Public aware that ignoring climate change is ignoring investment risk

Originally published on Good Returns

Just over five years ago Barry Coates was trying to find products for an ethical investment portfolio and gave up after a week. He says with a master’s degree in finance from Yale University, it should’ve been easy but the data wasn’t comparable and there were no objective measures.

So he started Mindful Money to conduct research and bring some transparency on ethical investing so investors don't have to.

In those days ethical or ESG investment was “a bit of a niche” but now it has come into the mainstream.

Members of the Principles for Responsible Investing (PRI), a UN-backed network of investors, now manages more than US$120tr a year.

“It’s a very big chunk of the world’s capital markets and in New Zealand virtually every fund manager has a commitment to ESG integration in some form”, says Coates.

Meanwhile the underlying reasons for ethical investing or ESG factors, issues such as climate change and modern slavery, are not going to go away.

“What is changing is there is a maturity developing in the way that this plays out. It throws up a lot of challenges for financial advisers and fund managers as to how to stay up to date with the new developments.”

He says an ideologically or politically-driven backlash by some US state governments, against the ‘notion’ of ESG investing hasn’t changed the ESG commitment of the US major financial institutions. And he doesn’t think it will shape the overall worldwide movement on ethical or ESG investing.

“With that core set of issues, the risks are material; they affect returns and need to be taken into account. What we see shaping all of this is particularly climate change. Climate risk is real to companies, it’s real to fund managers and it should be real to financial advisers.

“Increasingly the public is aware that unless you take climate change risk into your investments, then you’re ignoring important risk factors. That is becoming more prevalent, driven by what’s happening in the environment.”

Mindful Money’s annual consumer survey on ethical investment will be out soon and public commitment remains rock solid, he says.

“People expect their fund providers to be investing ethically, and in ways broadly aligned with their values. When you ask people what their values are, issues like human rights, modern slavery, treatment of workers in the supply chain and treatment of the environment are high.

“It’s not always the products that companies make, it’s the way they behave.”

Divestment debate

Whether or not exclusion changes company behaviour is always a debate.

“A lot of people say to us, if you divest it doesn't make a difference because someone else will buy those shares.

“That’s true at an individual level but the law of supply and demand works in financial markets just like any other market. So if you get enough people wanting to avoid fossil fuels, does that affect the share price of fossil fuels companies - you bet it does.”

Coates says globally, $40tr of funds under management avoid fossil fuel companies. Comparative returns for fossil fuel companies over the past 10 years have declined by 50% whereas share prices as measured by the S&P 500 have increased by 250%.

“So already you’re seeing some of the concerns being expressed through divestment and the depressing of share prices.”

Coates says it isn’t immediately obvious to the public that companies in KiwiSaver funds produce emissions and people don’t make the link between their KiwiSaver and climate change.

However they are starting to understand the influence of stewardship and engagement although they want to see evidence of it happening.

“It’s not enough to say you occasionally pick up the phone and talk to a company. In what way is your engagement changing the company?,” says Coates.

The theme of the Mindful Money’s conference this year is mainstreaming impact investment in Aotearoa. Earlier this year Mindful Money put out a report which found consumers are keen. 

“We’re seeing for the first time in NZ that some of the mainstream funds are investing into these positive impact companies.”

A panel discussion on social housing investment will include Simplicity CEO Sam Stubbs,  economist Shamubeel Eaqub and the head of Bay Trust Alistair Rhodes.

A second panel on renewable energy will feature SolarZero, NZ impact fund Purpose Capital and Our Energy.

Following on will be the Mindful Money awards where the winner of eight categories, including best financial adviser and a new people’s choice award, will be announced.