You might be surprised to know that investment funds that take environmental and social issues into account are just as likely to give you good returns as any other fund. In fact, as more investors choose them, they’re often performing better.
Track records of companies with good Environmental, Social and Governance (‘ESG’) practices, where management pays proper attention to issues like climate risk, health and safety, and aligning the interests of senior management with investors, show you can do well and do good.
In a growing trend, Kiwi investors have taken much more interest in what they’re invested in.
A lot of discussion was sparked two years ago when KiwiSaver providers met with a storm of controversy over investments in companies involved in producing cluster bombs and other weapons.
Kiwis let it be known that they disliked finding out their money was invested in firms who manufactured munitions. And once they started looking, they formed and shared opinions about other activities they didn’t like. These included tobacco manufacture, fossil fuels, mining, and pollution.
After that, funds under management with an ESG filter leaped from NZ$78.7 billion to NZ$131.3 billion in New Zealand.
As the demographics of Kiwi investors change, I predict we’ll see this effect more and more.
The best portfolio managers have always paid attention to risks affecting the companies they invest in. And to the ability of the company’s management to deal with those risks.
Health and safety track records, directors’ pay cheques, fines and court cases for pollution or corruption are all on the radar for portfolio managers; and all are examples of factors affecting ESG.
The best portfolio managers already have the instincts and discipline for doing the ESG ‘job’ (whether they call it that, or not).
Relevant to this, is a common misconception that ESG risks are non-financial risks.
But, if a risk does not have a financial impact – immediately or eventually – it is not a risk. ESG risks may take more study to identify and evaluate. Or they may play out over a longer period – like carbon risk.
The decision on where to draw the line with picking ESG companies is critical. The line can be tight or broad. Using landmines as an example, you can exclude companies:
· Manufacturing landmines;
· Owning other companies manufacturing landmines;
· Supplying goods and services to companies manufacturing landmines; and
· Owning other companies supplying goods and services to companies manufacturing landmines.
Each step takes you further away from the core activity and each person will have a different tolerance for companies involved in these activities.
Everyone needs to be clear on exactly what activities their own funds have excluded, and why. Portfolio managers need to know what their constraints are. And clients need to know if their fund has drawn any lines on ESG grounds, and – if so – whether they agree with where the line is drawn.
The only way to make sure your investment fund matches your own values and opinions is to go onto their website and read what they say on the subject. And see if what they’re invested in reflects that.
And if they haven’t thought about it, or they have but you don’t agree with their approach, you should ask them about it.
If they’re not prepared to have a discussion, or they are but you don’t like what you hear, you should vote with your money, and move it.
First published 4 May, 2018
By Paul Gregory, Head of Investments at Pie Funds Management Ltd
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