Every day we make decisions based on our values - the decisions we make help shape the world we live in.
We all want to make sure we build a future that we can be proud of. We grab the free-range carton of eggs, we take our keep cups to the barista, and we recycle. All of these are small decisions that we make to help shape the world we live in.
It's natural by extension to ensure that our money, including our KiwiSaver, is invested according to a similar set of values.
Responsible Investing is a process that considers Environmental, Social and Governance (ESG) issues in researching, selecting and monitoring investments (companies). Like people, companies make decisions on what they do, and there are consequences to those decisions. Good decision making can have both non-financial and financial benefits for investors.
Unfortunately, there is no clear cut definition of Responsible Investing. This concept can mean different things to different investors and Fund Managers. It can be a bit of a mystery. Fundamentally, Responsible Investing is about encouraging companies to be accountable against ESG issues such as those in the diagram above.
To help demystify Responsible Investing, we have set out below some of the critical Responsible Investing components.
Screening involves the filtering of companies and sectors involved in activities that don't align with the Responsible Investment strategy of a Fund. The most common screens are industries such as Tobacco, Gambling, Fossil Fuels and Weapons. If a Fund employees an exclusion strategy, they will not invest in any company that generates a material amount of revenue (generally greater than 5%) from that industry.
- Proponents of this strategy argue that if the investor base for the industry is limited (because most investors have excluded that industry), it will be harder for companies to operate due to difficulties in accessing capital.
- Opponents of this strategy argue that it is difficult to affect change if you are not a shareholder and involved in the company as you can do more good by owning shares in a company and using your ownership stake to encourage change.
Overall negative screening is the commonly used form of Responsible Investing due to its simplicity in executing. We would argue negative screening is an important starting point but is not enough to drive positive change.
Positive Screening strategies favour investments that are outperforming their peers in any of the ESG measures mentioned above. Positive screening supports business models that have strong credentials against ESG criteria.
The selection of companies is based on ESG ratings and scores from data provided by independent providers. It rewards companies that are doing well against ESG measures by making it easier for them to access capital. You can see an example of ESG ratings here.
ESG Integration is when an investor targets explicitly one or more ESG themes. This is generally achieved through detailed research that ensures investment decisions also take ESG information into account.
Generally, investors employing this approach believe that n ESG factors will provide an advantage to the firm over the long run, and integrating the ESG factors into the decision-making process will enhance returns over the long term.
Sometimes a Fund might be specifically set up to target a specific factor such as a Low Carbon fund that includes investment into renewable technology.
Active ownership means "voice and vote". It is when a Fund owns a significant amount of shares in a company, engages and votes on issues to initiate change in the company. There is direct contact with the company to influence its policies and practices positively.
In our view, this is an essential part of Responsible Investing. As shareholders, we can influence companies behaviour by using our ability to vote on specific resolutions and especially on Director appointments. As owners of a business, it is the investors' responsibility to hold Companies and Directors accountable.
Impact Investing targets investment in companies that have a measurable positive environmental or social impact. This takes the analysis significantly further than the financial and looks at the social outcomes of organisations.
Research increasingly shows Responsible Investing has benefits that go beyond the intangible as ESG Funds have been proven to outperform their traditional peers over the past few years.
In June, analysis from Morningstar showed 6 out of 10 ESG funds delivered higher returns than their equivalent conventional Funds on a 1-year, 3-year, 5-year and 10-year basis.
Pleasingly, the positive links between Fund performance and sustainability are becoming increasingly accepted as mainstream. Investors no longer need to prioritise returns against values - they can have both. Companies that address ESG issues are proving to be more successful and less risky in the longer term, which makes them better investments.
Making sure your KiwiSaver Fund reflects who you are as a person is essential both for your conscience and for your retirement. While we can't all be Greta Thunberg, we can still take a stand by using our consumer power to serve the world and our future best.
The kōura Difference
At kōura, we believe it's essential to have a meaningful impact on the world around us. All our Funds have ESG integrated into them.
- First, off we don't invest in companies that are involved in the Tobacco, Gambling, Weapons, Adult Entertainment and Whaling industries (Negative Screening)
- Next, we look at ratings given to companies by MSCI, ranging from AAA to CCC based on how they tackle ESG issues. The ratings identify which companies are leading and which are lagging in meeting the challenges of the future. Our Funds select only the companies with the highest ESG scores and exclude any below a BB rating (ESG Integration)
- Finally, we have chosen Fund Managers that have a track record of actively voting for ESG factors such as climate change action and diversity on Boards (Active Ownership)
We select the best of the best for your KiwiSaver investment, providing you with the assurance that your money is invested in making a positive change.