Recognising the Social Purpose of Investing
Climate change is all over the news. Today more than ever, many of us are making small changes to our lifestyle. From recycling to going vegan or using the car less often, we are changing our ways to reduce harm to the planet.
As an island country reliant on primary production and tourism for much of its economic wealth, New Zealand is particularly vulnerable to the economic and environmental impacts of climate change.
New Zealand must both adapt to current and future climate changes and also contribute to a coordinated international response to reduce greenhouse gas emissions to the atmosphere.
The draft advice for consultation from the Climate Change Commission released in January 2021 has found the New Zealand government needs to reduce emissions further to meet its obligations under the Paris Agreement.
The Commission has set three new targets: an average emissions reduction of 2 per cent each year between 2022 and 2025, 17 per cent each year between 2025 and 2030 and 36 per cent each year between 2030 and 2035.
The Commission's draft advice was open for consultation until 14 March, and the final advice will be shared with the Government on Monday, 31 May 2021.
All of the above actions will require New Zealanders to seriously consider the potential impacts of climate change in everything they do as consumers, voters, business owners, directors, trustees and citizens.
However, we often neglect the single most effective vehicle to fight global climate change: Investing.
According to Mindful Money, a New Zealand charity that promotes ethical investments, most investments and investors have traditionally focused only on financial returns and risks. This means the financial world has been separated from the impacts that arise from investment decisions. The consequences of decisions like selling cigarettes to children or clear-cutting native forests have not been taken into account. If there is a good financial return, investors have ignored the real world impact.
With the new Trusts Act now in effect, many beneficiaries are asking trustees the hard questions around investment sustainability. This is not surprising considering that a survey by Mindful Money in 2018 showed 72% of New Zealanders want to invest responsibly, but only 8% invest in a credible fund. The survey identified the barriers to investing responsibly - a lack of objective information, not enough time to research and compare the options, and the lack of credibility for ethical claims.
Fast forward to 2021: Times have changed. We are entering a new age of understanding the linkage between investment performance and social impact. Today more than ever, investors are calling for sustainability opportunities, and markets are answering. But investing isn't as simple as paper over plastic in the checkout line.
For an investor or trustee who seeks to hold a portfolio that reflects their commitment to sustainability, there are options to build sustainability-focused investment strategies using scientific research and sound investment principles.
The one key question I often hear from investors is whether they can adopt a sustainability focus and still have a good investment experience. For instance, is it possible to reduce a portfolio's greenhouse gas emissions exposure while maintaining broad diversification and a focus on higher expected returns?
My answer:
1. Start with a sound investment approach
An effective investment solution must be based on sound investment principles. By starting with a time-tested, systematic investment approach, financial advisers can build diversified, cost-effective sustainability strategies that pursue higher expected returns while thoughtfully integrating the environmental criteria that matter most.
2. Systematically Integrate Sustainability Goals
It is important to carefully define the sustainability issues and data that a systematic investment strategy can incorporate.
To do this, we need to understand not only the science of sustainability and the issues that matter to investors, but the availability, reliability, and usability of sustainability data, too.
This approach prioritises addressing the primary driver of climate change – greenhouse gas emissions – while also considering related sustainability concerns, such as a company's land use, toxic waste production, and water management, in a manner that permits company-level sustainability data to be integrated systematically across thousands of holdings. Additionally, emissions data are readily available from multiple sources, allowing for better data validation.
This involves looking at companies across the entirety of a portfolio and within individual sectors. For example, if the objective is to reduce a portfolio's exposure to greenhouse gas emissions and potential emissions from fossil fuel reserves, the worst offenders across all industries may be deemphasised or excluded from the portfolio altogether. An across-industry comparison of this nature provides an efficient way to significantly reduce the aggregate greenhouse gas emissions per unit of revenue produced by portfolio companies.
3. A Science-Based Approach to Sustainability Investing
When a sustainability-minded shopper reaches the checkout line at the grocery store, they no longer need to choose between a weak paper bag or single-use plastic – they can get out a reusable bag that carries their groceries effectively and demonstrates their commitment to sustainability.
That is the same case for sustainability-focused investors – they have the option to pursue a sound investment experience that reflects their sustainability values.
By starting with a robust investment framework, incorporating sustainability considerations guided by climate science, and applying our many decades of experience in data management, evidence-based financial advisers can offer a cost-effective approach that provides investors with the opportunity to align their investment and sustainability goals.
To sum it up
As a financial adviser, I think there are different flavours and no one-size-fits-all approach to ESG investing. When considering different asset classes, different methods are better suited than others for different types of investors.
Ultimately, the purpose of socially responsible investing is to create a virtuous cycle by allocating capital to those companies that create the greatest societal returns — both in business as usual and in improving the welfare of customers, employees, suppliers, and communities. It can be achieved with a financial adviser who can design an approach to preserve diversification while accounting for the social impact.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
