Changing the world one dollar at a time.
Words John Berry
Over the past decade, gains to animal welfare, climate change and environmental awareness from ‘conscious consumerism’ have been profound. Free-range eggs, eco-friendly cleaning products and organic foods were once choices only available in the shopping aisles of health-food stores but are now mainstream thanks to millions of consumers forcing change with their wallets.
The world of finance and investment has been late to the party. Until 2016, KiwiSaver providers routinely invested in manufacturers of controversial weapons (such as cluster bombs and nuclear arms) and tobacco companies. Only after these investment practices were exposed by the media – and the subsequent public outcry – did most providers move to exclude these from KiwiSaver.
Investment managers are gradually recognising that investors, and particularly younger investors, increasingly want their investments to align with their values. A recent survey by Responsible Investment Association of Australasia showed seven out of 10 New Zealanders want their KiwiSaver managed ethically and to have ethical investments.
But the trend is still in its infancy in New Zealand. Many KiwiSaver providers believe they have met investor concerns by excluding only the most objectionable companies from investment portfolios. The exclusions most often included those companies that manufacture controversial weapons and tobacco, those that mine thermal coal and those that profit from gambling or pornography.
This approach simply doesn’t go far enough – it’s as bad as chicken farmers proclaiming compliance with the minimum standards of animal-welfare regulations, ignoring the large gap between legal requirements and the humane treatment of animals.
True responsible investment requires much more, not least because the most objectionable companies represent only a small proportion of the world’s listed companies. For the rest, investment managers should recognise each company’s approach to ethical issues. Some have a sustainability focus (like fishing company Sanford), others may be fossil fuel businesses planning for the transition to a lower carbon future (like Z Energy).
For KiwiSavers and other investors the approach means engaging a fund manager that embraces the UN’s principles of responsible investment. Among other things, these principles require investors to both analyse and engage with a company over its environmental, social and governance (ESG) footprint.
Such an approach can be a powerful force for positive change. For example, Exxon Mobil’s shareholders used their voting rights to force increased disclosure on the company’s climate change effects. The change has required the company to set out its environmental impact and the steps it is taking to mitigate the damage. It is also driving rivals to follow suit. More to the point it wouldn’t have happened if the 62 per cent of supporting shareholders had simply excluded Exxon Mobil from their portfolios.
Shell Oil is facing a shareholder vote for senior executive pay to be linked to its carbon emissions. For a fossil fuel company that’s a game changer.
Companies cannot ignore these trends as they need the support of shareholders. Over time the alternative will be a reducing pool of investors willing to fund their operations and that translates into higher financing costs.
KiwiSaver is now a $50 billion savings pool involving around three million New Zealanders. Collectively it should be a significant force for making companies behave more ethically.
John Berry is co-founder and chief executive of Pathfinder Asset Management, a specialist responsible investment fund manager. He is also a member of the government-appointed Financial Advice Code Working Group.