduce what pollution is released. We don't need to invest in arms manufacture like Norway and Sweden but unlike them we do not have trillions in petroleum production assets that enable buying a green label for ourselves to make us look good on the world stage regardless of actions. We are so focused on shutting down our self sufficient more renewable powered manufacturing in NZ we do not even have enough to adequately maintain our infrastructure and frequently fail to supply enough to even complete house & infrastructure builds on time with suitable materials and budgeting.

It is almost like we want to emulate the image Sweden and Norway bought for themselves with their massive petroleum assets but we are not actually emulating their real world actions and investment profiles. No wonder it has been shown all NZ is doing is smoke and mirrors, becoming heavily reliant on far more toxic and polluting countries to do our work for us and ship it back to us, (we get them to mine the coal, manufacture products like timber & plastics using it and burn far more of it in the process shipping them back to us) with crippling social failures behind the scenes in NZ and the countries we import from. Using slave labour in our supply chain should never be allowed but hey NZ can wash its hands so long as we buy ourselves a big nice expensive green label to market nationwide.

hey who actually cares? Buy a tshirt and claim you are doing your part by cycling to work ignoring the functioning needs of urban cities and infrastructure required to enable accessible living for everyone. You brought the ticket now take the ride through sewage flooding. Smells like teen spirit.

by mills | 18th Mar 23, 9:07pm 1679126833

Excellent post Pacifica. As in most cases it is always easier to sell the sizzle rather than actual sausage.

Our green folk will be quick to expose "greenwashing" but as you point out, they are part of the problem too,...by promoting utopian policies and simplistic ideals.

Given NZ's lamentable engineering standards, the old adage,..."perfection is the enemy of good" applies....ie don't bang on about being clean and green when the immediate concern is to do basic, sound infrastructure tolerably well.

Instead we seem to have become caught up in woke slogans & jargon rather than measurable improvements at the most basic levels.