No. That’s not a typo. In the portfolio reviews we send to you, you might recall that our recommendations include funds with favourable ESG (environmental, social and governance)characteristics and are labelled “Sustainable” or “Responsible”.
The ethical dimension is not the sole reason we’re using them. We include these funds for a sensibly diversified exposure to assetclasses delivered in a cost and tax effective manner. These funds contribute to the performance of your portfolio.
But what a change we’ve witnessed in the past 25 years. The investment market of the 1990s was bereft of strong performing ethical investments. Since 2015 we’ve been seeing a plethora of offerings that look beyond monetary performance alone. These include funds that sport labels including Ethical Investment,Responsible Investment or Socially Responsible Investment (SRI) which take social and environment factors into account in investment decisions. The landscape is evolving quickly and much of the growth in this investment sector is coming from the everyday investors who wish to hold their portfolios to a higher standard.
With an ecologically stressed planet and rising concern over the impact of companies on individuals and communities, we see that consumer awareness and the resultant government regulations are driving the trend to invest in companies that donot exploit people or pollute the environment. Investors want to be part of the solution, thank you very much.
The financial industry demonstrates the complexity of sticking to sustainable, ethical, and socially positive investments. When youlook closer it becomes evident that there is no single pathway to achieve ethical investments. Different companies and fund managers travel different routes to arrive at their objectives.
- Screening – removing companies that don’t meet a deemed criteria for example, tobacco or fossil fuels.
- ESG Exclusions - avoiding companies with low standards in the environment, social and governance space.
- Targeting – selecting certain sectors like affordable housing, or renewable energy.
- Making an impact – companies with a purpose, usually a tight brief to bring about a positive change.
There is no single best avenue. Many of the funds available in NZ go for the clear-cut wins by explicitly avoiding investment in companies that generate harmful products e.g. tobacco, arms, landmines. Other funds have a themed approach and will support companies that might be moving towards being more socially responsible or environment friendly: there is a degree of leeway involved. The focus is on progress and transitioning to new business models.
Our approach is to consider the fund’s ethics and sustainability credentials, but at the same time stick to core investment principles and be somewhat pragmatic and practical to meet client needs. Therefore:
- Diversification is important for our portfolios as it’s an effective way to mitigate risk. Listed companies on the stock exchange are subject to a higher degree of reporting and transparency. If they are waving an ethical flag, then their activities are subject to public share market scrutiny.
- Returns from any of our investments must be measurable independently – how do they compare against recognised benchmarks, or industry standards? Are there appropriate regulations that govern the managers of the investment funds?
- Liquidity is also important. We have clients who are retirees drawing down on their retirement money. (And not just retirees may be in this boat. Some people have seen their circumstances change and they need to withdraw funds quickly, for example toput a deposit on a house). The need for liquidity may preclude investment in certain ethical funds.
