Two experts explain what responsible investing means and why it’s so powerful.
This content was created in partnership with Kiwi Wealth.
In the last 10 years, investing has become far more accessible. The introduction of investing platforms for beginners and a groundswell of support for everyday people to start investing has made it far more simple to take that first step. And it’s never been more important for our future financial health.
It’s something most New Zealanders do already, without actively thinking about it. Your Kiwisaver works in the same way as investment funds do – you input money (usually 3-10% of your income), and your KiwiSaver provider invests that money to grow it for you, so it’s there should you need to buy your first house, or want to retire.
But more often than not, we have very little idea about where that money is going and what it’s doing. Among the hundreds of KiwiSaver investment funds, and thousands of other managed funds out there to invest in, how do we make sure our money is going towards the things that matter to us?
The terms “ethical investing” and “responsible investing” are thrown around a lot at the moment. There’s been a significant trend for funds to divest from industries such as fossil fuels and illegal weapons. But with so many funds claiming to be “ethical,” how do we know that our own beliefs align with where our money is being invested?
The Spinoff spoke with Kiwi Wealth’s Responsible Investing Strategist Holly Marshall and Head of Quantitative Strategy Steffan Berridge to find out more about how to be responsible investors.
What is responsible investing?
It’s difficult to define, because ethics vary person-to-person. An “ethical” or “responsible” fund will generally divest from certain sectors that are harming the planet. Kiwi Wealth for example doesn’t invest in controversial and nuclear weapons, tobacco, whaling or companies with significant involvement in fossil fuels. They have also committed to reducing their carbon emissions to Net Zero by 2050, in line with the Net Zero Asset Managers initiative.
Berridge says there are many reasons why investing in more sustainable companies is better, not just for the planet but for your retirement too.
“Companies that are more sustainable tend to perform better in the long run. It’s not only that you’re investing in more sustainable companies, which people who care about sustainability like, but all else being equal we’d expect better returns.”
Fund managers like Kiwi Wealth use ESG (environmental, social and governance) criteria to discern whether potential investments are worthwhile.
“When we’re looking at what to invest in, it’s important to look at financially material ESG issues, the environment, the social impact the company has and the way it’s governed – how is it run? Responsible investment is firstly about building a strong portfolio, and secondly it’s about trying to drive better ESG outcomes or persuade companies to be more sustainable, as active shareholders,” says Berridge.
What should I look out for in an investment manager?
Investment managers should be collaborating and voting to drive changes on ESG matters where they align with you, their customers and investors. As shareholders, they have a lot of power to hold companies accountable.
In quarter three of this year, Marshall says Kiwi Wealth’s voting power at shareholder meetings has helped to push many companies towards greater accountability through proxy votes, and ensured the right people are sitting in director’s positions.
“As active investors committed to the just transition to a low-carbon economy we understand we can’t manage what we can’t measure. We use our voting power to put pressure on companies we’re invested in to encourage public reporting on their environmental and social impact. We’re then in a stronger position to assess whether they are moving at the rapid pace required to create an equitable, sustainable future,” says Marshall.
“We voted in support of more than 100 new annual environmental reports and decarbonization commitments in our portfolio in Q3 alone. With stronger reporting in place, we’re able to assess what steps we need to take as active shareholders and portfolio managers to reach Net Zero commitments and mitigate the risks from climate change.”
One easy way to see if a fund manager is serious about responsible investing is to check they’ve signed the Principles for Responsible Investment (PRI), says Marshall. These principles are a public way to show dedication to “build a more sustainable financial system,” the PRI website states – one with annual, independently assessed, internationally recognized reporting standards.
There are also independent certifications, like that offered by the Responsible Investment Association Australasia (RIAA) that give investors more confidence in their fund manager. Kiwi Wealth was made a responsible investment leader through RIAA this year, which is awarded to investment managers who demonstrate “explicit consideration of environmental, social and governance (ESG) factors in investment decision making, strong and collaborative stewardship; and transparency in reporting activity.”
So how can investment platforms actually push companies to make change?
It’s the fund manager’s job to make decisions on behalf of the people whose money it’s handling. A manager like Kiwi Wealth therefore needs to ensure it is using its power as shareholders to make the best decisions possible for its customers, but that doesn’t always mean just divesting from big players who don’t necessarily align with investor values. Shareholders have the power to move a company forward, you can’t do that without skin in the game.
“While some ethical investors think it’s easy to just divest from companies that they don’t agree with – or invest in only “carbon-light” companies – they’re actually the companies with the big capital to create the technologies to help us get to net zero or a lower-carbon economy,” says Marshall.
“We want to make sure we’re investing in a way that creates sustainable finance and acts as an active investor towards moving some of the larger companies towards the transition to a lower carbon economy.”
Collaboration is a really useful tool in this fight too. Berridge says because New Zealand is such a small fish in a massive pond, building relationships with other shareholders to fight for common goals is crucial.
“We can’t move this mountain on our own, but if we collaborate with everyone who’s aligned with us, which is quite a large number globally, then we have more chance of delivering change.”
How do fund managers know what their investors want?
In the last 20 years, climate change has gone from a known but minor concern to one requiring huge global efforts to find solutions for. Berridge says as attitudes change over time, it’s crucial for fund managers to meet these changes. To do this, there’s teams of portfolio managers looking at companies’ ESG commitments and using frequent investor surveys to get a reading of the top issues for investors.
“Human rights issues have become more top of mind in the last few years for people. People are really horrified by things like modern slavery and child labour… Issues like climate change have become more important for people over the years and there are persistent issues that have been around for a while like tobacco, alcohol and gambling,” he says.
Ultimately, who you invest with, and how you invest, is completely up to you. The measures for “sustainable,” equitable,” and “responsible” investing are constantly changing as investors and investment managers push companies faster towards a better future. Whether you’re investing through KiwiSaver or putting money into a separate investment fund, you can play a part in shifting how companies operate.
