Socially Responsible Investment and NZ Managed Funds

As KiwiSaver account balances grow and New Zealand investors become increasingly interested in where their savings are invested, more interest may be shown in socially responsible investment (SRI). A number of New Zealand fund managers offer SRI options. This article will look at the basic terminology used and the different kinds of options available to investors.

SRI is an investment process that considers environmental, social and governance (ESG) factors. This means that rather than simply looking at the potential return of an asset, an investor will take into account the effect their investment will have on the environment and society and whether the corporate governance of the company also considers these factors. Fund managers are able to show their engagement with ESG issues by signing the United Nations Principles for Responsible Investment. The six principles represent a voluntary commitment to take ESG factors into account during the investment process. A number of New Zealand fund managers are signatories to the principles including Devon Funds Management, Harbour Asset Management and Salt Funds Management.

A common way to invest responsibly in practice is to exclude certain industries entirely. These industries, often referred to as ‘sin stocks’, include alcohol, tobacco, pornography, gambling and armaments. A number of New Zealand managers that offer SRI funds try to exclude certain industries from these particular portfolios. For example, specific SRI funds are offered by AMP Capital, Grosvenor Investment Management, Pathfinder Asset Management and Quaystreet Asset Management. As investor appetites change, so do the industries that are considered ‘sinful’. For instance, Grosvenor and Hunter Hall (an Australian fund manager) have both recently removed direct exposure to fossil fuels in their SRI funds.

The different ways in which managers can take ESG factors into account means that definitions necessarily differ from manager to manager. At one end of the spectrum is ‘deep green’ investing. Rather than simply excluding industries that are perceived as having negative social and environmental impacts, deep green investing means actively seeking out investments that can have a decidedly positive impact. Although Hunter Hall offers a deep green fund, this investment style is relatively absent from New Zealand. Grosvenor attributes this to “hypocritical discomfort” where investors do not want to acknowledge the ways they ignore ESG factors as consumers.

Finally, there is discussion around the extent that socially responsible investing affects investment returns. Some analysts argue that limiting the investable universe of a fund can decrease fund returns and increase volatility. Others claim that actively managed SRI portfolios can offer strong returns.

There are a number of SRI options available to New Zealand investors. These include KiwiSaver funds and non-KiwiSaver unit trusts. For more information about the SRI exposure of your portfolio, talk to an Authorised Financial Adviser.