Kiwis are demanding that their investment managers invest responsibly. But what does that really mean?
The top three issues Kiwis want to avoid, according to that survey, were animal cruelty and both human and labour rights abuses. Kiwis aren’t that keen either on investments in tobacco, personal firearms, adult entertainment and nuclear power.
One difficulty for mum and dad investors is that responsible investing isn’t simply black and white, or even green. To make the right choices for them, Kiwis need to understand the many shades of responsible investing.
Understanding the jargon
It’s is a broad concept, says Solly. Some funds that call themselves responsible may be simply “negatively screening” out the worst companies. At the other end of the scale, deeply responsible funds will be “positively screening” for individual investments that do good, such as wind power or companies with socially responsible business practices.
A term you’ll see often in relation to responsible investing is ESG (environmental, social and governance). Responsible fund managers often screen for ESG when choosing investments, says Solly.
Using ESG helps in determining the likely medium and long-term performance of a company. “Our research shows that being selective and weeding out poor ESG performers means investments do better over time compared to the average.”
Have your cake and eat it too?
Many Kiwis still have a misconception that there is a trade-off between how much money you make (aka investment return), and responsible investing.
The truth is, you can have your cake and eat it too, says Solly. Focusing on companies that behave well can boost your investment returns in the long run, he says.
At Harbour, years of experience has shown that poor ethical behaviour by companies can be a red flag to signal future issues likely to impact share value. “Companies that behave responsibly often perform better in the long term,” he says. “Responsible investing is good for investors, and it’s good for our community.”
Isn’t everyone doing it?
With responsible investing becoming the new norm, nearly every fund manager advertises its ethical credentials. Not all these investments are created equally, however, and investors either need to research every last investment held in their funds or choose a fund manager with a truly responsible approach to do it for them.
Harbour was one of the first fund managers in New Zealand to focus on this area. “We signed the United Nations’ Principles for Responsible Investment in 2010, and Harbour is a member of RIAA.”
Harbour also uses its large shareholdings to lobby companies for improvements in their ethical practices. “As large shareholders, we have the access to engage constructively and apply pressure for real change within companies,” he says.
Investing right involves drilling down deep into companies’ operations on issues as broad as carbon emissions, waste, diversity, labour practices, executive remuneration and anti-competitive behaviours.
“Harbour calculates scores for companies which measure their environmental, social and governance policies and behaviour,” says Solly. “These have a huge impact on which stocks we pick for our funds, and how much of different stocks we hold.”