What is responsible investing?
By Mark Brighouse, Chief Investment Officer
05 September, 2016
Listed companies are often, by their nature, fairly large and complex organisations. This means that even the most well-meaning are likely to eventually face some kind of ethical challenges. They could be environmental challenges, social challenges or governance challenges. Some companies will do a good job of dealing with these challenges and investors should recognise this.
At the other end of the spectrum, some companies operate in industries where their products cause such broad and significant harm that responsible investors have no choice but to avoid them. Examples of such industries are tobacco and armaments.
Given the range of potential ethical challenges, investors are right to ask their fund managers what is being done to invest their portfolios responsibly. Some fund managers are going to be in a better position to answer than others.
As a New Zealand fund manager we are able to design our investment process to meet our clients’ concerns; as opposed to large overseas firms who may not have the desires of Kiwis at the front of their minds.
Also, we are active as opposed to passive managers and this is an important difference when it comes to the ability to invest responsibly. Active managers analyse prospective portfolio companies taking into account factors affecting their long term sustainability. Active managers exercise their voting and provide increased oversight of company management.
Contrast this with passive management which involves buying a fund that mimics a particular market. Passive management has become very popular.
The problem is, a passive fund doesn’t choose its investments — it will own good companies and bad, in all sorts of industries, usually based on the composition of an index. The companies in an index are determined by their size, not by their goodness. Passive funds don’t visit management, lobby companies or vote to change practices to encourage “good corporate citizenship”.
Responsible investing involves being aware of the issues that portfolio companies might face, engaging with them to achieve sustainable long term growth and avoiding those companies where the concerns are simply too great.