Seminar Series: Principles for a Responsible Recovery

Seminar: Principles for a Responsible Recovery

Simon O’Connor, CEO of the Responsible Investment Association of Australasia (RIAA)

Watch the full session on youtube

Barry Coates, founder and CEO of Mindful Money, warmly welcomed Simon. The following is a brief summary of the seminar.

Simon observed that it is not an exaggeration to refer to the rise of responsible investing worldwide as a revolution within the investment sector. Responsible investment is now mainstream, especially over the past 3-5 years, driven by:

• Compliance – regulators (such as the FMA and the Reserve Bank) around the world are starting to require fund managers and advisers to take ethical issues and Environmental, Social and Governance (ESG) risks into account
• Consumers – globally consumers want to use their finance to do good, or at least, to avoid harm
• Competitive positioning – responsible funds perform better financially. It is not a surprise that companies that look after the environment, treat their employees well, and are well-managed also have higher returns.

It’s a good start, but there is a long way to go for responsible investment.

In New Zealand, RIAA and Mindful Money partner on annual surveys of the public focused on trends and perspectives about ethical investing (the term generally used by the public) and responsible investing (the term usually used by the financial sector).

Simon commented that ethical investment is not only driven by millennials (as is commonly suggested) but also by older New Zealanders. Another feature of the surveys has been the strong emphasis (around 80%) on avoiding companies that do not fit with investor’s values. Relatively few investors want to invest in funds that try to shift corporate behaviour by engaging with them. If fund managers want to make this approach more popular and better understood, they need to show how it makes a difference. There are some good examples of companies changing their policies as a result of pressure – as shown in Mindful Money’s recent seminar.

Barry noted that RIAA plays an important role in certification, to verify ethical funds, and this is a part of Mindful Money’s criteria for inviting ethical funds onto its platform. Simon explained that certification spans a range of strategies that fund managers use for responsible investment. They provide scrutiny over systems and policies to ensure that the fund managers are doing what they say they are doing, and their certification gives a tick of approval.

The way we invest money as a society shapes the economy and our society for the future. If we want to achieve zero carbon or the Sustainable Development Goals, our investment urgently needs to shift towards making that happen. It needs a long term perspective. If we don’t invest for the future, more business as usual will undermine our economy as well as society and the environment.

Barry noted that the bonuses for most fund managers are measured on 3 monthly financial results, and, in turn, they push back on the companies they invest in for short term profits. Changing these

Simon’s blog on a resilient and sustainable recovery makes the point that investment needs to tackle other crises, particularly the climate crisis. This is the best way to create jobs, as well as lowering climate risk. The policies need to be participatory. The bushfires have shown that essential services are fundamental to people’s welfare and should be prioritised, particularly as we are likely to see more shocks. It is supported by a wide range of voices and research. Barry noted that this seminar is also part of Visionweek, and there has been an outpouring of articles and research on the need for ‘building back better’. The test will come in the allocation of the next tranche of $20bn for the recovery.

In response to a question, Simon noted that a number of European pension funds and investment companies are avoiding harm and supporting positive impact. This is supported by regulation in the UK and elsewhere requiring that funds Barry noted that the issue of advisers and funds ‘asking the ethical question’ is under discussion in New Zealand’s Sustainable Finance Forum under the Aotearoa Circle.

A question asked whether RIAA certification required funds to divest from nuclear weapons manufacture. Simon observed that international norms and conventions are a strong basis for excluding companies, whereas ethical judgements can be more subjective. There are some funds in New Zealand that take this approach, like the NZ Super Fund, but it is by no means all funds. RIAA doesn’t prescribe what funds should invest in because some funds have an advocacy role to shift the practices of companies.

Mindful Money’s analysis of KiwiSaver funds showed that $100 million of KiwiSaver funds are invested in manufacture of nuclear weapons. The weapons free page lists the KiwiSaver providers that exclude weapons from their portfolios.

Simon said that the principle of fiduciary duty should not be interpreted as meaning that companies and fund managers can’t take action on social and environmental issues. Barry added that a legal opinion on fiduciary duty, arguing along these lines, was included as part of the Sustainable Finance Forum. He questioned whether a change in Company Law is required to allow companies to practice corporate social responsibility, even if it is not in their financial interest to do so. This reflects the evolving views on what is the purpose of a company.

In response to a question about the effectiveness of divestment versus corporate engagement, Simon noted that it depends on the situation and the strategies for change. The huge divestment of funds from the coal sector is an example of the effectiveness of divestment. However, across much of the rest of the economy there will need to be a change from brown to green methods of production that does not lend itself to straightforward divestment. Simon also noted that the sell-off off of assets might end up with unscrupulous companies operating in sectors like mining, and causing worse damage. If funds are engaging, they need to demonstrate they are making progress.

Barry concluded by thanking Simon for the discussion.

With thanks to our principal sponsors - Generate KiwiSaver, Harbour Asset Management, Booster Asset Management, and Sustainalytics; contributing sponsors - AMP Capital, Harbour Asset Management, Mercer and Milford Asset Management; and supporting sponsor - Devon Funds Management.