Investors are being told it’s a myth that putting their money into socially and environmentally-friendly investments will cost them.
The amount of New Zealanders’ money invested in negatively screened funds – those that avoid certain investments, such as tobacco or land mines – increased 2500 per cent last year, to hit $42.7 billion.
But some investors are still reluctant to shift their money to responsible options – assuming that to do so would cost them returns.
Chief executive of fund manager Pathfinder John Berry said there was a “generational divide” at work – young people were increasingly interested in where their money was going.
His business has launched the Pathfinder Global Responsibility Fund, which uses best practice responsible investment frameworks, incorporating environmental social and governance (ESG) factors into its stock selection and ownership practices.
It will also be offered via Sharesies, the online platform that allows investors to put small amounts of money into shares.
The fund will invest in 250 stocks, excluding manufacturers of cluster munitions, anti-personnel mines, tobacco, nuclear weapons and whale meat. Companies that generate revenue from gambling, tobacco, controversial weapons, pornography and thermal coal will also be excluded – along with companies whose investments are generating “significant controversy”.
“Many New Zealand fund managers’ responsible investment practices extend only to the exclusion of companies in a narrow range of sectors. Many do not see the need for responsible investment to go further. They regard environmental, social and governance factors as only relevant to specialist funds rather than having broad appeal. Sometimes managers almost describe responsible investment as an after-thought,” Berry said.
“We don’t think that goes far enough. We believe the investing public expects a more proactive, common-sense approach that is positive and goes beyond simple exclusions.”
He said funds that were screened for ESG factors had the potential to deliver returns that were as good as or potentially better than other global portfolios – and it was a myth that investors had to be willing to sacrifice returns to do good with their money.
“At the same time, they allow people to invest in a way that is aligned with their aspirations for higher business values and a better world.”
Simon O’Connor, chief executive of the Responsible Investment Association of Australasia, said research showed responsible investing helped investors to strengthen their risk-adjusted returns, net of fees, due to the extra insight they had on the underlying companies they invested in, and by reducing exposure to risky companies.
“There will always be stronger performing funds than others, which will at times change over time periods, which is precisely why we have competition and many fund managers in the market place, and heightens the need for consumers to choose funds that match their own needs, time horizons, risk appetite.”
Christopher Douglas, head of manager research in this region for research house Morningstar, pointed to research from his firm, which showed the negative perception from some investors came out of a kernel of truth.
Purely exclusionary screens— broadly screening out “sin stocks,” for example—could have negative impact on a portfolio.
But Morningstar said very few modern sustainable and socially responsible funds used exclusionary screening so extensively that it severely limited the available universe of investments.
The oldest sustainable/socially responsible index was created in 1990, the MSCI KLD 400. It out-performed the S&P 500 by a large margin during the 1990s, suffered during the dot-com bust but recovered well.
“[It] makes a strong case that sustainable and socially responsible investments are capable of keeping pace with conventional investments, and are even capable of producing better returns,” Morningstar said.
Douglas said the options were still limited for New Zealanders.
“There are only a small handful of ethical or sustainability-focused funds for New Zealand investors to choose from, and not a broad enough size to make too many lasting conclusions. Hopefully this will change as investors seek out such products.”
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