Experts say there is a sea change in the way people are investing.
There’s a fascinating statistic from the Financial Markets Authority showing 68 per cent of New Zealanders prefer investing their money ethically and responsibly – though only 26 per cent have actually done so.
It’s perhaps the strongest demonstration of the value placed on the Environmental, Social and Governance (ESG) measures more companies are putting in place as they demonstrate and report on a greater purpose than mere profit.
“ESG considerations are definitely becoming a lot more important, particularly as we see greater interest in and a sharper focus on issues like climate change and social justice in the media,” says Craigs Investment Partners Senior Sustainability Analyst, Vanessa Stevens. “When Covid hit, people really started thinking harder about certain social aspects, that they could make changes in how they invest – the same as you might make changes in your day-to-day life.”
However, the rubber hasn’t quite hit the road yet. While there is clearly growing appetite for more responsible portfolio allocations, only 26 per cent of Kiwis have chosen a fund manager based on purely ethical grounds. The other 74 per cent included those who had investigated it, and those who hadn’t made any effort at all.
While that couldn’t by any means be called a ‘worrying’ situation, it is indicative of the ‘thoughts and prayers’ mindset. Action is harder than sentiment, but Stevens says what starts as interest becomes action over time – a trend Craigs Investment Partners picked up on.
“Four years ago, we noticed more clients asking around the ethical and sustainable side of investing, and that led to the creation of my role. We created a framework which assesses the sustainability and ESG performance of various listed entities, assigning a score to each of the E, S and G pillars and an overall score as well as a text summary. This information is provided to our investment advisers and clients, so they have informed views and discussions in relation to these non-financial aspects of an entity’s performance, highlighting the various ESG opportunities and risks for those entities.”
The scores consider factors such as emissions, waste, resource use, and biodiversity under the Environmental pillar (E). For Social (S), product responsibility, supply chain practices, community, and employment are assessed. And for Governance (G), board structure, workplace equality and diversity, business ethics, shareholder rights and transparency come under the microscope.
There’s pressure from governments, too, with the number of reported ESG-related regulations worldwide near tripling from 493 introduced from 2001 to 2010, to 1255 in the period from 2011 to present.
What this adds up to, Stevens says, is that while investors were previously primarily interested in good returns, the growing ESG focus sharpens attention on organisations managed in line with solid ESG principles for the long term. The evaluation of opportunities now encompasses appropriate action towards the issues of the day (Stevens again stresses climate change), along with morally and ethically sound approaches to diversity of the workforce, and staff management and rewards.
“There’s a bigger picture here that investors are picking up on. Businesses with sound ESG scores attract and retain people, and that helps them perform well.”
With interest coming from investors themselves, she says there’s a role for advisers too: “Our advisers are there to converse with clients and take into consideration their ESG preferences. Of course, it isn’t black and white; for example, on the face of it, mining companies aren’t good for the environment.”
But look a little deeper, she says, and these companies play a crucial role in the transition to a green economy. After all, lithium batteries in electric cars, copper in wind generators, and multiple other mined products are essential components of sustainable technology.
“These are the nuances we engage on with our clients as we tailor-make their portfolios to align with their values. Every client must be comfortable with where they place their portfolio – that comfort today is about far more than the returns and should align with personal values.”
Stevens has seen growing awareness of ESG and believes the relatively low figure of those already investing this way is set to increase. “It started at the larger end of town, but we’re steadily seeing smaller investors taking a keen interest, screening to avoid certain sectors while focusing on those with higher sustainability scores. Those sustainability summaries are being referenced; there is growing interest in this space.”
There is of course, the next generation lining up, too. “When we grew up and went to school, there wasn’t a great deal of talk about ESG. Today’s generation are quite different. They constantly think about these issues – and when they enter the workforce and become the investors of tomorrow, there is no question they’ll be motivated by sustainability before profit.”
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