Seminar Series: Beyond Divestment

Barry Coates, Mindful Money Founder and CEO, introduced Harbour Asset Management’s Managing Director, Andrew Bascand, and Harbour’s specialist in Environmental, Social and Governance (ESG) issues, Jorge Waayman.

Barry welcomed them to the seminar, noting that Harbour has $5 billion of financial assets under management, across equities and fixed interest securities. Harbour has had a long record of responsible investing and has been highly rated in the strength of their approach.

Barry noted that many people will be used to the idea of avoiding fossil fuel companies in their KiwiSaver or investment funds, but may not be aware of being able to make an influence through engagement. Their fund manager is their shareholder representative and responsible for corporate governance. He asked Andrew to explain how that works.

Andrew explained that fund managers like Harbour are a fiduciary of people’s investment, responsible for acting in the client’s interests in looking after their funds. A key aspect is considering the sustainability of the investment, as well as the long term financial returns. This means following some clear guidelines around the principles of responsible investing.

Jorge added that Harbour has been a signatory of the UN-linked Principles of Responsible Investing (PRI) since their inception. They use their own proprietary survey of corporates that covers a comprehensive range of factors, including carbon emission, labour practices and bribery and corruption policies.

Harbour has compared the survey to returns over time. They have found there is a relationship. The lower scores on the survey - worse Environmental, Social and Governance (ESG) practices - tend to under-perform. If the companies don’t lift their scores, the evidence suggests they will have lower returns. The scoring involve engagement – they use the survey to try to improve corporate performance.

Harbour does the surveys before investment. They will look for where companies are showing they are serious about improving their ESG performance, and will help them on their path. An example has been A2 Milk. Harbour and others have been suggesting that A2 Milk strengthen their sustainability practices. It is encouraging that last year for the fist time, A2 Milk has reported on their carbon emissions.

Barry asked how the engagement happens. Andrew replied that it depends on the situation. It may be with management or the Bord, publicly or behind closed doors. This is coupled by surveys, for example of corporate reporting carbon emissions.

Barry noted that the record on NZX companies reporting on carbon has been poor compared to other countries, as shown in data from the McGuiness Institute. Jorge agreed and noted that responses to the Harbour survey have also been disappointing. Investors like Harbour have been pushing for this reporting for a long time. Now corporate awareness is growing, particularly as it is likely that the government will regulate on disclosure.

Andrew talked about the different metrics for measuring corporate practices, including broader measures that cover supply chain and indirect impacts. He pointed out that responsible investing is growing and there is now a weight of international investment funding, both in equities and green bonds, that is demanding more information and comparable reporting standards. Jorge noted that this information would help Harbour with aggregation, so they can carbon footprint their portfolios.

Barry asked about whether Harbour is seeing a willingness of New Zealand companies to set targets for contributing to the goal of keeping global warming below 1.5 degrees C. Jorge responded that some corporates, like Fletcher Building have set science-based targets. Others are setting targets such as 30% reductions in emissions by 2030. Andrew noted that targets are fine, but companies need to innovate and take tangible steps forward. Mainfreight, for example, is testing electric trucks, and Synlait has converted milk drying to electric boilers, replacing coal, and is providing a premium price for sustainable on-farm practices.

Barry referred to the common perception that divestment is the most commonly understood way to invest in a climate-friendly way. Andrew responded that, at a high level, Harbour wants to engage with companies to see if they are serious about taking steps forward. If they aren’t prepared to show progress, Harbour won’t invest. Jorge noted that divestment doesn’t necessarily create change because someone else will provide the capital, whereas engagement aims to shift company practices.

In response to a question on whether there are opportunities to move beyond a ‘do no harm’ approach to invest in companies that create positive benefits. Andrew explained they have international research partners that are looking for these opportunities, and there are some New Zealand companies that have a good story eg. Kiwi Income Property Group has been an investor in solar, and Auckland airports have switched to electric power for their ground-based units. Barry noted that there will be seminars later in the series that look in more depth at the impact investing (positive benefit) opportunities in New Zealand and internationally.

A question asked about the prospects for growth in responsible investing. Jorge noted that the benchmark survey by the Responsible Investment Association of Australasia (RIAA) had shown rapid growth, but part of that was just the exclusion of a few sectors like tobacco. Barry noted that the joint survey of the New Zealand public by Mindful Money and RIAA has shown a high and growing level of public demand for ethical investment but those demands have not yet been met by the sector. This has been an important reason for the formation of Mindful Money, in providing real transparency on KiwiSaver fund holdings and making it easy for people to find a fund that fits their values.

Barry asked whether there is a sense of real urgency about climate change in the investment community. Andrew said it is moving fast in Europe and Asia but not in the US, although some companies and states are moving, despite the politics. Andrew said he is an optimist and sees innovation starting to change the nature of agriculture, transport and carbon capture. New developments could change the outlook. Ten years ago, we didn’t predict that Tesla would become one of the world’s leading car makers and nearly every major auto brand will phase our internal combustion engines by 2025. The costs for companies to reduce emissions are falling rapidly.

There was a question on whether there will be standardised carbon reporting. Jorge anticipated there will be a step by step improvement over time. The standard that is likely to form the basis of New Zealand regulation, based on the Taskforce on Climate-related Financial Disclosure (TCFD), will provide useful future-oriented information through the use of scenarios.

A questioner asked whether there are sectors such as coal mining or oil production where divestment may be a better approach to engagement. Andrew agreed that there are sectors where we want companies to exit, but some of the companies still producing those products are also making the transition towards renewable energy. In some cases, providing investment capital for the transition may be justified. He noted that the world’s largest investor, the Norwegian Sovereign Fund, has undertaken to divest significantly from fossil fuels, despite the fact that oil and gas sector had provided the funding.

Barry thanked Andrew and Jorge for an interesting discussion. Harbour’s approach and research is available on their website.

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.