Fund managers shirking responsibility with sector exclusion

28 June 2018

Fund managers that rely solely on sector exclusions from investment portfolios, rather than use their financial clout to drive better corporate behaviour and performance, are doing more harm than good, says Kiwi Wealth.

“The propensity toward sector exclusions is accelerating, with fund managers claiming they’re being responsible investors,” said Kiwi Wealth chief investment officer Simon O’Grady.

“But just throwing out entire industries and sectors as a sole responsible investment strategy is far from responsible. Aside from the potential for these exclusions to outperform and leave investors out-of-pocket, blanket sector exclusions also remove the ability to engage as a shareholder and drive positive change in those sectors.

“So nobody wins, and it’s an exceptionally lazy strategy to boot. Investors are being put at risk of underperformance, and excluded companies aren’t being pushed and challenged to change for the better.

“Being a truly responsible investor means working with members to ensure their investments are both tuned for financial performance and able to drive improvements in corporate behaviour in line with their Kiwi values. We believe the best way to balance these two critical outcomes is to reduce focus on exclusions, and at the same time actively and consistently demand that the companies we invest in are lifting ESG performance.”

Last month, Kiwi Wealth engaged global proxy voting adviser Institutional Shareholder Services (ISS) to manage the research and execution of proxy voting rights across its in-house global equity strategies. ISS provides research and voting recommendations for all shares held directly by Kiwi Wealth and executes a voting strategy in accordance with Kiwi Wealth’s industry leading responsible investment policy.

Proxy voting has been deployed previously in separate Kiwi Wealth fund components, like its Core Global enhanced index fund, which is built and directed by its in-house Kiwi Invest investment management team.

“Most investors want to see their money invested responsibly. Proxy voting for positive change in companies satisfies their demands to be invested in the most responsible portfolios while maintaining strong portfolio performance,” Mr O’Grady said.

“By actively exercising our shareholder voting rights with a view to driving companies to operate more sustainably and reduce risks, we can lift the environmental, social and governance (ESG) performance of companies that we invest in. When companies do make changes to address ESG issues, their value tends to increase as they improve their sustainability, reduce their risks, and make themselves more investable.

“This is a key advantage of investing with an New Zealand-based manager strongly aligned with clients’ values and prepared to advocate these values. Investments channelled through offshore funds, particularly passive indices, will usually come up short on their ability to drive positive change on key ESG issues.”

ISS, which also provides proxy voting management services to the NZ Super Fund and ACC, was founded in 1985. It represents more than 1900 institutional clients in 115 global markets, executing close to 10 million proxy ballots annually.

Kiwi Wealth’s October 2017 white paper on responsible investment, Investing in an imperfect world: our take on true responsible investment, was critical of the over-reliance of New Zealand fund managers on exclusions as a sole responsible investment strategy.

It found that responsible investing and fiduciary objectives were best achieved when ESG factors were considered across all investments in a portfolio, in combination with actively engaging with companies and exercising proxy voting rights to support shareholder value while addressing key ESG issues.

The white paper can be viewed online at https://www.kiwiwealth.co.nz/ri-whitepaper.

ENDS

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