On the money: Socially responsible investing could be ideal niche for NZSE

By Michael Coote

Friday 24th May 2002

Corporate do-gooders are attracting capital from investors who want to make a difference to the world while they save for retirement.

Although relatively new to New Zealand, socially responsible investment (SRI) is taking off in Australia and is well-established in the US and the UK.

SRI is variously defined but mainly centres on selective strategies for investing in companies that promote some form of wellbeing as a core part of their business objectives. There are even SRI sharemarket indices, such as the Dow Jones global responsibility index or the FTSE4Good index.

The UN-sponsored UNEP Socially Responsible Investment Conference was held in Auckland this week. UNEP supports initiatives that involve financing business for sustainability purposes.

The conference, organised by Melanie Hewitson of Tower Asset Management and opened by Finance Minister Michael Cullen, attracted delegates from throughout Australasia, including a member of the Ministry of the Environment and representatives of the socially SRI industry from Australia.

All were involved in one way or another with profitable business investment around themes connected with social or environmental purposes.

Many local trustees, fund managers, and investment analysts also attended.

The conference was told SRI did not produce investment returns or risk levels widely different from investing in the market as a whole over the longer run.

Accordingly, SRI is not sold by investment advisers on the basis of higher returns but on the ethical preferences of the client.

Arguably, however, future returns from SRI could be higher than for the whole market, because if sustainability and social and environmental responsibility become the norm for businesses, then those companies that adopt such standards will be sunrise industries, whereas those who lag behind will be sunset industries.

For fund managers, SRI is a style of investing, rather than something that fundamentally differs from traditional asset classes. Most SRI funds invest in equities but more are starting to place money into bonds.

There are four broad strategies for SRI fund managers to pursue. One is engagement, where the manager invests in a company and tries to persuade it to mend its ways. Another is "best of breed," whereby the manager invests in those firms which come nearest to its SRI criteria.

Yet another is negative selection, where the manager refuses to invest in companies that do not meet SRI criteria. The fourth is positive selection, in which only those companies that strictly meet SRI standards merit investment.

The selectivity of SRI creates higher shorter-term risk for investors because it reduces the universe of qualifying securities.

However, over time the performance of SRI equates to the broader market.

A quirk of the approach is that it tends to favour "growth" over "value" when making its company selections, meaning it is biased toward new industries rather than old.

In its early days SRI tended to be concerned with excluding naughty industries such as those producing alcohol, tobacco and military products. Nowadays there is greater interest in supporting environmentalism, human rights and good corporate governance.

The NZSE is ripe for an SRI approach as it scratches its head over how to remain relevant as a capital market. It could copy overseas trends and produce an index of its stocks that qualify for SRI.

The "clean, green" image of New Zealand could bolster such a move. Ethically motivated foreign capital could be attracted and many more company listings could result.

New Zealand's small sharemarket could be subjected to SRI activism, wherein investors engage with or practise positive or negative selection of existing listings in much the same way as small shareholders have clubbed together to sink the boot into errant companies.

Dr Cullen's superannuation fund will take an SRI approach as a way of making it more palatable and avoiding the accusation that public money is to be placed in inappropriate industries.

For example, our nuclear- free policy should require that the fund does not invest in uranium mining or nuclear power plants and weapons contractors. And surely there is a niche for a socially irresponsible fund. Each to his own.

Disclosure of interest: Michael Coote works for Tower Managed Funds

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