Ethics is a strong foundation to long term success. We have long championed operating ethically and upholding our legacy toward corporate and social responsibility. Having this outlook not only ensures considered decision making but also means a more sustainable direction, as the two go hand in hand.
As a continuation of our commitments to ethical practice, recent changes have been made to the composition of the underlying assets in the three Booster Asset Class KiwiSaver (ACKS) Funds. These will better answer the call for sustainable investment opportunities which avoid companies with poor environmental, social and governance (ESG) metrics. While these changes result in a consistent application of measurable ESG criteria across the whole portfolio, these changes still strongly adhere to sound investment principles seeking broad diversification across asset classes and factor tilts to earn higher expected returns.
WHAT THIS MEANS
In essence, the new allocations maintain the same weightings of the underlying funds. The global equity portion of the funds continue to take into consideration market, size and value risk premium, and adherence to Dimensional Fund Advisors (DFA) investment principles, which include the Fama French Five Factor model.
A comparison between old and new allocations is in Table 1.
The changes include the replacement of both Fixed Income and Equity assets with their respective sustainable alternative, offered by DFA, and were implemented during July 2021 and February 2022.
These new sustainable funds are constructed by DFA using their science-based approach, backed by decades of research, and then overlaid with DFA’s specific environmental and social screens[1]-[2].
These screens exclude companies involved in:
Tobacco
Pornography
Gambling
Alcohol
Cluster munitions
Nuclear devices
Personal firearms
Factory farming
They also exclude or underweight companies with relatively high carbon emissions and poor sustainability scoring (being the management of toxic waste, water usage, land usage, and biodiversity).
In terms of governance, DFA have long been pioneers in shareholder advocacy – striving to enhance and protect shareholder value by focusing on key governance principles, including board structure and composition, risk management, shareholder rights, and executive compensation. DFA’s actions to promote shareholder advocacy are published annually in their stewardship report[3].
IN MORE DETAIL
Fixed Income:
DFA Global Bond Trust (NZD Hedged) was replaced with the Global Bond Sustainability Trust (NZD Hedged).
The sustainable fund was launched in April 2018 and has the same benchmark as the current fund, the Bloomberg Global Aggregate Bond Index (Hedged to NZD). Overall credit ratings, maturity, the currency of issue, and sector are similar between the two funds.
Joining the previously added DFA 2 Years Sustainability Fixed Income Trust (July 2021), the Fixed Income exposure of ACKS is now all sustainable.
Equity:
DFA Global Core Equity Trust (NZD Hedged) was replaced by the DFA Global Sustainability Trust (NZD Hedged)
The aggregate of DFA Global Large Company Trust, DFA Global Value Trust and DFA Global Small Company Trust was replaced by DFA Global Sustainability Trust (Unhedged)
DFA Australian Core Equity Trust was replaced by DFA Australian Sustainability Trust
DFA Emerging Markets Value Fund was replaced by the DFA Emerging Mkts Sust (July 2021)
The current hedging ratio is maintained. The equity allocation by sector is generally similar, but with slightly reduced exposure to energy, consumer staples, industrials, materials, and utility sectors in the new models. All equity exposure of the ACKS’s funds are now sustainable.
Stewart Group and DFA have completed a thorough stress testing analysis for the new allocations and have concluded that the performance of the new funds to interest rate and other market shocks or scenarios is not expected to materially change compared to the old funds with no ESG overlay.
Notably, the new asset allocations have reduced the management fees for the ACKS’s funds.
Table 1 summaries the key changes made.
OUR OWN APPROACH
Stewart Group believes sustainability starts at home. That’s why we are constantly working to improve our environmental footprint by creating a sustainable workplace. Since the launch of our Simply Sustainable™ framework[4], we have converted our Hastings office to run on self-generated solar power. Our vehicle fleet is 100% EV and charged by our solar power. Stewart Group have also started waste reduction initiatives such as using energy-efficient hand dryers to remove the need for paper towels, and water management.
TABLE 1
[1] https://my.dimensional.com/dfsmedia/f27f1cc5b9674653938eb84ff8006d8c/51675-source/sustainability-trusts-brochure.pdf
[2] Dimensional’s approach to sustainability investing is protected by U.S. Patent Nos. 7,596,525 B1, 7,599,874 B1 and 8,438,092 B2
[3] 2021 Stewardship report can be found here https://my.dimensional.com/dfsmedia/f27f1cc5b9674653938eb84ff8006d8c/43993-source/2021-annual-stewardship-report.pdf
[4] https://www.stewartgroup.co.nz/simply-sustainable-tm
