Responsible Investments Grow To Half The Market And Typically Outperform Traditional Investments

• Investment managers up their engagement with the corporate sector on ESG
• Government requirements are driving increased investor transparency and disclosures
• Responsible investment continues to make strong financial sense, matching or outperforming equivalent markets and timeframes

The portion of New Zealand assets managed using a rigorous, leading approach to responsible investment reached 49% totalling $179 billion in 2021, up from 43% in 2020, a new study by the Responsible Investment Association Australasia (RIAA) found.

The Responsible Investment Benchmark Report Aotearoa New Zealand 2022, researched in collaboration with EY, shows a step up in responsible investment activity. Investment managers are expanding their responsible investment offerings to investors across their portfolios, improving transparency and disclosures, ramping up their engagement with companies on sustainability issues, and increasingly excluding sectors deemed unethical.

The study also shows excellence in responsible investment typically materialises into superior financial returns. In 2021, products certified by RIAA as quality, true-to-label responsible investments on average outperformed benchmarks across all categories and almost all timeframes, while non-certified products labelled responsible investments stayed on par with benchmarks.

Dean Hegarty, the New Zealand-based Executive Manager of Membership and Engagement at RIAA said “It’s clear that the trade-off between strong long-term financial returns and investing ethically and responsibly is a myth that is being left in the dust. Those investments that have been through a rigorous process of certification by RIAA have on average produced even greater returns than both non-certified responsible investing products and traditional investments.”

This year’s analysis of 52 investment firms found 19 had adopted leading responsible or ethical investment practices and a further four were ‘emerging’ or close to leading, when measured against RIAA’s Responsible Investment Scorecard.

Responsible Investment Leaders explicitly and systematically consider ESG factors in the allocation of capital and are decidedly transparent, reporting publicly not just on their activities to improve sustainability, but also the outcomes being achieved.

“This year’s report shows that the rising tide of codes, standards, and guidance facing investors has lifted all boats. For example, negative screening for fossil fuels and weapons increased at the same time the government’s requirements for default KiwiSaver providers to exclude such investments came into effect in July 2021. Investment managers are also getting much better at backing up their claims around the sustainability of their portfolios, as they don’t want to find themselves on the wrong side of tightening greenwashing regulation and scrutiny,” he said.

Pip Best, EY Oceania Climate Change and Sustainability Services Partner said, “Investors are faced with a triple whammy of drivers to improve their responsible investment processes. Clients are demanding better transparency and looking to invest their money in ways that align to their values; regulation to address climate change and reduce GHG emissions is increasing; and evidence continues to mount linking improved ESG performance to higher long-term returns. This is leading to an increased focus on innovative products that can respond to these drivers and provide attractive investment opportunities to the changing demands of customers.”

Negative screening continued to expand in 2021 with new categories including investments in regions experiencing government integrity or corruption issues, palm oil and activities that violate the rights of Indigenous peoples.

“On the other hand, while divestment remains an important strategy driving change in some sectors, meaningful engagement, done the right way, has the power to produce real-world outcomes and transitional support that divestment cannot,” said Dean.

“A record 38% of investment managers are holding companies to account on matters relating to environmental and social issues through their corporate engagement activities and reporting back to investors on the outcomes achieved. This number has almost doubled in the past two years, showing an industry moving beyond merely divestment and exclusions as the only tool for influencing companies to become more sustainable.”

However, the study shows that the growth in this responsible investing practice – also known as corporate engagement – is lagging compared to Australia, recording a 9% uptick in assets in 2021, compared to a 54% growth seen in Australia over the same 12-month period.

“This finding highlights the strong need for a Stewardship Code for Aotearoa New Zealand, which was released last month, and provides a clear framework for investors to steer the companies they own on critical ESG issues,” said Dean.

Sustainability-themed investments almost doubled in 2021 to reach $40 billion, and now includes $1.9 billion of sustainability-linked loans, as product issuances continue to see strong growth in the market.

Almost half (49%) of all sustainability-themed investment AUM target climate change-related themes, though other themes emerged such as green property (12%), waste management and circular economy (10%), sustainable transport (10%), and healthcare and medical products (9%). Combined with impact investments, there is a strong flow of capital shifting to support ever more sustainable businesses in NZ.

RIAA’s Benchmark Report is the most comprehensive review of the responsible investment sector in Aotearoa New Zealand. The 2022 report reviewed the investment practices of 52 financial institutions.

© Scoop Media