Responsible investing more than just negative screening

By Rebekah Swan
Chartered Member of Institute of Directors (CMInstD) Managing Director / Head of Clients New Zealand

It’s great to see that more and more New Zealanders are embracing the concept of responsible investing, with record growth in this type of investment over the past year. This is the finding of the latest Benchmark Report released by the Responsible Investment Association Australasia (RIAA) which showed ‘core’ responsible investment in New Zealand increased from $1.6 billion in 2015 to $42.7 billion at the end of 2016.

Simon O’Connor, CEO of RIAA, also shared some Morningstar data which showed that sustainable investment globally has increased from $18 trillion to $23 trillion between 2014 and 2016. That means around a quarter of all professionally managed assets globally are done so with some form of sustainable focus.

While this is a great result, the growth in New Zealand was primarily due to the introduction of negative screening by the majority of KiwiSaver providers following the controversy around investment in tobacco and controversial weapons. Excluding such investments is a good start and to be encouraged, but responsible investment is so much more than just screening out negative holdings from portfolios.

The leading responsible investment providers apply multiple approaches and strategies to their responsible investment process. As well as screening of investments, the integration of environmental, social and governance (ESG) factors is a key part of the investment decision-making process.

At AMP Capital, understanding how a range of ESG factors may affect an investment has long been an integral part of our process.We compare the ESG attributes of individual companies and consider how these factors impact relative value and the long-term sustainability of company earnings. This is because knowing how a company is managing its ESG risks and opportunities is an important indicator of overall company value and management quality.

Over the long-term, factors such as a company’s governance, leadership and their attitude towards risk are likely to have a greater influence on company value and share-price performance than the more tangible factors that are traditionally considered by investment analysts. Understanding these non-financial drivers can deliver deeper insights that in turn lead to better informed investment decisions and potentially higher returns for investors.

Our ESG research focuses on a broad range of factors such as demographic trends, climate change, technological advances, risk management, supply-chain management, employee engagement, leadership, company culture, board diversity and occupational health and safety performance. We also engage with companies on key aspects of their corporate governance and their relationship with society as a whole.

It is gratifying to see the increased public awareness of responsible investing which came about from the focus on the underlying holdings of KiwiSaver investments. As the RIAA benchmark report highlights, this “has effectively caused an entire industry to switch to a base level of responsible investment practice in an incredibly short period of time”.

That said, I believe there is still enormous scope to increase the level of uptake of responsible investment funds as well as the level of sophistication in responsible investment strategies being employed by product providers. While demand and awareness is growing, more education and promotion is needed if responsible investment is to have a deep and lasting impact.

View the full copy of the RIAA Responsible Investment Benchmark report for all the detail. 

For further information on AMP Capital’s responsible investment philosophy and range of responsible investment funds, please visit the responsible investment section of our site.

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Important notes

This blog post has been prepared to provide general information and does not constitute financial advice in accordance with the Financial Markets Conduct Act 2013. An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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