What is ethical investing?
Ethical investing is when clients choose to extend their personal values, beliefs and philosophies into their investment portfolios.
Clients choose to invest in such a way so that they are supporting businesses and industries which are working for the good of the planet and society in general.
There are three main strands to ethical investing:
#1 Environmentally responsible
This involves investing in companies that do not harm the environment.
A negative screening approach would remove investment in fossil fuels, companies that produce toxic waste and high levels of pollution, or that generally damage the environment with their products or the way that they conduct their business.
A positive screening approach would include companies that manufacture products that have a smaller carbon footprint than other products in their sector (such as “green” buildings), companies that make products that are less harmful to the environment than their competitors (i.e. eco cleaning and household products), and companies that use sustainable approaches to the use of the environment (ie, sustainable forestry and renewable energy).
#2 Socially responsible
This is investing in such a way that takes into consideration the “social good” of the investment.
A negative screening approach removes investment in industries like gambling, alcohol manufacture, weapons manufacture and tobacco.
A positive screening approach would specifically include companies that offer good employment conditions, that work to improve general standards of living in their community and offer products and services that contribute to the improvement of society.
#3 Good corporate governance
This takes into consideration how companies manage themselves and their relationships with shareholders and employees.
Good corporate governance focuses on the values and ethics of the business, and the way that they conduct themselves as a corporate citizen. It considers their accounting practices, their compliance and reporting, their remuneration programmes, and their political involvement.
How this works from a practical perspective:
All investments that can be accessed by New Zealand investors have to offer a prospectus/investment statement which registered for use in New Zealand and compliant with NZ legislation.
There are several Australian based funds available to investors that use negative and positive screening for the three strands of ethical investment.
There are also a few NZ based funds that also meet most of the ethical investing criteria as well.
BEWARE – NOT ALL ETHICALLY BRANDED FUNDS ARE CREATED EQUAL!
With the exception of environmentally ethical funds, there is no generically recognised standard for ethical funds.
Any fund can brand itself as ethical but in reality, it may just be paying lip service to the principles.
It takes a lot of research to dig down into an investment to see what screening they use and where they are choosing to place investors’ money.
Similarly, there are funds that do not brand themselves as ethical, but the reality is that they apply the principles and screening and hold appropriate investments to meet ethical investing criteria.
We now have the research available to put together portfolios that are almost entirely ethical in nature, and we will continue to stay alert and look for new investments that we can use in this space.
Notes from the Responsible Investment Association Australasia conference
Held on Tuesday 24 November 2019
Mike Bennett – Z Energy
This was an interesting presentation from a man, who by his own admission, is responsible for a business that generates 9% of New Zealand’s total carbon emissions!
Z Energy is a business which has a commitment to reducing fossil fuel use and to reducing the carbon content in the fuel that it sells.
Z Energy has a very strong company commitment to ESG. Mike said that ESG, when taken seriously, challenges the very DNA of your business. He sees it as a fundamental risk management tool, and being the CEO of a business is all about mitigating risks.
As a business operation, Z Energy is running at carbon neutral. They have reduced their waste by 80% over the last few years.
One of their current initiatives is to create a biofuel diesel out of tallow. Tallow is an animal fat by product. 85% of tallow from NZ is exported to China and used to make soap. Mike spoke about the challenges that they have had with developing their bio fuel. However, they are making progress and fully intend to start selling bio diesel at Z service stations in the next few years.
Mike said that it is important that you never expect to nail a new development on your first try, because you have to start with what you can do at that point and then work from there. He said that, if you want to get it all perfect from the outset, most innovations would never have been developed!
One of his other statements which I really liked is that taking action to reduce carbon emissions is not about saving the planet, it is about us saving ourselves as humans. It is much closer to home than a lot of people acknowledge.
Matt Whineray – NZ Super Fund
Matt was speaking about the NZ Sustainable Finance Forum, of which he is a member and the current chair. The forum was started in early 2019 and their mandate is to look at sustainable prosperity and reversing the decline of NZ’s natural resources.
The Forum is tasked with designing a roadmap to help New Zealand shift to a financial system that supports economic, social and environmental outcomes. The forum will identify opportunities and make recommendations to help align New Zealand’s financial system with 21st century sustainability challenges such as meeting New Zealand’s Paris commitments around reducing our emissions and achieving the UN Sustainable Development Goals.
They hope to have a report out in 2020, along with a roadmap of actions to take.
A panel of investment fund managers talking about active ownership
This was a really interesting panel of corporate and wholesale investors and fund managers from NZ, Australia and the UK talking about how they can make a difference in the ESG of the companies that they invest in.
They talked about meeting with company management on a one-to-one basis, using their voting rights to effect change, and collaborating with other investors to propose shareholder resolutions to bring corporate resistance to change into the light.
One of the examples that they used was working with a building company to review their health and safety policies following the death of a staff member.
A new trend is intentional collaborative engagement. The recent NZ example of this was when the NZ Super Fund, ACC, the Government superannuation fund, the National Provident Fund and other fund managers threatened to dump Facebook, Google and Twitter shares if they did not take more responsibility for what they were hosting on their sites. This was part of the early movement for what is now being called the Christchurch Call.
Collaborative engagement is being used widely in Australia to propose changes to company resolutions around ESG, and having large shareholders vote in blocks. This is particularly important in areas where there is a political vacuum (like climate change in Australia) and sometimes is the only way to get the attention of a board of directors.
The panel also commented that many companies have been very focussed on governance but are now starting to focus on environmental impacts and social issues as well.
The panel which talked about where responsible investing is likely to be in 10 years time
It was noted that the volume of responsible investment in Australasia has multiplied tenfold in the last 10 years.
Barry Coates, who was head of OXFAM for 10 years, talked about the explosion of fair trade into markets, where it grew by 40% per annum during his tenure at OXFAM. Barry feels that responsible investment is at the same point in its life cycle – it has reached critical mass and is about to explode. He said that in 10 years time, we will be looking at what it is like when consumers are driving ESG in investment, and not the financial services industry. He also thinks that investors are going to look to become more aware of what they are investing in.
The panellists also talked about the rise in shareholder activism as a significant trend. Mike Bennett from Z Energy had commented that it was more effective to “work with the enemy from the inside to effect change”, and this is what they specifically talked about.
John Berry from Pathfinder flagged the increase in consumer activism – being part of something bigger than yourself. This is where people will boycott buying products or boycott a business because of their response to the impact of their business on the environment or on society.
The panel then digressed into talking about change in general – about the climate change marches by young people, about the fact that AI is going to take away 800 million jobs by 2030 and the need to look after people and communities, and about responsible disruption changing industries.
It was also discussed that the largest investor in fossil fuels is the largest index (passive) investment house in the world, being Blackrock, and they currently will not use their voting rights to effect change in the fossil fuels industry.
Another area which was discussed was impact investing. Impact investing refers to an investment strategy that is meant to generate not only financial return, but also a social and environmental impact. This is an area which is in its infancy in NZ, but which the Maori tribes are making amazing progress with. Dennis Turton, the chair of Trust Waikato, talked about some impact investing that the Trust is undertaking, specifically with building medical and wellness facilities in partnership with government in small regional towns like Te Kuiti. While impact investing is in its infancy in NZ, a recent survey by RIAA indicates that there is real interest in the growth of this sector.
Overall, it was an excellent conference. All of the speakers brought information of value, and it was really interesting to have the input of the Australian speakers regarding the developments with responsible investing across the Tasman. I was really encouraged by what is happening in the fund manager community and also in the investment adviser community in Australia, which will flow through to New Zealand as the responsible investing industry continues to grow.