Responsible Investing: it’s more than ruling out industries
Mark Brighouse, Chief Investment Strategist
11 December, 2017
Responsible investing has become an increasingly important part of the investment landscape in New Zealand in the last 18 months. This has seen the majority of KiwiSaver providers introduce this in some form or another. With everyone having their own different approaches you may be wondering what exactly constitutes responsible investing? Like many things in life it is up to interpretation. For some investors it is merely ruling out the worst industries and not investing in them. This exclusion approach may involve, for instance not investing in some armaments companies. For us an active manager on your wealth this broad brush exclusion approach is simply the start to truly investing in a responsible way.
We have ingrained responsible investing as a fundamental part of our investment framework. As an active fund manager we believe that it is more than just the right thing to do, it also helps us identify the best companies and the worst companies in the World. In our view managing a business to be truly sustainable is one of the many indicators that points to a company’s long term success. We apply our responsible investing overlay in two distinct ways.
The first of these is the more typical broad brush industry exclusions on manufacturers of tobacco, weapons that cause indiscriminate/ disproportionate harm and, somewhat unusually in New Zealand, thermal coal producers. Our process doesn’t stop there. Our second pillar of responsible investing is to evaluate the corporate conduct of companies. This means looking at a company’s behaviour from an environmental, social and governance perspective. We use this information in both a positive way, to identify companies with sound records of sustainability but also to exclude companies with poor sustainability track records.
To do this we partner with research agencies who help us collate a wide range of information and data from sources that provide deeper insight into the culture and operating principles of companies. One such source is people on the ground from Non Government Organisations. A great example of this is feedback that is gathered from Amnesty International staff and volunteers who deal with workers first hand and observe the day to day conditions of that they face. This type of feedback can help identify those companies who have a sustainable long term approach to labour relations and those who don’t.
This information, combined with our own observations and research, helps us form a picture of a company’s conduct. This is taken into consideration when forming our exclusion list of the companies that we will not invest in on the basis of the way they operate. Altruistic and environmental purposes aside, there is sound economic reasoning why companies with a poor record of corporate misconduct should be avoided. Recently published research by MSCI, a well-respected research house for institutional investors found that exclusions of the worst types of corporate wrongdoing had a “mildly positive effect on returns.” The way I look at these results is that while making decisions on this basis of corporate conduct alone is not a silver bullet to guarantee good returns, it definitely helps and we are always looking for every edge we can identify. We continue to believe investing responsibly is investing wisely.