Ethical investing hits new highs
Consumers and businesses drive new investment waves rewarding “good companies”.
Millennials and retired baby boomers are predominantly fuelling New Zealand’s fast-growing embrace of ethical investing.
That’s the message from Shane Solly, Director, Portfolio Manager for investment management company Harbour Asset Management — and who says such socially responsible investment is “the fastest-growing part of our business.”
The statistics also show what Solly describes as “the gathering force”. Funds in sustainable investment in New Zealand reached $180 billion last year — a 40 per cent increase over the previous 12 months. In the US, at the beginning of 2018, US$11.6 trillion of all professionally managed assets— one $1 of every $4 invested there— were under ESG (environmental, social and governance) investment strategies, a sharp increase from 2010 when the amount was nearly US$3 trillion.
Solly says two highly interesting patterns are emerging as the market for ethical investing grows — first, there is increasing understanding that ESG investment does not mean lesser returns; in fact quite the opposite. Secondly, in New Zealand, baby boomers and millennials are driving the change.
“The baby boomers tend to be retired and they are often people from the hippie era; they tend to say, ‘We’ve had a great life but now it is time to make sure the world is in a better place for the next generation,” he says.
“The millennials are in their late 20s and early 30s and are really starting to hit their economic straps. They are really leading the conversation in this area.”
Solly says Harbour Asset’s Management research, over the nine years since it signed the UN Principles of Responsible Investing, has shown that investing ethically can boost returns and help investors avoid the risk of backing a company which is shown to have poor ESG credentials or is involved in a scandal which could ruin an investment.
“Some people still think there is a trade-off,” he says. “You can either do the right thing by investing ethically or you can make higher returns. What we are seeing now is that both are happening — there is no trade-off.”
Ethical investing has come a long way from the days when mainly religious organisations based investment decisions on values which shunned involvement with companies in, for instance, alcohol or gambling sectors.
Solly says Harbour Asset Management employs a strategy of engagement — where companies are encouraged to improve their ESG behaviour. Fund managers are often significant shareholders and influence the board and management to change policies, strategies and products.
In tandem, publicly traded companies sense an increasingly bright spotlight falling on them as growing numbers of investors align investments with personal principles and beliefs.
“We’ve seen a big change in the last two or three years,” he says. “It’s become mainstream, core — a lot of companies are now saying, ‘we have got to do it’.
“There is a growing pool of capital globally actively looking for businesses which have a positive impact in social outcomes — driven by consumers, yes, but by businesses as well. We are now seeing businesses coming to us and demonstrating their improvement in this area.
“Some businesses have felt the weight of investors saying they will go somewhere else because ‘we think you are not doing it right’ — adding to that new wave of capital searching around, looking for businesses ranking better in ESG.”
Smart businesses are taking the initiative and others are making rapid and large changes to adjust to these new forces. As an example, Solly outlines some retail companies who, a few years ago, did not know whether their supply chain included child labour and/or slavery.
“However, in three or four years, they had gone right back through their supply chain and done audits — and spot audits — and were able to tell us they were free of any child labour or slavery issues.”
The incentive for this? “We know from our research there is a definite correlation between companies with ESG policies and who have implemented ESG strategies — they tend to deliver better and consistent results over time. Companies at the other end of the spectrum tend to have weaker and inconsistent performance.”
In other words, it has become a no-brainer. Harbour Asset Management’s annual Corporate Behaviour Survey researches how New Zealand companies rate on issues like carbon emissions, health and safety, diversity, modern slavery, stake holder relations, governance ethics, executive remuneration and anti-competitive practices.
It collates scores, annually aggregated to provide an overall ESG rating used as a fundamental part of Harbour Asset Management’s analysis applied to companies in “our investment universe”.
Solly says: “The fact companies with sound ESG practices generally do better is a real boost. Good companies become good because they address the needs of stakeholders like customers, staff, community, supply chains, the environment and have a firm eye on social outcomes as a whole. “So what happens? Good companies become good investments.”
“The millennials are in their late 20s and early 30s and are really starting to hit their economic straps. They are really leading the conversation in this area.” Shane Solly