Different shades of green– What is ethical investing?
Stefan Stevanovic, 24 August 2018
Ethical or socially responsible investing continues to be a hot topic of discussion globally and in New Zealand.
The astonishing revelation at the start of the year that the Florida Teachers Pension Fund invested in the gun company that sold the assault rifle used to massacre students and colleagues at a Florida school raised some serious questions regarding responsible investment. Tragically, it was not the only gun manufacturer in their portfolio.
Closer to home RNZ recently uncovered the Auckland City Council’s $320m investment portfolio held shares in tobacco companies, while ironically implementing a Smokefree Policy across parks, playgrounds, stadiums and other council owned property. After considerable ratepayer response and public backlash, the councillors finally voted to divest out of tobacco.
Despite the topic of socially responsible investing often resurfacing and attracting a lot of attention, the actual amount of money allocated to socially responsible investment funds remains very low. Looking at New Zealand, a country that has reputation for being a pioneer in progressive social policy and a strong drive for sustainability, it is somewhat surprising that approximately 0.3% of all KiwiSaver savings are invested in socially responsible funds*. However, this is gaining momentum as global trends show a strong desire and uptake from younger investors.
The challenge investors face today is deciphering which fund in New Zealand is truly socially responsible.
There is a broad range of investment funds or strategies labelled as green, ethical, socially responsible or sustainable with varying levels of screens and processes in place. There are examples of funds that label themselves as “green” but still invest in companies that emit exorbitant amounts of greenhouse gases, or mine and explore for oil. That might be acceptable for some investors, while many others who are concerned about climate change and the risks it poses would expect these types of companies to be excluded from their investments.
How green do you want to be
The chart below shows the broad range of socially responsible investment funds, from impact-based funds designed to deliver positive environmental and social outcomes to those that exclude controversial industries or specifically take into account environmental, social or governance (ESG) factors. Importantly, investors also need to be mindful how this affects their risk and potential returns
The range of socially responsible investment funds
In 2016, many KiwiSaver funds amended their investment policies to exclude tobacco and controversial weapons manufacturers, simply by adopting the New Zealand Super Fund’s exclusion list. This exclusion list is comprised of companies that many would classify as the worst perpetrators, such as those with severe human rights abuse allegations, or those that produce banned products. Therefore, these funds are still allowing investment in other controversial industry segments such as gun manufacturing, casino operators and heavy coal users.
QuayStreet Asset Management screens for “good” and “bad”
At QuayStreet, our stringent socially responsible investment process is designed to appeal to a very wide group of responsible investors without compromising investment returns. We apply a two stage screening process where we first filter out those companies that operate in what many would consider to be immoral industries or clearly have negative environmental or social effects. Of the seven industries that we exclude the main ones are fossil fuel miners, tobacco, weapons manufacturing and nuclear.
The second stage, during the portfolio construction process, we assesses each company’s performance against ESG factors. We take a deeper dive into how the business operates, what effect it has on the environment, how it conducts itself and decide if it meets our criteria. The basic idea is that a company with strong ESG performance is one that is focused on sustainability and therefore is more likely to achieve greater long-term returns.
As one of the first socially responsible KiwiSaver funds available to the public, the QuayStreet Socially Responsible Fund has fine-tuned its qualitative-based research over the past decade and is true to its name. Find out more about our Socially Responsible Investment Fund and our SRI process.
QuayStreet’s Socially Responsible Investment Screening Process
Find out more about the Socially Responsible Investment Fund >
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